With many advisors frustrated about the way management is running their franchises, more are starting to explore the independent channel.
It’s still too early to tell. But changing jobs is certainly top of mind these days. Indeed, a recent Registered Rep. survey of 1,459 advisors found that 63 percent might change firms in the next two years. In fact, one in four advisors said they are considering or would consider starting an independent advisory business.
There are many benefits to going solo. For starters, you are in control of your own destiny. You get to call the shots, you have more flexibility in how you run your business, you can potentially provide a lower cost structure to clients, and you may be able to make more money than you would as an employee of a firm.
When you work for a big company, “you have massive amounts of pressure to produce revenue,” said John Burns, founder and principal of Burns Advisory Group, a registered investment advisor in Oklahoma City. As a business owner, however, your clients’ interests come first, he said.
That said becoming an independent advisor is not as easy as hanging a shingle on your door. Here are some factors to consider as you contemplate your options:
1. Make sure you have the entrepreneurial spirit and skill set to run your own business.
It takes a certain personality-type to be able to succeed as an independent advisor.
“Most financial advisors are sales people not business people. The critical question is do they have the skill set to run a business,” said Mitch Vigeveno, chief executive of Turning Point Inc., a recruiting firm in Safety Harbor, Fla.
You have to be bottom-line oriented for example. A lot of advisors at wirehouses haven’t had to worry about finding space, hiring help, dealing with benefits, dealing with the accounting aspects of running a business, and constantly looking to see whether or not you are profitable, he said.
Indeed, when you go on your own, you can no longer rely on the mother ship for all the answers. “You have to make your own decisions on the platforms, the custodians, and the technology. You need to be well-capitalized. You have to be able to motivate yourself in the morning and not [feel the need] to listen to a company rah rah speech on a regular basis,” said Peter Miralles, president of Atlanta Wealth Consultants.
2. Do the math.
“Just because you’re getting a higher payout doesn’t mean that you’re taking home 90 cents on the dollar rather than the 40 cents on the dollar you were receiving before,” said Marc Freedman, president and chief executive of Freedman Financial in Peabody, Mass. While there’s no question your revenue will be higher, it is “how you choose to manage your expenses that will dictate whether it was worth the move.”
Rent alone can be a large, but necessary expense. You want clients to believe you can offer the same level of service as you did before. As a result, you can’t go from having a big office, a secretary and a staff to a desk in the basement of your house and expect to keep clients, Freedman said.
As an independent you also have to pay for various types of insurance, phone systems, computer systems, marketing, stationary, business cards, and more. “Business tends to slow down a little bit unless they hire an administrator because they have to do all the administration themselves,” said Pete Deragon, North American practice leader for financial services with Stanton Chase International in San Francisco. Even bill paying takes time. “When you’re at a big firm, it’s all done for you,” he said.
Advisors considering a move to the independent channel should also make sure they have a comfortable nest egg. Adequate capital resources should be available to fund all business and personal expenses for a minimum of six months. At least half of this amount should be liquid, according to Vigeveno of Turning Point.
Indeed, it can take several years to be more profitable than working for a wirehouse, said Carol Fabbri, managing partner of Fair Advisors, an independent financial advisory firm in Denver. Fabbri, who was with Merrill Lynch before starting an independent firm late last year, also said advisors should be conservative and assume only 40 percent of clients will move with you.
3. Do your homework.
Advisors need to be aware of the types of providers out there. Do you want to affiliate with an independent broker/dealer, for example, or do you want to be a registered investment advisor? In either case, advisors also need to consider whether to go it alone, or join an existing group.
Before you make a move, you also need to make sure you have the proper people in place to help you, such as an attorney to protect your interests and a custodian who will help you transition your practice as well as provide you with a technology platform and hold securities and funds on behalf of your firm.
It is also important to network, network, network. That’s what Miralles did before he made the switch. He attended industry conferences, for example, which helped him gain practical information about running his own business.
4. Expect a challenge
One thing George Wilbanks, a senior member of the global financial services sector at Russell Reynolds Associates in New York, hears over and over again from advisors is that it is harder than they expected and the reason is not because they haven’t done their due diligence. It is because of the exceptional levels of capabilities and sophistication they are leaving behind. “I think a lot of folks take it for granted,” Wilbanks said.