By Austin Philbin
The transition from a traditional financial institution to becoming a registered investment advisor is an exercise in faith.
From a knowledge perspective, educated consumers are aware of the shift of assets out of banks and brokerage houses into independent custodians. However, statistics alone oftentimes are not enough evidence to provide comfort to a transitioning financial advisor.
Advisors need to understand exactly how the service model their clients have come to expect will be able to be replicated. This service model needs to span the deliverable spectrum, from access to investment products to the utilization of human capital for estate planning or insurance solutions. The beauty of the independent advisory movement is its tremendous level of flexibility, which can create a far superior client experience.
Here are some of the common myths around independence and a few of the most frequently asked questions during the discovery phase of the transition to independence.
Myth No. 1: I won’t be able to provide the same breadth of products and solutions.
The reality is that the evolution of financial services has created an open architecture distribution model versus a proprietary captive one. Steve Schwarzbach, co-founder and partner of Icon Wealth Partners states: “We like to refer to our platform as Open Architecture Plus. We essentially had no issues transferring our clients’ assets, including most alternative investments. Now we have an even broader, more robust set of investment solutions than at our previous firms.”
Existing companies are looking for new revenue streams and new companies are being created to focus specifically on an approach to appeal to a wider range of clients. Having worked with incredibly skilled advisors, who can have really complex end-client needs, I’ve seen firsthand how structures like individual retirement accounts and products such as physical commodities can be transitioned to independence. There are also a wide variety of human capital solutions from estate planning specialists to family wealth coaches that can be employed to provide expertise to end clients. Finally, the flexibility around how to charge clients for various services makes it easier to cater to a wider variety of client types compared to rigid institutional pricing structures.
Myth No. 2: My clients won’t believe their assets are safe with a startup.
The financial acumen, quality of advice, and trustworthiness of the financial advisor don’t change when clients leave a bank. Further, the only startup aspect of the majority of newly minted registered investment advisors is the legal entity formation (in other words, paperwork). Assets are held at custodians, like Charles Schwab, Fidelity, and Pershing/Bank of New York Mellon, that safeguard trillions of dollars and have been in business for many, many years. Additionally, if advisors have been proponents for third-party money managers for investment management, they will have as large if not an even larger line-up of managers to choose from in the independent environment. Finally, both the custodians and the RIAs should have protections in place, with E&O / D&O Insurance, Fidelity Bonds, etc., to provide liability protection should fraud or a similar event occur.
Brian Buckley, founder of Buckley Wealth Management in Las Vegas, explains the importance of the custodian in the following way: “Having a quality independent custodian is a real plus for our clients—they have a second set of eyes on their accounts. BWM acts in the clients’ best interests in terms of investment management; and our custodian devotes its vast resources to safeguarding the clients’ assets, providing independent reporting directly to the clients and enabling the clients to access their accounts anytime from anywhere. Having a third-party custodian solidifies our ability to act as a fiduciary, giving us far less restrictions from a products and services stand point.”
Myth No. 3: I will just do it myself.
One of the first questions that I ask someone who’s interested in starting an RIA is: “Do you want to be an entrepreneur?” It’s a really critical question because I feel confident that, with enough understanding of a value proposition, individuals can be “sold” on leaving a traditional institution. What cannot be sold is the fire required to start a business. Assuming one can be great at everything related to business is a dangerous risk. We live in an outsourced business model world within the RIA community. The strength of this model is that it allows financial advisors to focus on core competencies like investment management, relationship management and financial planning, while shifting responsibilities for things like technology, compliance and bookkeeping to other professionals. Instinctively, the costs for goods and services increase when a business employs outsourcing; however, when you add the human capital costs, along with the time/energy it takes to perform certain tasks, the true cost to a profit and lost balance sheet is often a wash at best.
Blake Pratz, co-founder and managing partner at Icon Wealth Partners helps to put things in perspective: “Even the most entrepreneurial among us can’t possibly cover the entire gamut of what it takes to set up a new RIA. In the end, true do-it-yourselfers end up with less time to focus on their clients.”
Myth No. 4: Technology will solve all my problems.
One of the drivers for financial advisors to evaluate the independent space is the recognition that technology is rapidly becoming a crucial part of the overall value proposition. Large financial institutions have dual issues with technology that prevent them from fully extracting the value of the progression of technology: (1) legacy systems built on top of each other; and (2) managing to a lower common denominator to limit risk.
However, technology alone does not make anything better. Successful independent financial advisors/advisory firms understand how to build scale through the effective use of technology. They automate as much of their practice as possible. They find new and creative ways to allow their clients to visit with their money and strengthen their brand recognition by white-labeling the solutions. It’s a commitment because many times with technology a step back, in order to learn new processes, results in a massive leap forward.
To sum it up, the independent space does provide financial advisors with the ability to serve the needs and interests of their clients. Sometimes the process behind the delivery of certain products is different; however, the sources available expand exponentially. Through proper education and due diligence, an outstanding offering that is tech-enabled becomes not something that you need “faith” to find, but rather a reality. To quote the late George Michael, “You gotta have faith.” But you also need proper guidance to make informed decisions.
Austin Philbin is Director, Western Division at Dynasty Financial Partners.