Going independent is not what it used to be. With the transition packages being offered by the wirehouses at all-time highs (top deals over 330 percent), the persistent negative press about Wall Street firms having quieted, and plenty of uncertainty about proposed sweeping regulatory changes, those advisors considering a move are less inclined to choose independence.
There is no question that over the long term, the economics of independence dwarf the upfront cash and short-term windfalls that advisors are being offered by the big firms. Increased take-home pay, the preferential tax treatment for business owners, the ability to build equity and eventually sell the business for a significant multiple, which is typically around five times free cash flow (earnings before owner compensation) in today's market for fee-based practices, all make independence very alluring.
But, most advisors must also take into account the unvested deferred compensation they would walk away from if they leave the wirehouse firm before it vests, the retention packages that they were paid, and the lack of certainty about what the ultimate pay day will look like if they make the move to independence. The bottom line is, in many cases, the ultra-sexy seven-figure deals that quality advisors are being offered by the wirehouses are just too compelling to pass up.
Take Marla and Sam, a long-tenured Southern $2.4-million dollar team managing in excess of $300 million in assets. Hyper- vigilant compliance, greater bureaucracy, and increased fees at their wirehouse firm made them decide that it was time to explore options elsewhere. While independence was the option they were most intrigued by, they agreed that they had to at least look at the other wirehouses because they had not previously monetized their business and knew they had built significant equity in it. The ability to take money off the table mid-career was quite appealing.
After six months of multiple meetings with two of the three major firms in town, a number of regional firms, and the three top custodians (Fidelity, Pershing and Schwab), Marla and Sam realized that they were not as entrepreneurial as they thought. The notion of having to deal with the administrative aspects of running a business was not in their DNA, and walking away from almost $2 million in unvested comp between them made independence almost impossible to consider.
This reality created a conflict for the team. THey believed that their independence would create an ideal world for their clients, but they had to pay attention to their own economics as well. In the end, when they put pencil to paper, they realized that accepting a check from a wirehouse firm would give them a financial windfall without requiring them to sacrifice service.
The team made sure that within their prospective wirehouse branch office, there was a culture of autonomy and flexibility and that would allow them to run their businesses with complete freedom as long as they remained clean from a compliance perspective. Did this decision to forego independence force them to sacrifice anything? Sure it did. The team gave up brand equity, the ability to sell their business on the open market at the end of the day, the ability to create a legacy, and almost 25 percent in take-home pay. But, the more than $3 million in upfront cash they were offered plus the likelihood they would be paid $4 million more over a span of five years was too much to give up. What's more, the new firm has a succession planning program that will allow them to sell their business to the next generation. They chose the wirehouse.
Independence may be the answer for those who are long-term oriented, but for advisors who are swayed by the guarantee of life-changing money, the wirehouses may be a better bet.
is president of Diamond Consultants, of Chester, N.J., which specializes in retail brokerage and banking recruiting. www.diamondrecruiter.com