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Options for Institutional Advisors Are Not Nearly as “Institutional” as One Might Think

With all of the high-profile movement going on in the financial advisor landscape, one area of practice that seems to capture less of the limelight is the institutional advisory space. While institutional advisors—those whose clients are charitable organizations, corporations, retirement plans, Taft Hartley plans, municipalities, government entities and the like—represent a relatively small percentage of the financial advisor population at large, they typically have very successful businesses and are highly coveted by the competition.

Generally speaking, these advisors run their businesses from one of two different places: a wirehouse firm or some form of independence (an independent broker/dealer or RIA). The world-class resources, support, favored-nation pricing, scale, guardrails and brand of a major firm can give institutional clients—and the advisors that serve them—a sense of comfort and stability. Alternatively, more and more of these institutionally-focused advisors are finding their way to the independent space—either establishing their own firms or joining forces with already established ones.

Truth be told, in today’s day and age, platform is largely a commodity, so there isn’t much advisors can’t access in the way of product or service, whether they are independent or an employee of a bulge bracket firm. The decision around where to run one’s business should come down to the following:

  • How do I want to live my business life?
  • Do I see myself as an entrepreneur or an employee?
  • Do I want turnkey or to build something my way?
  • What do I value more: freedom, flexibility and control, or brand, scale and in-house access to everything that can support my business?

Some advisors, even though they would love to become an entrepreneur (and feel limited by their employee status), operate under the mistaken belief that their institutional clients need the deep pockets of a big firm in order to stick with them. This is simply not the case.

Three things that have opened up a new world for institutional advisors

The changing landscape has brought about an evolution, providing much to be explored in the way of new opportunities for an independent institutional practice.

  • Errors and Omissions Insurance (E&O) is what protects an independent RIA against claims of wrongdoing. Shirl Penney, founder and CEO of Dynasty Financial Partners, says, “The largest malfeasance claim against a team was $10 million. $10 million of E&O insurance costs approximately $45,000 per year; $20 million of coverage costs approximately $75,000 per year.” And, if an advisor doesn’t take discretion, s/he has significantly less exposure; the custodian would be responsible for things such as fraudulent wire transfer. The truth is that the greatest risk rests with the custodian.
  • Top institutional clients and billionaire family offices believe in a model where safe asset custody, product manufacturing and advice are separate. This model is exactly what being an RIA is all about. Plus, ultra high net worth and institutional clients value an independent voice and transparency in fees.
  • Independence offers more flexibility, true open architecture access, the ability to customize the client service model, as well as a broader worldview from a research perspective and the ability to be multi-custodial with cutting-edge technology to tie it all together.

At the end of the day, however, some people are just more comfortable as an employee, especially given a more onerous regulatory environment. They have no desire to manage the minutia of running a business, or take on the attendant risk; the easy access to best-in-class resources and solutions is what they value most. There is no judgment in that statement at all—from where I sit, it’s why Baskin Robbins makes 31 flavors of ice cream.

It’s all about choice

Don’t stay put because you feel jailed by the belief that “My institutional clients would never get comfortable with me leaving a major firm and going independent.” Clients are far more dedicated to honest, hard-working advisors who they recognize act as fiduciaries with their best interests at heart than they are to the brand name on their monthly statements.

Mindy Diamond is President & CEO of Diamond Consultants in Morristown, N.J., a nationally recognized boutique search and consulting firm in the financial services industry.

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