Indie Existentialism

Freedom has its price, the saying goes, and perhaps nowhere is that price more frequently calculated than in the brokerage industry. Year after year, captive financial advisors, dreaming of independence and of the promises of an untethered professional life, kick around the numbers of their profession in hopes of arriving at a total that will deliver them their dream arrangements: Total freedom! Astronomical

“Freedom has its price,” the saying goes, and perhaps nowhere is that price more frequently calculated than in the brokerage industry.

Year after year, captive financial advisors, dreaming of independence and of the promises of an untethered professional life, kick around the numbers of their profession in hopes of arriving at a total that will deliver them their dream arrangements: Total freedom! Astronomical payout! Entrepreneurial spirit!

But as the process of attracting and retaining clients grows more complex, the metrics of forsaking wirehouse “chains” for the life of an independent advisor are likewise getting more complicated. For some, the lures of an independent practice are too strong to be ignored, regardless of how the numbers shake out.

“I can't imagine working for a big Wall Street firm,” says one independent rep affiliated with Edward Jones. “I'd feel like a guy on an assembly line.”

For most advisors, though, the decision hinges in no small measure on whether going independent will translate into a better net payout. Independent advisors make up an estimated 40 percent of the brokerage workforce, but their ranks are thinning, if slowly. According to Boston-based Cerulli Associates, the current number of 96,484 indie advisors is expected to drop to 95,761 by 2006. The driving force behind this downward movement: Many reps are finding that the amount of time and money spent to keep a business going detracts from the satisfaction they derive from their jobs. They also are learning that autonomy is not a wholly positive state. It also carries with it enormous responsibility and rising financial costs.

“I still cringe when I sign the paychecks, and I've been doing this 20 years,” says Mark Snyder, head of the Mark J. Snyder Financial Group, affiliated with Royal Alliance in Medford, N.Y. “That part never gets easier.”

Crunching the Numbers

According to the compensation study by wealth management consultants Prince & Assoc., commissioned by Registered Rep. (see page 32), the average production of an independent rep is $290,000, with average assets of $34 million and a total of 290 clients. With an average payout of 80 percent (according to a study by Moss Adams, the West Coast consulting firm), independent life looks pretty good at first blush.

But after applying Raymond James Financial Services' “Business Plan Calculator” to the numbers, the reality of going independent comes into focus. The calculator breaks down how much an average rep takes home after accounting for expenses, according to Matt Matrisian, vice president of RJFS' investment advisors division.

Taking the average production of $290,000, and multiplying it by the 80 percent payout, yields $232,000. Then, using conservative estimates from RJFS' calculator, which assesses expected monthly accrued expenses for an advisor using their plan, you can get a feel for how much of that $232,000 will find its way into a rep's wallet.

The calculator accounts for costs incurred by most independent reps, including employee salaries, rent, phone bills, insurance, advertising and the like.

Using conservative estimates, the average monthly expenses for a producer comes out to $8,076 a month, or $96,912 a year, making the actual average income $135,088. When compared to average wirehouse payouts, that income figure pales. According to Prince, the average production for a wirehouse rep is $530,000. When multiplied by Moss Adams' average payout of 35 percent, the wirehouse rep takes home $185,500 a year, or $50,412 more than an indie, on average. (Based on this math, however, a particularly prolific indie rep would easily outpace a wirehouse rep with the same production.)

Remember that the wirehouse reps are free of many of the administrative headaches that plague independents. Cerulli estimates that independent broker/dealer reps spend 40 percent of their time working on running a business rather than working on their book.

Further, the payout figures do not account for the costs of starting an independent office, which, most reps will tell you, is the biggest financial drain of all.

“You have to spend an enormous amount of time and resources before you even open the door,” says Dean Vernoia, chief operating officer and vice president of business development at J.P. Turner, an Atlanta-based independent b/d with 500 reps in 130 offices. “You're getting into another business now.”

Matrisian says his firm suggests any rep wanting to go independent with them have $200,000 in trailing gross revenue over the previous 12 months. For its registered independent advisors, they require a minimum of $25 million in assets.

