Top 3 Questions Every Breakaway Advisor Asks

Part 1: Why Stay at a Wirehouse?

By Larissa Marcontell Sonnen

As breakaway transition consultants, we are often asked, “What are you hearing from wirehouse advisors these days?  What’s on their mind?”  For years, the breakaway conversation revolved around all the bad things that were pushing advisors out of the wirehouses and into the RIA channel.  As the independent space has evolved, the narrative is slowly changing to all the positive things that are pulling advisors and motivating them to start their own RIAs (See “The Push vs. Pull for Breakaway Advisors”).

Regardless of what got them to the point to pick up the phone and call, there are typically three questions breakaway advisors initially ask us:

  1. Should I stay?
  2. Should I go?
  3. If I go, how do I do it?

My goal is to address each of these questions in their own post, giving them their much-needed attention, as each is a critical decision for every breakaway advisor contemplating a move.

“Should I Stay?”  or “Why Stay at a Wirehouse?”

The biggest reason most people don’t take action to improve their lives in just about any endeavor or profession, sadly, often just comes down to inertia.  As the saying goes, “Better the devil you know than the devil you don’t.” Creating an RIA from scratch can result in many sleepless nights, stressing about the operational aspects of the transition, as well as the security of those ever-important client relationships.  Some advisors may simply conclude that they’re just not willing to put themselves through the hassle.

Many advisors agree it can be a hassle doing business within the wirehouse, and that it seems a bulldozer is needed to crash through the bureaucratic walls of the institution to meaningfully grow.  However, after a significant amount of time spent within those walls, they have learned their way around.  While it may be strained, they usually have a decent, workable relationship with their local branch manager.  For the most part, they are left alone and the advisor can basically do what they want.

These advisors tend to call us when their frustrations have recently spiked – the payout grid has been changed once again, and never in the advisor’s favor; they’ve been asked once again to focus on their short-term sales numbers; they’ve been pressured into selling proprietary products that the advisor doesn’t believe are in their clients’ best interest.  Other pain points come from their overbearing and non-service focused Compliance department.  After sitting on it for two weeks, Compliance has rejected yet another timely commentary to their clients, describing recent volatility in the market and expressing the advisor’s guidance on how to best position portfolios.  Or maybe technology in the branch office has broken down yet again, with no commitment by the firm to finally upgrade it, while at the same time a new hire to support the advisor and their team has been rejected by management due to another hiring freeze – the list can go on and on.

Once the boiling blood settles, the wirehouse advisor and his/her partners start to dream of a better way.  And here is where the bulk of the questions come from as they ponder how to migrate their clients into an independent business model with the advisor also playing the role of business owner. Hiring and firing decisions are now the responsibility of the advisor.  Compliance is now a process the advisor has to manage, and technology, while far superior in the independent space than inside the wirehouses, now becomes key to running their business and requires oversight and maintenance.  Adding to the list of tasks are all of the fine points that come with being an employer, such as insurance coverage, both from an E&O/D&O and Worker’s Comp perspective, as well as health insurance benefits for employees.  Breakaway advisors have to be prepared to wear all these hats, and to be comfortable with each hat, as this is the advisor’s firm, thus the advisor’s responsibility to make sure each of these elements are handled properly.

The good news is, with the growth of the independent space, there are many customized resources breakaway advisors can tap into to make these issues more than manageable (more on this later).

Further concerns potential breakaway advisors have are to think about the operating expenses of the business – office rent, technology, and employee salaries often can range around 25% of revenues as part of the overhead of any business.  In the meantime, upfront costs will be required to get the business up and running, prior to any revenues coming in the door.

When launching an RIA, as opposed to joining a competing wirehouse, there is no signing bonus handed to the advisor on the first day of their new venture.  To get started, the new firm will need to secure real estate, furnish the office space, purchase computers with cloud-based servers, and float the operating expenses of the business for the first 3 – 6 months before the majority of client assets have transferred and the business can reach its first full billing cycle.

For many advisors, these seem like insurmountable obstacles and while it may be fun to dream of entrepreneurship, this reality ultimately doesn’t appeal to the average advisor who decides to remain in his/her seat wearing their employee hat.  There is nothing wrong with this outcome, it simply isn’t their cup of tea. They choose the “stay” route.

But for a select few, these challenges aren’t viewed as headaches or obstacles, but as opportunity.  This is their opportunity to service clients with the exact products and services they have always dreamed; this is the opportunity to park that bureaucratic-blasting bulldozer forever and run a nimble business that can implement change as quickly as the owners can envision them.  This is the opportunity to build a lasting legacy, with true equity value, that can be passed to next gen partners or family members.  For these advisors, they begin to seriously consider the next question on the wirehouse advisor’s mind: “Should I go?”

Check back with us next week for Part 2 of this series…

Article originally appeared in IRIS.XYZ

Part 2: Why Go Independent?

