First, a disclaimer: We are not lawyers, and this post does not contain legal advice of any kind. As operational consultants that advise financial advisors on the nuances of starting an RIA, we always suggest advisors consult with legal counsel before embarking on a breakaway transition.
The recent news of Morgan Stanley’s and UBS’ exit from the Broker Protocol caused quite a stir in both the wirehouse and RIA industries. You can see our take on the news here. Many industry leaders believe that other wirehouses will follow suit and exit the Protocol themselves. Some are questioning if those departures will quell the movement of advisors from the wirehouses to Independence. While this news has definitely made advisors re-evaluate their commitment to transitioning their business, we believe non-Protocol transitions can be extremely successful, as long as advisors take a few operational issues into account as they plan their departure.
Whether you are planning an exit under the Protocol or not, all aspects of your move prior to your resignation from your wirehouse firm are the same – you cannot notify clients of your intention to move, nor can you solicit employees of the firm to join you. Protocol or no Protocol, you are still bound by your duty to your employer not to compete. Once you have resigned from your employer, however, a Protocol vs. Non-Protocol transition will differ substantially.
Under a Protocol transition, you are allowed to take basic client contact information with you when you depart – you can take client names, addresses, phone numbers, email addresses, and account types (consult with an attorney to learn how and when you can properly and legally take this information). You are then allowed to contact clients by phone and/or email to notify them of your departure and let them know about your new RIA. You can also provide that basic contact information to the custodian of your choice to pre-populate the account opening and transfer forms, which you will send to your clients in relatively short order to get their approval and signatures to move their assets to your new firm. Protocol transitions, on average, take about 3 months to transition the majority of your client assets, as you track down clients to explain the virtues of Independence, get the proper signatures and other relevant information on the appropriate documents, and get the assets transferred from your old firm to your new one.
With a non-Protocol transition, you cannot leave your wirehouse firm with any client contact information, nor are you allowed to actively reach out to clients to notify them of your move. As clients reach out to you via cell phone or social media, however, they can express their desire to continue working with you as their advisor, and you can then send them a data request that will provide the custodian of your choice with the proper information to fill out the necessary forms to move their assets. Once completed by the custodian, you can then forward the documents to clients for signature. While a Protocol transition will take approximately 3 months, we feel advisors should anticipate a conservative 6-month transition time for non-Protocol moves, given the added time it will take for clients to reach out and provide the necessary information to transfer their assets.
Many advisors are able to “bootstrap” their business for 3 months, as they pay their employees, office rent, and technology expenses out of pocket until the client assets have transferred and they can process their first billing cycle. With a 6-month window, however, financing may be more critical. Live Oak Bank is the largest provider of startup capital in the RIA industry and has loaned more than $500 million to independent advisors. “We can provide transitional capital (as we call “Advisors in Motion”) based on anticipated cash flow, something most other banks cannot do,” says Jason Carroll, managing director of Live Oak Bank’s Investment Advisory lending team. “Many Advisors worry about what their families will live on for those first six months of their transition. That doesn’t have to be a big problem with solid plans. Ending the Broker Protocol makes a transition to independence more challenging, but it is far from impossible, especially with capital in place.”
Once your financing is in place, budgeting expenses for the next several months will be more crucial than ever. You may want to cut back on some office buildout expenses until after your clients have transitioned. Maybe you don’t need the fancy artwork on Day 1, or the most state-of-the-art video conferencing system on the market. We can help advisors with budgets and overall project plans as they anticipate the launch of their RIA. Non-Protocol transitions are far from impossible, but do require a tighter planning schedule and budgetary process. With proper legal and operational guidance, regardless of Protocol status, teams can tackle these transition obstacles with confidence and ultimately reach their goal of financial independence.