Is security or independence more important for running a successful business? That seems to be the key question advisors face when they set up their own business, according to a new survey by the NFP Advisor Services Group.
The NFP Advisor Services Group, a business segment of National Financial Partners Corp., a provider of benefits, insurance and wealth management services, compared the operations of financial advisors who work for large corporate RIAs and advisors who are independent RIAs.
The overwhelming sentiment was that independent RIAs have the luxury of being their own bosses while advisors with a corporation do not have to worry about compliance and other administrative duties. NFP surveyed 161 advisors almost evenly split between independents and corporate advisors.
Independent advisors interviewed for this story said they would not give up their independence, despite the extra work it puts on their shoulders.
For 60 percent of the financial advisors who choose to be RIAs, the ability to maintain control over their business is very important or extremely important, the NFP survey says. Advisors want the freedom of establishing their own operating model and product mix and the ability to run their own business, according to the survey.
Maintaining Finra licenses and having the ability to manage compliance risks are the top two reasons advisors leverage a corporate RIA structure, NFP says. Taking away these tasks leaves the advisor with more time to spend on clients, advisors said.
James Poer, president of NFP Advisor Services Group, says, "The financial advisors affiliated with firms like NFP operate independently but have someone else to maintain the RIA status. It is a question of whether you want to have your own entity as an RIA or you want to leverage someone else's entity that is an IA and still have the independence to run your own business. It is not like being part of a wirehouse or a bank. The advisor is using the support provided by the RIA corporation."
That convenience, however, isn't enough to overcome the negatives of a corporate environment for some advisors.
“If you are with a corporation you get lost,” said Melody Juge, managing director of Life Income Management in Southfield, Mich. “You are only as good as your assets under management.”
As an independent, Juge says she is not selling a product but is servicing clients. She would advise others to go independent, although she acknowledges it is difficult to start from scratch today because there is so much to learn.
“You have to get trained somewhere and the corporation will train you, but once you start with a corporation they do not want to let you go,” she said.
Lauren Locker, founder of Locker Financial Services in Little Falls, N.J., with $35 million in assets under management, has been independent her entire career and would not change.
“Being your own boss is a curse and a blessing,” she said. “But it helps you relate to business owners you are advising because you know what they are going through.”
It also enables a firm like Locker Financial to cater to aging baby boomers and to specialize in advising the elderly. An independent can decide to cater to any group, such as teachers or autoworkers, where he or she develops an expertise, Locker said.
Being independent means you could miss the interaction with a lot of other advisors, but that is why associations are so important for sharing ideas, Locker said. Locker is chair of the National Association of Personal Financial Advisors (NAPFA) and says her interaction with colleagues through the association is invaluable.
Whether someone can be their own boss depends on the type of person he or she is, according to James Poe, owner of Jim Poe and Associates in Fort Worth, Texas, with about $40 million in assets under management. He also runs a hedge fund.
“If you are a good boss you should go independent,” says Poe. “If you are not, it won’t work. For me, I do not want to have someone else managing my work. We manage all of our clients' money ourselves.”
Another burden taken off the plate for an advisor who opts to go with a corporate RIA is marketing.
“It is not how good you are, it is how good your marketing is,” says Mark D. Kemp, president of Kemp and Associates Retirement Services of Harleysville, Pa., which has $270 million under management. “You have to be a go-getter and be willing to take on the headache of running your own business to be independent. Some advisors are willing to trade the independence for security and a flow of clients that a corporation can provide.”
Advisors interviewed disagreed with the NFP study's conclusion that most advisors working for a corporate RIA make more income than those who are independent.
The worst off of the independents are those with between $100 million and $200 million in assets under management because they do not have enough to achieve economies of scale, according to the study. which stated that independents have to have a book of business 27 percent larger than the corporate advisor to achieve the same income. The $200 million mark is often the tipping point where the independents reach some economy of scale, according to the study.
“It depends on how big you want to be,” says Juge. “A business with $50 million in AUM is very doable.”
Locker agreed, saying she has carved out a very comfortable lifestyle, and Poe argued he would have to give up more of his profits if he worked for a corporation.
Poer says the advisor connected with a corporate RIA has the advantage.