By Larissa Marcontell Sonnen

Wirehouse advisors do not launch RIAs on a whim.  After years of toiling away in the captive employee model, building a book of business and having the privilege of earning client trust and loyalty, they have a pretty good gig going.  Many advisors, rightfully so, have the attitude that the devil you know is better than the devil you don’t.  But as the RIA industry continues to gain client assets (see described Cerulli report) and more and more wirehouse advisors make the switch to the independent model, curiosity tends to set in, and advisors begin to focus on three questions:

  1. Should I Stay?
  2. Should I Go?
  3. If I Go, How Do I Do It?

We covered question #1 in our previous post (see: Part 1) and all the legitimate reasons an advisor would choose to stay an employee at a large bank/brokerage firm/wirehouse.  Here, I would like to focus on what drives advisors to take that leap of faith and finally determine that the grass is in fact greener on the other (independent) side.

“Should I Go?” or “Why Go Independent?”

The one thing keeping wirehouse advisors in their current position is the thought that the large brand behind them is important to their clients.  For every advisor seriously considering starting their own RIA, they have given up on the culture/brand that they have been displaying on their business card for the duration of their careers.  Many Merrill Lynch advisors feel that Bank of America has ruined the “thundering herd” brand that they proudly joined decades ago.  Often, UBS advisors are frustrated with foreign ownership and the uncertainty surrounding the long-term plans for wealth management at the parent firm.  Many Morgan Stanley advisors have been upset for years following the cultural integration issues of the Smith Barney merger.  And most Wells Fargo advisors are running from the negative headlines surrounding the cross-selling and illegal account opening scandal that rocked them last year.

On top of that, the compensation grid always seems to change in favor of the wirehouse and against the advisor.  Those looking to become business owners are seeking operating leverage for the first time in their careers.  Top advisors within the wirehouse community are paid on a 42% payout grid, which means for every dollar of revenue their clients produce, the advisor takes home 42%.  In contrast, RIAs can attain profit margins of 65% – a 23% increase in take-home pay from the wirehouse model.  Additionally, profitability increases for every new dollar brought in, as opposed to the fixed 42% payout at the wirehouse.  When advisors fully embrace the concept of operating leverage and the ability to expand profitability as a business owner rather than an employee, they get very serious about the RIA model.

Advisors contemplating Independence are also excited about the prospect of improving the technology tools used to deliver their services to clients, as well as the ability to report and advise on all client assets, regardless of where they are held.  By removing the compliance handcuffs and implementing fairly basic aggregation software, the RIA advisor is able to pull in outside assets onto the client’s quarterly performance reports, which immediately elevates the advisor in the mind of the client – for the first time in his/her career, the advisor is able to truly advise on the client’s entire net worth, including the liability side of the balance sheet (see PFI Advisors’ white paper: “Innovative Lending Solutions in the RIA Space”).

Speaking of Compliance, top advisors are exhausted from the internal battles that result from the fact the branch offices are built around and managed to the lowest common denominator.  It is quite common for advisors to go to management with an investment opportunity they would like to show their clients, only to be told that while they might be able to offer this in a compliant fashion, management fears that the younger advisors in the office would get everyone sued if they tried to offer this sophisticated investment to their clients.  Since investment opportunities must be offered uniformly by all advisors to their clients, this frustration occurs more often than not when a top-performing advisor tries to find innovative solutions for their clients.

The idea that compliance at an RIA can be structured to protect the client and the advisor, and not solely to protect the firm, is very appealing to wirehouse advisors.  Knowing that the marketing roadblocks will be removed around social media and the ability to market themselves as a distinguished firm rather than individual employees of a larger organization with identical web pages every other advisor has under the shared brand, makes these advisors ecstatic. They will have the freedom to position themselves and brand their RIA to their unique niche, finally differentiating themselves from the competition.

Succession planning and the opportunity to build a brand and a firm with legacy is very attractive to advisors who are considering the move to Independence.  While some advisors have a hard time seeing past the short-term benefits of a large recruiting check from another wirehouse, it has been proven that the long-term economics favor starting an RIA and building equity over time.  Mindy Diamond recently published a research piece spelling out the math for advisors considering making a move: (”The Math Behind the Move to Independence”).  PFI Advisors has written about it in the past as well: (“Long Game of Starting an RIA”).  Advisors are opening their eyes and doing the math for themselves.

In the end, the biggest thing on the mind of an advisor about whether to start his/her own RIA is the sheer excitement to finally own their own destiny.  They now control who their clients are, what they can charge their clients, what products and services they feel best serve their clients, where clients hold their assets, and what product providers offer the best solutions for their clients.  Regardless of the current state of the Fiduciary Standard in Washington, advisors attracted to the RIA industry feel that they must make this change if they want to best serve their clients.

Once this decision has been made, there is one last question on their minds: “How on earth do I do this?”  That question will be answered in my next post!

Article originally appeared in IRIS.XYZ

Part 3: If I Go Independent, How The Heck am I Going to Make it Happen?

By Larissa Marcontell Sonnen

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