Top 3 Questions Every Breakaway Advisor Asks – Part 3

June 22, 2017, by Larissa Marcontell Sonnen
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As discussed in our previous posts (See Part 1 and Part 2), many wirehouse advisors have concluded that while their current employment situation clearly has its faults, for the most part, they have found a way to make it work.  Many advisors decide that for the amount of money they earn, they can live with the inherent headaches associated with their current employer.

“If I Go, How Do I Do It?”or “How the Heck am I Going to Make This Happen?”

A subset of advisors see the benefits of Independence and desire to manage client assets in a fiduciary capacity, but they have no desire to be a business owner and they are intimidated by the idea of running their own business.  They entered the wealth management profession to service clients, not to manage profit and loss statements and employees.  These advisors are well served by joining an existing RIA as an employee or part owner of the business.  The RIA gains the AUM associated with the advisor’s book of business and picks up the cash flows associated with those assets, in exchange for providing an infrastructure in which the advisor can leverage to grow his/her business more quickly than had they stayed at the wirehouse.  PFI Advisors highlighted several of these acquisition-oriented RIAs in our white paper, “Becoming a Professional RIA Buyer.”

For advisors who do not wish to become employees of an existing RIA, they can join a larger organization, such as an Independent Broker Dealer (“IBD”) or another regional firm, and open a new branch office for them.  This option should provide a bit more independence than the RIA tuck-in option above, and still provides plenty of back office support from the home office to help advisors run their business.  Depending on the larger organization, some advisors get the opportunity to use marketing of their choosing and brand themselves as their own firm, while using the larger firm as the platform that serves their operations and compliance.  They are also able to employ staff of their choosing, host client events, and position themselves as independents.

The downside here, of course, is the structure of IBDs. These firms still have a very heavy hand when it comes to compliance and managing to the lowest common denominator as well.  Additionally, they have restrictions to which technology advisors can use, as well as what investment products are on the platform. Advisors in the IBD model are still considered “reps” of their firms and as a result, experience many “ticket charges” for technology, compliance, marketing, and other overhead support rendering those attractive payouts heavily advertised as so-so, at best, once these costs are applied.

Other advisors will look to combine their move to independence with a liquidity event.  For that, they can turn to “aggregators” or private equity firms looking to take an equity stake in their newly-established RIA.  As the RIA channel has continued its success, plenty of sophisticated investors have seen the opportunity to pick up valuable equity on the cheap, and are eager to write a check for a piece of the RIA’s future cash flows.  This allows the advisors to take some chips off the table, however, when all things are considered, this can be a very expensive way to remove those chips. For billion-dollar teams (several million in earnings) that forgone equity can be in the range of tens and even hundreds of millions of dollars in future valuation.   This makes it very difficult for the investing firm to ever earn their keep, ultimately begging the question, who has really invested in whom in this relationship?

Wirehouse advisors not interested in selling a portion of equity but who seek assistance in setting up and running their RIA can look to plug-and-play solutions offered by platform providers.  For a multi-year service contract, these middleware platforms provide technology and back office solutions that some advisors find attractive.  These platform providers have selected some of the top industry vendors (custodian, reporting provider, CRM, financial planning, etc.) to build out their back office suite so that breakaway advisors can simply “plug” into these systems – the decisions have already been made.  This is an extremely attractive proposition for the smaller breakaway advisor feeling overwhelmed and fearing the unknown when looking to set up an RIA.  However, this is usually not the best solution for larger teams.

Billion-dollar teams that have scale on their own may find that they can get more competitive pricing if they contract directly with the individual vendors and choose their own technology suite that bests fits their clients’ specific needs.  For more information on how costs of aggregators and platform providers tends to break down for very large breakaway teams, please see our initial white paper, “Pursuing the RIA Dream.”

For entrepreneurial advisors looking to own 100% of their firm and have full control of the operations of the business, PFI Advisors can help them attain “Pure Financial Independence.”  These advisors don’t want to outsource post-break operational activities, feeling they have the capacity and willingness to manage the day-to-day business responsibilities on their own.  That being said, they’ve never set up an RIA and still have questions around real estate, technology, RIA systems, the client transition process, billing, etc.  These advisors aren’t willing to pay exorbitant long-term fees for outsourced services they feel they can handle internally, and are looking to pay a simple, one-time consulting fee for assistance during the setup phase.  While this channel of Independence ultimately results in the most work/responsibility for the advisors choosing this option, it also equates to larger profit margins and pure freedom, especially when compared to the other choices.

The beauty of the current state of the RIA industry is that there are more than enough service providers offering all types of independence across the spectrum.  Wirehouse advisors have varying incentives driving them and their business decisions.  Many will never leave their current employer, choosing the safety of the familiar environment.  Some will look for greener pastures, but not want to take the risk to leave the wirehouse system altogether, simply leaving for a similar firm.  Others will be attracted to the independent channel, but all have disparate aspirations as to how much entrepreneurial responsibilities they want to take on.  Some will choose to join an existing RIA, some want to start their own RIA but prefer to plug into existing infrastructure, and others will choose “Pure Financial Independence.”

Regardless of the avenue of independence chosen by advisors, we (the industry as a whole) are here and happy to help!

Article originally appeared in IRIS.XYZ

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