The RJFS calculator also helps reps determine how much they'll need just to get started. Using the above hypothetical, and accounting for an industry-average $4,000 a month in rent for office space, the calculator spits out about $30,000 initial expenses.

Randy Carver, founder of Cleveland-based Carver Financial Services, a division of Raymond James, suggests that reps wanting to take the plunge go even further, saying it's probably wise to have nine months of all expenses paid before even “considering getting into this.”

Matrisian says any rep making the shift to independent should expect a few months of downtime at the start, noting that sometimes it takes two or three months just to get accounts moved over.

“We've seen people take four years to get ready to make a move toward going independent, and we've seen four weeks,” says David Grau, president of FP Transitions, a Oregon-based advisory that helps independent reps buy and sell their businesses. “It's a lifestyle choice, really.”

Free at Last

Of course, the above hypothetical is based simply off an industry average, and a rep who can navigate the choppy initial waters and grow a business, while still keeping overhead costs from spiraling out of control, can certainly beat the payout averages.

Snyder, who has been independent for 20 years, says that going independent was the best move he ever made and, in fact, found the transition easy. “You just have to make sure you know what you're getting into,” Snyder says.

The benefits of going independent are almost self-evident. A rep is able to construct his business as he sees fit, set his own hours and not be beholden to a wirehouse culture.

“I don't know why more people don't make the jump,” Snyder says. “Some people just like to be coddled by wirehouses, I guess.”

Most important to many reps, the business — and the equity a successful one produces — is owned entirely by the rep, and can be passed on to family members through succession planning or, more often, sold to larger b/ds.

“You're finding more and more people cashing out early,” Grau says. “No one sells their business at 65. Buyers are just looking to buy a great rep's clients.”

Profitable, rewarding, interesting — going independent can be all these things. But jumping into independence will never be easy, reps say. The entrepreneurial aspect has become, according to many reps, one of the lifestyle's top selling points, but it is also fraught with peril.

“You have to really ask yourself: ‘Is this an ego thing, or a business thing?’ There's a right answer to that question, and if you give the wrong one, you're in for a world of trouble,” Carver says. “But when it works, it's the best way to go.”

The Little Things

Attention to the most mundane details can mean the difference between a successful independent launch and a failed one.

When embarking on his independent career at Raymond James, Dean Vernoia learned more than he wanted to about where the devil resided.

While setting up his office he couldn't help but notice that his long-distance bill was, in his words, “insane.”

“Those guys will tell you that the charges you might not understand will all even out in the end, but let me tell you, they don't,” he says. “If you're not careful with every little expense when you're starting out, you'll lose all your money before you even start.”

Here's a guide to keeping these and other practice-launching costs in line:

Payroll

These costs extend well beyond the salaries of assistants and administrators. Remember to factor in health insurance, payroll taxes, accounting fees, Social Security, vacation time, travel expenses, workman's compensation and sick leave. Underestimate these at your peril: One rep affiliated with Raymond James says that when his assistant became pregnant, he hired an almost comical succession of temporary workers to spell her. “Temp labor is so expensive, and almost never productive,” he says. “That set me back a month, at least, right there.”

Marketing

Most advisors, says Randy Carver, founder of Cleveland-based Carver Financial Services, put little to no thought into advertising.”In a lot of ways, it's the only way to introduce yourself to people,” he says. And simply paying for a little extra space in the phone book probably won't cut it. Most advisors favor TV. “You kind of feel like a slimy ambulance chaser sometimes, but television has proven to work for us,” an East Coast RJFS rep says.

Insurance and lawsuits

Matt Matrisian, vice president of the investment advisors division of Raymond James Financial Services, says many reps, particularly those working as a registered independent advisor rather than under a contractor model, don't know about errors and omission coverage needed on all assets. (Many contractor models, including Raymond James', offer the insurance to reps for $226 as part of their monthly financial advisor fee.) The going rate for errors and omissions — meant to cover small, simple financial clerical or trading errors that could eventually need accounting for — is $1,500 a year for every $10 million in assets under management.
WL

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