More planners are leaving wirehouses to become fee-based RIAs.
Over the past 35 years, Ralph Parks has been a
successful broker doing his share of financial planning at the three
wirehouses where he's worked. But his employment hasn't been without
challenges. When he became distrustful of investment research at one
firm-always known for its impeccable analysis-he bought his own to the
tune of $10,000 a year.
It was a fortuitous decision in hindsight, since 20 years later the firm was nabbed for writing erroneously favorable reports for its investment banking clients and had to pay the Securities and Exchange Commission and the state of New York hundreds of millions of dollars to settle their cases against the firm.
While Parks has always stayed light years ahead of the curve, he says he still has had to "wonder what all these scandals have cost me and my clients in terms of resources." These days, he wonders a lot less about wirehouse transgressions, since he's one of a growing number of former registered reps who are converting their practices to an independent registered investment advisor.
"I've always wanted to shoulder full responsibility for my clients and worked as an independent at every firm I worked at," says Parks. "So it only makes sense I build my own firm." He converted his firm to an RIA in October and now is president of Ralph Parks Investment Group in Pittsford, N.Y.
It's an attitude that appears to be spreading. The urge to go independent-to break away from the brokerage business to a fee-based RIA-appears to be on the rise, according to industry observers.
The head-butting between regulators and brokerage companies has fueled the trend, prompting stepped-up efforts by independent broker-dealers and advisory service companies to roll out programs specifically focused on making the transition to RIA easier and cheaper. Also contributing to the independent streak among registered reps, according to observers, is the desire by many reps to provide more comprehensive services grounded in fees and an investment toolbox that isn't cluttered with proprietary products.
On an even more basic level, observers say, many reps see the current landscape as a good opportunity to start their own businesses and have total control over the clients they accept and how they manage assets. It's an entrepreneurial spirit that is common among financial advisors, says Philip Palaveev, a consultant with Moss Adams LLC in Seattle.
"You have to go out, find clients, meet their expectations, explore
those expectations, define a solution-you have to kind of manage other
people," Palaveev said at a recent conference, sponsored by TD
Waterhouse, which explored the issues involved with transitioning to an
independent RIA. "So in a sense, you're already entrepreneurs
regardless of where you work."
Keith Newcomb, for example, started his life-planning practice, Full Life Financial LLC in Nashville, Tenn., five years ago, after deciding the brokerage industry didn't mesh with his view of serving clients. "The industry structure, as it evolved over decades, was not built around my clients' interests," he says. "It was a competing interest."
Newcomb says the transition to independent RIA was made easier by the fact that he had a background in running his own business, having spent ten years running a music publishing company before his career in financial services. "I think entrepreneurialism is in my genes," he says. "I was working a business out of my dorm room when I was in college."
Of the more than 13,000 independent RIAs working in the financial services industry, Palaveev says, more than 80% were at one time or another working for a full-service firm. "There's one number you'll never see, which is the number of independent advisors that are going back to the wirehouse," he says. "If that number were ever published, it will be a non-existent statistic. It's a one-way street."
There seem to be common motivations shared by many of those who make the transition. The chance to have full control over their practice. Broader and more meaningful relationships with clients. Total independence when it comes to investment decisions, and the freedom to define a compensation system grounded in the value of the advice a client receives.
"I felt the independent channel provided a much better way of investing for my clients," says Bud Kasper, who transitioned from working at a regional brokerage house to running his own practice, Financial Security Investment Advisors of Kansas City, about 11 years ago.
Since setting up his independent RIA practice, Kasper has built a business that now has affiliated offices in St. Louis and Springfield, with total assets under management of $275 million.
Like many advisors who make the change, Kasper found one of the key hurdles to overcome was the significant drop in income when first making the move.
After leaving his brokerage firm, where most of his income was derived from mutual fund sales, Kasper estimated that his RIA would initially be making 25% to 30% of what he had been making as a broker. The dip in profits and revenues was aggravated by Kasper deciding to implement asset-based fees that were lower than the average, starting at 1% for accounts from $100,000 to $500,000, and ranging down to 0.3% on accounts of $5 million or more.
"What we ended up doing is looking at what others were charging and we decided to take the route that was most fair to our clients and to ourselves," he says. "We felt we would garner better results by utilizing that approach."
Over the long run, Kasper proved to be correct, with his new firm taking only three years to beat his earnings in his former brokerage job. Moreover, he now owns his book and has equity in his firm. But owning your own firm carries risks as well. Because people making the transition to RIA need to make this initial profitability hurdle, not everyone with an interest in making the change goes through with it, says Derek Bruton, senior vice president and national sales manager at TD Waterhouse, who heads that company's advisor transition program.
Of the advisors who call TD Waterhouse with an interest in transitioning, he says, only about 25% take the steps to make a successful change. "A lot of them don't have the drive," Bruton says. "They realize the firm they are with has been taking care of them how many odd years. They don't have the ability to start a business on their own, hire people, get the computers and do all the things they have taken for granted for many years."
That's why, he says, younger reps are more likely to seriously undertake a transition, while older brokers-as well as top producers-are more likely to stay where they are. "Especially with the best producers, often times they are well taken care of by the firm," he says.
Joseph Birkofer, owner of Legacy Asset Management in Houston, made the switch to RIA in 1996 as a junior partner with a top producer at PaineWebber. "The main driver was, frankly, he didn't want to be forced to put his clients into what was then PaineWebber's wrap program," Birkofer says. "He had built his own."
Two years after making the transition as a partner, Birkofer went totally independent and started his own firm. One of the hardest issues during the transition, he says, was trying to start a business from the ground up while getting used to fee-based revenues that came in on a quarterly basis, rather than weekly or monthly.
"The hardest part about going to a fee-based from a brokerage environment is cash flow management," he says. "You'd better be a good budgeter because you're only going to get a hit every three months."
Recent scandals and the public image of brokerage company practices have also taken their toll. In 2005, Russell Gebhard left his broker and hooked up with an independent broker-he picked LPL Financial-after fully realizing how the public viewed commissioned brokers while attending a Christmas party a year ago. Gebhard, whose brokerage firm was the recipient of multiple regulatory fines in recent years, remembers conversing with a wealthy investor and a colleague who had recently gone independent. Once the investor found out the colleague was an independent advisor, he virtually ignored Beghard.
"He looked at me like I was a blue-collar investment advisor," Gebhard says. "At that moment is when I made the decision to break away." He founded Sovereign Investment Group LLC of Houston, in August. "I told them I was tired of having my and your futures tied to a wirehouse firm that will pays its CEO $77 million severance and its president $30 million for three months work," he says.
Also disgruntled about the regulatory climate on the brokerage side was Lisa Kirchenbauer, who converted to a fee-based RIA practice while working at an independent broker-dealer in 1999.
There, she soon found that working as a fee-based RIA for an independent broker-dealer had its own set of issues.
Among them, she says, were the firm's cumbersome e-mail platform and compliance issues. "I was having to worry about compliance policies and paperwork that was related to commission-based sales and not the fee-based work I was doing," Kirchenbauer says.
She took that a step further a year ago, going completely independent by starting her own life-planning practice, Kirchenbauer Financial Management and Consulting in Arlington, Va. "I think more and more of the public and clients want to see that you are independent and objective," she says.
Washington Editor Tracey Longo contributed to this story.