Big RIAs Now Face Their Own Breakaway Movement

April 3, 2017, by Matt Sonnen
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There is some debate as to the official launch of the breakaway advisor movement, when advisors began leaving the shackles of the captive wirehouse environment for the freedom and independence of the RIA community. In order to pinpoint an exact date, we not only need to consider the exodus of advisors, but we also need to consider at what point was there a true RIA industry that advisors could break away to.

While there are plenty of RIAs that are over 20 years old, it is a safe estimation that the first major “Breakaway Advisor Movement” started sometime in the mid-to late ‘90s and gained further traction after the tech bubble in the early 2000s. At that time, new PC-based technology, the Internet and re-engineered discount brokers arrived on the scene to create new platforms that could house these new businesses and replicate much of what they left behind in the wirehouses

Regardless of when advisors officially launched their RIA, it seems that almost everyone cut their teeth at the wirehouses and learned the ins and outs of the wealth management business while working as a captive employee. Over the next decade, as it became apparent that this movement to independence was real, opportunistic service providers began popping up to assist advisors in their transition.

Newly formed aggregators provided all-important startup capital and transition assistance for an equity stake in the newly established RIA. Middleware platform providers charged basis points over a multi-year service contract in exchange for transition assistance and for providing a “plug and play” technology back office stack that got the breakaway teams up and running.  At the time, these were incredibly valuable services in the early days, when the breakaway movement was still relatively new and advisors didn’t have the knowledge of what was required to establish an RIA or what was needed to run their own business.

As the industry continued to grow and mature, large teams continued to leave the employee model for the entrepreneurial model throughout the first decade of the 2000s. Encouraging the leap to independence were those who went before them, as wirehouse advisors suddenly had more and more friends and former colleagues who had made the jump—both on their own and with the assistance of the aggregators/platform providers.

What advisors began to hear from the breakaways that had used these middleware services was, “The transition services were invaluable—we never could have transitioned our clients to our new firm so efficiently without their help. But now that we have an established RIA, and we’ve been on our own for six months to a year, we pretty much have it figured out. We’re not sure what ongoing value we are receiving at this point.” As Jeff Spears stated after shutting down Sanctuary Wealth, his platform for breakaway advisors, “Once advisors began learning how to run their own business, they stopped renewing their contracts.”

This realization by advisors led to Breakaway Advisor Movement, Version 2.0, which was featured on our blog a year ago (read more here). In addition to Sanctuary Wealth closing down, the most high profile “breakaway” from a platform provider was Pagnato Karp’s exit from Hightower to become a standalone RIA, which received press last summer.

While there are many non-publicized breakaways, (in fact most go unnoticed) and we anticipate more of these transitions to come, we are also seeing a new breakaway evolution in the industry. This new breakaway consists of some subset of junior advisors and staff looking to leave the RIA they currently work for and take their clients with them.

We were recently made aware of such a situation, and while speaking with one of the major custodians of the RIA space, we were told this situation is not unique; they know of multiple other scenarios just like this—a subgroup of an RIA is looking to leave and set up their own RIA, in direct competition with their original firm.

We find this phenomenon to be fascinating and are dubbing it, Breakaway Advisor Movement, Version 3.0. Much like our analysis of Version 2.0, it appears that this “problem” for the industry is a direct result of the success of the RIA channel. Let me explain:

The original breakaway movement began from a belief that “there has to be a better way.”  Advisors became employed by wirehouses to learn the wealth management profession, but over time became wary of the bureaucratic nature of these large firms, and the prevalent nature of management by the lowest common denominator.

As the independent space gained more traction and the industry became more legitimized by large, successful RIAs, advisors began to leave for greener pastures (read more here). Over time, advisors became emboldened to start RIAs without the assistance of aggregators/platform providers, and felt they could grow both organically and inorganically on their own. As those firms experienced more and more success and started reaching the $1 billion, $2 billion and even $5 billion AUM milestones, they slowly turned into the very bureaucratic organizations that they had originally rallied against. Meanwhile, the younger, more entrepreneurial employees at these RIAs are now beginning to say to themselves, “There has to be a better way,” and are looking to start their own firms. Some of this is driven by the firm’s lack of succession planning and the younger employees feeling like they will never get a meaningful piece of the pie, and much of it is driven by a desire for a smaller organization with fewer clients and deeper relationships (the exact reason the original RIA owners left the wirehouse in the first place!).

While the Breakaway Advisor Movement, 3.0 trend contains many legal and compliance issues that by themselves are worthy of discussion, themessage here is that the RIA space, like many other aspects of financial services, will continue to adhere to a cycle of consolidation and disruption. As a result of this creative destruction, it will continue to attract the best and brightest due to its open architecture and unlimited opportunities to find the best models for serving both clients and employees.

Matt Sonnen is the founder and CEO of PFI Advisors.

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