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What Does Independence Really Mean in the Wealth Management Industry?

While independence means less bureaucracy and red tape, it comes with additional responsibilities that advisors should be aware of before opting to make the leap.

We’re reminded of an old saying each year around this time: Freedom isn’t free. And it’s more important than ever to acknowledge the sacrifice and service of countless others who, in many cases, gave their lives to protect the freedom that has become a cherished way of life for us all.

While trivial in comparison, independence has also become an important concept in the wealth management landscape: An alternative to the traditional captive models that long dominated the advisor ranks, particularly at the upper reaches.

But just as Independence Day means more than barbeques, beers and fireworks, independence in the wealth management industry is more than breaking free from a big firm. Yes, it means freedom from a complex/branch manager, and perhaps less bureaucracy and red tape. However, being independent comes with additional responsibilities as an advisor shifts from “financial advisor” to “financial advisor and business owner.”

There are other essential considerations that advisors should be hyper-aware of before opting to make the leap to independence; these five represent some of the most prominent:

  1. Independence is what it sounds like.
    Let this serve as a good reminder that, at the end of the day, the word “independence” means what it implies. It’s unreasonable to expect the same services and support you might enjoy in a captive channel. And indeed, most advisors who make the leap to independence are happy to get away from all the scaffolding and guardrails. One advisor who recently committed to an independent broker/dealer was surprised to learn that the IBD wasn’t providing much of the support and services her previous captive b/d provided. But you can’t have your cake and eat it, too. While different independent firms and platforms do indeed offer varying levels of support, at the end of the day, it’s likely to feel much less structured and supported than the traditional firm model. And that’s by design: Advisors hate the amount of revenue the traditional firms take from them, but that revenue override pays for ancillary services and support.
  2. You have to really want it.
    Independence is not for everyone. Even the most supported versions of independence require some degree of entrepreneurial spirit and desire. Establishing an independent practice typically comes with more work (especially in the early innings of launching and setting up the business). And while it’s well worth it to some, it’s simply a bridge too far for others.
  3. There are quality alternatives that may feel independent enough.
    Some people simply don’t have the desire to own, run, and operate their own independent business. And that’s perfectly fine. One of the great things about the modern wealth management landscape is that there are countless options for exactly such advisors. They might consider a boutique or RIA firm that will allow them to join as W-2 employees. To some, these middle-ground options are the best of both worlds: a chassis of a boutique independent firm without the hassle of independent status. In addition, these firms likely provide real estate and benefits.
  4. The short-term economics require a leap of faith.
    There is an opportunity cost to making a move toward independence. In most cases, advisors are choosing to forgo a very substantial recruiting deal from another traditional firm. For example, a wirehouse advisor who opts to move to another wirehouse likely stands to make north of 300% of revenue in a recruiting deal. So why might such an advisor still consider independence? For one, the longer-term economics are likely much more attractive (both in the form of higher ongoing payout and the ability to monetize the business at day's end for long-term capital gains at a significant multiple). And secondly, many advisors just find the notion of independence more exciting, rewarding, and enjoyable. Advisors who make the leap to independence are comfortable with the idea of being “long-term greedy.”
  5. Independence means different things to different people.
    Because the landscape is constantly evolving, there’s no one definition of what it means to be an independent advisor. To some, it means owning and operating your own RIA. To others, IBDs are great ways to achieve independence with some added layers of scaffolding and support. There is no right answer, but at a minimum, independence typically means ownership of the business equity and data, and the autonomy to run the day-to-day and long-term strategy of the business as you see fit. Beyond that, it’s a wide-open sandbox with new options coming to market each day.

Independence Day provides the perfect opportunity to reflect: What does it really mean to be independent? It may sound like a simple exercise, but the answers may surprise you. And, of course, remember that in the wealth management industry, independence is not inherently better or worse than other captive options; it’s just different. By being honest and introspective about what it means to live your best business life, you can likely clarify whether independence is truly for you.

Jason Diamond is Vice President, Senior Consultant of Diamond Consultants—a nationally-recognized recruiting and consulting firm based in Morristown, N.J. that focuses on serving financial advisors, independent business owners and financial services firms.

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