“Going independent” once meant only one thing – you left the world of traditional brokerage firms to begin your own Registered Investment Advisory firm within a fiduciary environment. It was choosing to control your own destiny versus remain in an employee model beholden to the benefits and challenges of an integrated solution. The decision, albeit highly significant, was binary– A or B.
Today, the independent landscape is dynamic, varied and oftentimes confusing. For every advisor considering independence, there is a right fit along a spectrum of supported autonomy. Every independent firm gains destiny control and ownership, but what exactly does that look like day-to-day? Identifying the right model of independence is not a simple decision.
When faced with this challenge, many financial advisors choose to first interview independent solutions and custodial firms to understand their capabilities. Instead of making the decision easier, this can lead to more confusion and additional questions than answers.
The most important things to know before going independent are defined by your own preferences and needs. Understanding the details of your vision for the future – in particular your cultural, support and economic needs – will focus your subsequent conversations.
Begin by asking yourself the critical and difficult questions:
- How much operational support do I need on my team? Or would I rather outsource a majority of the operations?
- Am I worried about “being on an island”, distanced from new industry trends and best practices?
- Economically, do I have immutable needs, such as upfront cash to pay off an existing debt?
- Am I interested in owning the equity of my own business or a piece of a larger enterprise?
- Do I, ultimately, want to be a Partner or a CEO?
Among others, these questions elucidate the nuances of your business needs and help clarify what support, culture and economic model is right for you. By carefully assessing your preference in these three key topics, you will be better prepared to approach the varied models in the independent landscape and make a critical decision for your practices’ future. This should be the first step, preceding deep due diligence into any independent platform.
Consider Culture, Support & Economics
Your cultural preference will be a strong guiding factor in determining what independence will look like for you. The culture spectrum ranges from building an independent culture that is unique to your firm, to a culture of community that is possible through a Partnership-like association with other financial advisory practices. In the former, an advisor creates a brand and culture for his/her business, which he/she manages independently as CEO. In the latter, the advisor and practice benefit from “plugging into” a larger enterprise whose culture they can shape and leverage.
One of the most wide-ranging aspects of independent solutions for financial advisors is the level of operational support. As with culture, there are two ends of a spectrum. On one end, there is an outsourced solution whereby the majority of the business’ operations are absorbed by a partner firm. On the other end, the business runs autonomously, managing middle and back office operations internally. For the latter, you hire an internal team that manages the day-to-day operations of the business. In the former, an outside firm’s operational team provides leverage for your business.
Economically, the range of models of independence can vary greatly. Economic considerations should impact your optimal deal structure. On the one hand, some advisors seek a considerable up-front package for the transition. The package can be comprised of a cash payment and/or equity in an existing enterprise. On the other hand, an advisor can choose to invest money in the creation of his/her own enterprise, building his/her own equity, but not receiving a package up-front. In addition, different models yield different payouts. What percent payout is optimal for you?
Additionally, it is critical to assess which preference you prioritize. Is your cultural preference more important to you than your economic? Or is your decision being primary driven by support and economics?
Because today’s independent landscape includes myriad platforms and solutions, breakaway brokers often begin their path to independence by researching model after model to understand the nuances of each. However, it is far more critical to first self-assess and identify the unique needs of your business and what motivates each decision-maker.
Along with the destiny control and ownership inherent in independence, the right model of supported autonomy should provide the necessary operational support, culture and economic solutions to make your vision a reality.
Michael Parker is National Director, Enterprise Development for Hightower Advisors.