A breakaway artist confesses the ‘mistakes’ he made in ushering PBIG’s Hou-Sear team. With its elevators, synchronized watches, office hijinks and voice-over IP, Luminous Capital was a virtuoso Merrill Lynch defection but not to Matt Sonnen

By Guest Columnist Matt Sonnen
Brooke’s Note: It is one thing to create a textbook scenario of executing an ungainly task complete with bullet points and encouraging words. But not only are textbooks boring as heck, they commit the even greater sin of being relatively useless. Much more helpful is a spirited telling of the land mines that blew up in the face of the last hapless sap who tried to complete the task, nose buried in the book’s pages. Matt Sonnen is far from a hapless sap. See: How the mastermind of the Luminous Capital breakaway is parlaying his cloak-and-dagger skills Rather he is a straight-shooting writer who will make a prospective breakaway feel much better equipped to get out of dodge without being blindsided by an unforeseeable nuance.

If you believe some experts, as much as 25% of wirehouse advisors will “breakaway” to independence within the next five years. Because of this anticipated demand for transition support, there are countless experts, consultants and platforms offering guidance and services to advisors looking to start their own RIA.

I am here to tell you, from my own experience, what not to do!

In late 2007, I was tagged with the responsibility of figuring out the RIA space and leading a team of 17 employees and advisors into the exciting world of “Independence.” This team of Merrill Lynch brokers launched in 2008 as Luminous Capital and since then its meteoric rise from $1.7 billion to $6 billion and then subsequent sale to First Republic Bank in 2012 was much ballyhooed.

I won’t rehash those details here and what went right. What I would like to discuss, however, are many of the mistakes I made in those early months.

The first step in building an RIA is typically deciding where to locate your office. This is a tough decision that many breakaways struggle with. You need to balance “I want my client to view my new RIA as something fresh, different, and exciting compared to my stuffy former employer” and “I need my clients to view my new RIA as a real business, not as a risky startup.”

I leaned toward the latter, mistakenly thinking we needed to keep the new office in the same building as our old office, so clients could “keep some familiarity.”

Making the copier work

Spending six months building out office space eight floors below, and using the same elevator bank, as your former employer is ridiculously risky. I needed to visit the space several times a week to oversee the build-out. There were only so many off-hours trips I could make through the service elevator before someone was going to spot me and ask, “What are you doing on the third floor?” While it worked out in the end, this is a huge mistake — do not put your new RIA office in the same building as your former employer!

Not building out a proper website for launch day was my second major mistake. I purchased a domain and had a landing page for clients to visit. The problem was that clients saw nothing more than “Client Login” when checking the website after learning of the founding of our new firm.

It’s impossible (and not necessary) to have a detailed website just minutes after the launching of your new firm, but you do need to present at least some basic information and possibly a mission statement for clients to better understand your vision. While we provided all of this information to clients via email, I was way behind the curve, even back in 2008, in appreciating how important it is to have a thoughtful online presence that invites clients to join the new firm.

My third mistake, and probably my biggest, had to do with our phone and IT system. When starting an RIA from a wirehouse, your former employer’s number one argument in persuading clients not to leave is, “Great advisor, but he/she doesn’t know how to run a business — they will spend all of their
time trying to get the copier working, and won’t have their eye on your portfolio.”

That is why it is imperative that your business infrastructure (phones, computers, video conferencing, office space, etc.) all work seamlessly while interacting with clients on Day One. That wasn’t the case in the first few days of Luminous Capital’s existence.

Hello? Hello?

Employing a penny-wise, pound-foolish mindset, I hired a low-cost voice-over-IP (VOIP) provider to administer our phone service. This vendor couldn’t handle both data and voice traffic simultaneously, so if anyone downloaded a large file from the Internet or from an email attachment, all of the active phone calls would drop immediately.

Conversations went something like this, “Yes, Mr. Client…we have launched Luminous Capital and we think it is in your best interest to transfer your $50 million portfolio to us because we are a…..” Dial tone. It was awful! Learn from my huge mistake — only hire top-notch service providers when building your RIA, and be sure to do proper due diligence of each and every one! See: How and why I’m starting an RIA from scratch and what I’m spending to make it happen.

Meanwhile, I was horribly unprepared for the amount of paperwork involved in transferring client assets to our new firm, and this was my fourth big mistake.

Assume an average $1 billion book of business will be comprised of 200 client relationships, and each relationship will represent five individual account numbers. That’s 1,000 accounts to keep track of in a very short amount of time. I was marking clients as “complete” four different times: once when the advisor called from outside the meeting to report a verbal “yes” from the client; once when the signed paperwork was received in our office; once when the paperwork was submitted to the custodian; and once more when the assets hit the account. We were only attempting to move $1.7 billion, but my spreadsheet reflected over $5 billion in advised assets after only 30 days of being in business!

Paper chase

The sheer volume of paperwork can easily overwhelm you, if you allow it. You need one person in charge of all outgoing client paperwork, and every packet should include a return envelope and tracking number for the paperwork as it comes back to you. There should be stations set up around your office to separate paperwork into the various stages of the transition process. See: Facing the breakaway paper blob with a game plan and a quarterback

Keep in mind that some paperwork in the client packet is meant to stay with the client forever; some of the returned paperwork needs to go to the custodian, and some paperwork is intended for the RIA to keep. Limit the number of people allowed to touch the paperwork at each phase in the process. Above all else, over-communicate with clients as to where in the process their paperwork is, and how long it will be before their new accounts are opened and the assets get moved.

My fifth mistake (and far from my last) when building Luminous Capital had to do with business continuity and having a proper disaster recovery plan in place. As I educated myself on the various ways to back up data and store it offsite, I thought we were doing everything we needed to.

While I could confidently say, “Yes, I’m backing up my data,” it wasn’t until I actually tested our ability to replicate that data in a usable fashion that I realized we had a problem: Had there been an actual disaster, it would have taken weeks to get back up and running. When it comes to business continuity, do not make the same mistake I did. You must go beyond the bare minimum requirements and periodically test the effectiveness of your plan
to ensure your clients will not be negatively impacted by a manmade or natural disaster. (And yes, with the help of a third-party technology firm, I rectified this mistake very quickly before it became an issue.)

Pitfalls aside

There are countless tiny details to consider when building an RIA from scratch, but none of them are insurmountable. The trick is addressing each and every one of them, and addressing them appropriately, before “D-day.”

Give yourself plenty of time to work through the process, keep your wits about you, and leverage reputable (and cost-effective) solutions available to you.

Despite this unburdening of my mistakes, I’m not warning you off the transition to an RIA. Pitfalls aside, every breakaway team I have worked with all say the same thing at the end of the transition period, “It wasn’t as bad as I thought it would be…we should have jumped to independence sooner!”

Matt Sonnen is founder and CEO at PFI Advisors, which works exclusively with billion-dollar breakaway teams that feel they already have the scale to start their own RIA without partnering with the national platforms that are currently out there.

This article originally appeared on RIABiz.


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