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Six Key Drivers to Consider on the Path to Independence

With so many options to choose from, how does an advisor decide which path to independence to take?

Many advisors dream of going independent for the freedom and flexibility to control their business, client service model, and bottom line. And the path to independence used to be simple: For most breakaway advisors, it was a straight line from an employer to an independent broker/dealer. 

But today, an expanded independent ecosystem offers more choice on which path an advisor can take. That is, there are service providers that offer state-of-the-art platforms and support, an ever-growing number of consultants to serve as guides at start-up and longer-term, and a growing pool of capital resources available to advisors seeking working capital, liquidity, or to offset unvested deferred comp that may be left behind.

Although more choice is beneficial, it adds a layer of complexity when determining the “right” independent solution, so much so that even our own guidance to advisors has changed over the last few years.

With so many options to choose from, how does an advisor narrow down which path to independence to take?

It’s a decision-making process that often starts with six key drivers—and their importance to an advisor’s goals.

1. Money

While the decision to go independent is about the long-term monetization of the business, there are still important short-term financial considerations to assess. These include how much deferred compensation you may leave behind, your willingness and/or ability to fund the start-up costs, and the desire to “de-risk” the move by being paid an upfront deal. The good news is that there are an increasing number of capital sources available to breakaway advisors to help them launch and scale the business. 

Independent b/ds pay up-front cash transition deals, some of which can be substantial, allowing breakaway advisors to see some short-term monetization of the business. In the RIA hybrid space, there are platform providers that offer several forms of financing, including upfront transition capital, minority investments and working capital loans. The key for a breakaway team is to assess the importance of the short-term versus long-term economic considerations since options that provide more upfront capital typically offer a lower ongoing net payout.

2. Support and Resources

The notion of taking on the tasks of managing compliance, technology, HR, and finance is often what stops advisors from going independent. Plus, as larger teams make the move to independence, they need to be certain that they can support complex businesses and sophisticated clients without missing a beat. The advent of RIA platforms solves for these concerns, providing breakaways with integrated technology, sophisticated investment and planning solutions, and access to trust and banking capabilities. These platforms don’t just provide support at launch; they also offer ongoing operational, compliance, marketing, and practice management support to optimize the business for growth.

For advisors who choose an IBD and want greater support, aligning with a large enterprise or office of supervisory jurisdiction (OSJ) can provide many of the same benefits offered by the RIA platforms, including support for compliance, technology, middle- and back-office operations, marketing and more.

3. Community

Some advisors rule out independence because they feel that there is a lack of community, that essentially, they’d be setting up shop “alone.” Others worry about the optics of a solo practice, the continuity of impeccable client service, and how they will replace their firm’s thought leadership on investments. The reality is that being independent doesn’t mean being alone.   

Advisors who prioritize community can benefit from affiliating with an RIA platform provider or OSJ, as community is a core pillar of these models, with opportunities for engagement via conferences and ongoing initiatives available. Additionally, industry events and custodial or broker/dealer conferences give advisors time to interact regularly. And, of course, there is always the option to build your own community via targeted recruiting and acquisitions.

For those seeking even more of a community feel, alternatives include tucking into an established independent firm with a fully built-out team and infrastructure or joining a quasi-independent model that offers more freedom and control in a supported traditional branch office setting.

4. Customization Versus Turnkey

An advisor’s vision for the business also plays a crucial role in determining the right path to independence. Surely the desire to go independent is predicated upon achieving greater freedom and flexibility—but just how much of each is a question advisors need to consider.

If maximum customization is a priority and the vision is to offer a bespoke client experience including personalized reporting, a curated technology stack, private deals, boutique alternatives, concierge services, and tax planning and preparation – the RIA path is the right direction since it provides the greatest level of control.

Yet others prefer turnkey access to a comprehensive platform that provides all resources under one roof. Several high-quality IBD solutions serve this very purpose

5. Freedom and Control

The goal of achieving “freedom and control” is also dependent upon an advisor’s vision for their business. An RIA has complete control, including the ability to “shop the Street” for the best prices and products, the freedom to use marketing and social media unencumbered, and to engage in outside business activities. It’s the path for those who want to be a true fiduciary—completely unrestricted and unconflicted.  

Conversely, in the IBD space, an advisor must adhere to the broker/dealer’s compliance regulations, marketing guidelines, and investment menu. Yet it’s an attractive option for advisors who prefer a comprehensive one-stop-shop solution, with operational, practice management and recruiting support, and ultimately the protection that comes from the IBD’s compliance guardrails.

6. The End Game: Succession

If an advisor is highly growth-oriented and the goal is to build a substantial enterprise that will sell for top dollar when the advisor retires, then choosing a path that maximizes inorganic growth potential and enterprise value is vital.

For such enterprise builders, the RIA space is often a natural fit since the ability to be multi-custodial increases the pool of acquisition targets. Plus, when RIAs are sold, they typically attract the highest multiples since acquirers place a premium on the advisory business as well as the lack of broker dealer/FINRA-related restrictions.

For other advisors, the aspiration isn’t to create a large enterprise but to run a smaller, high-quality business that prioritizes clients and provides a fulfilling lifestyle for the advisor. These advisors may prefer the support an IBD will provide in helping them identify a successor and structure and finance a competitive retirement buyout.

The independent landscape has evolved dramatically, offering advisors greater choice than ever before. Yet optionality can make the decision-making journey more complex. Taking the time to assess these six key drivers will be time well spent—providing a roadmap for identifying the right independent path and eliminating the potential pitfalls along the way.

Wendy Leung is a senior consultant at Diamond Consultants.

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