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Which Path to Independence Is Right for You?

Five things every advisor should know about joining an IBD versus an RIA.

Independence has become as legitimate an option these days as being an employee, providing advisors with the freedom to ask themselves how they want to build their career. With an industry landscape that has expanded well beyond most expectations and wirehouse deals reduced significantly, there are many exciting options for entrepreneurial advisors looking to go out on their own.

If you’re considering making the jump, ask yourself, “If I go independent, should I choose the independent broker/dealer or registered investment advisor space?”

Take the example of Elliott, a financial advisor who has worked at the same wirehouse firm for almost 20 years. He has a book of 75 high-net-worth clients and manages just shy of $600 million, generating annual revenue of approximately $4.5 million. Elliott is in major growth mode, has been offered outsized transition deals from other wirehouse and regional firms, and could take his enviable book and go anywhere he chooses, or not. But Elliott has had an itch to be a business owner from the time he was 16 (noting that at that time he started a small business fixing home computers), so he always knew that if he left his firm, he would go out on his own.

Over the past six months, Elliott has met with business development folks and senior leaders from five different IBDs, RIA custodians and service providers like Dynasty Financial Partners and HighTower. Each of the prospective firms are wildly interested in Elliott because he is personable, has built a great business, which is 75 percent annuitized, and has no compliance issues.

After all of these meetings, one question remained in Elliott’s mind: What are the real differences between the IBD and RIA spaces?

Five Key Differences Between IBDs and RIAs:

  1. IBDs offer transition money (from 25 percent up front to 125 percent in some cases) as incentives that RIA custodians don’t. To be sure, an advisor can monetize by joining a national RIA firm, but because it’s a W-2 model, that advisor would not really be “independent.” 
  2. The IBD space offers more cover and support for a breakaway broker. It tends to feel more familiar and therefore less overwhelming than the move to the RIA space.
  3. For the most part, sophisticated buyers and sellers don’t look to the IBD space to buy or sell; typically they don’t want to be limited by the override the IBD takes and the restrictions it places on its advisors. Those would-be entrepreneurs who are looking to maximize enterprise value will need to make sure that the underpinning of their business is solid and will allow for the greatest amount of optionality.
  4. The IBD space can be limiting — less limiting than being an employee. But advisors must use the platform and technology that the firm provides. Those advisors looking to build something more customized may feel stymied by an IBD.
  5. While there are a fair amount of top advisors in the IBD world, the majority of the corner office folks who are interested in building an enterprise practice are in the RIA and hybrid spaces. As a result, the community can be all wrong at an IBD.

Still considering his options, Elliott has yet to make his final decision. Often the biggest question left to answer is: Why not go to the highest bidder? While transition money is often very attractive, that may mean giving up some freedom and flexibility — and negatively impact overall enterprise value at day’s end.

No matter which choice Elliott or any other advisor makes, the key is to move forward knowing what limitations may lie ahead. Ultimately, whether he chooses the IBD or RIA route, he will still have more independence than he has now. Often, that’s what matters most.

TAGS: Careers
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