According to an ongoing study by Discovery Database, every month an average of 2,000 or more advisors change their broker-dealer relationships. Some remain in the same channel (within a wirehouse, an independent, a regional B-D, a bank, an insurance channel or an institutional channel). Others find new ones. But in December 2008, 50% of all those registered representatives who relocated moved out of the wirehouses. It's a staggering statistic, but hardly surprising considering what happened in the channel in the latter part of the year. Yet it's still interesting because wirehouse reps face enormous challenges when they go into the independent world.
Seeing the inherent opportunity, several independent broker-dealers have developed marketing programs designed to appeal to the migrants. Firms such as LPL, Cambridge Investment Research and Raymond James (among others) have positioned themselves as transition partners to those leaving the wirehouse world.
Most of these advisors have enjoyed years of high-end back office support that is typically lacking in the independent world because of the economics involved. The independent advisor is expected to create his own support systems, for the most part. So the independent B-Ds have, in many cases, built flexible platforms that offer choices to advisors for the different levels of support they might ultimately choose to pay for. Raymond James, for instance, has four distinct channels for advisors to choose from, depending on the payout levels and support they want. And, within the four, particularly in the fully independent channel, additional avenues of support can be worked into the package.
This type of flexibility may be attractive to a former wirehouse broker who lived in a world where compliance, trading, statement generation and other back-office duties were typically handled by others.
This is by no means the only challenge faced by newly independent advisors, however. The changing face of financial services has created challenges for them on all levels, not the least of which is the specter of distrust among clients as account values fall, and thus those clients are more likely to question the motives of their financial counsel. The fee-only advisory firm may be appealing, allowing a new crossover player to trumpet his lack of bias, but the mere fact that he has just come out of the wirehouse world (where commissions are common) could make the transition and retention of client assets that much more difficult. Research studies have shown on average that a financial advisor migrating from one firm to another will retain about 68% of the assets under management (or clients). This number is likely to be somewhat lower in the current climate. The clients may indeed be ready to move to a new firm, but not with you as the advisor.
So if an advisor is considering the independent world, how can he migrate successfully and retain the highest number of clients and/or assets under management? The answer lies in planning and forethought. To be successful, the advisor needs to spend an inordinate amount of time (and maybe money) planning a transition campaign. Several aspects of this need to be considered.
Where do you go? Simply deciding to leave is not enough. You also need to consider the world in which you will reside, whether it's as an independent broker/dealer, as an independent registered investment advisor or as something else. The independent B-D can find support systems but faces the inevitable disadvantage of lower payouts. The registered investment advisor, meanwhile, can reap the advantages of higher payouts but has to bear the burden of all the back office duties, compliance responsibilities, etc. It really should come down to style.
What style of business do you want and how much control over the style do you require? If you want true independence, you must prepare yourself for the startup costs and responsibility. Size matters! An advisor with $25 million or less of AUM to transition might not find it financially feasible to take the independent RIA route alone. It may be wise to look into merging with others.
How do you get started? A properly planned transition could take months to pull off successfully. Prepare for this. Use that time to explore all your options and line up your technology, office space, human resources and outsource provider needs. Membership organizations such as the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA) and the International Association of Registered Financial Consultants (IARFC) have tons of resources available to their members wanting to become independent. Most of these are freely available or discounted to members. Use this information!
Who do you ask for advice? There are a number of external consultants that may prove useful in this transition process, and it's essential to work with one who focuses on building your ADV (state and/or federal registrations). Shop around! There are a number of them out there and prices vary for the same services. Use a technology consultant to make sure you are spending wisely on the technology you need and not on what someone else thinks you ought to have. Contact an operations consultant that can help you structure your internal operations, staffing needs, office space requirements, etc. You may also need legal advice on your firm's corporate structure, selling agreements, engagement letters, etc. All of these external consultants can work with you well in advance of your planned move.
Build a detailed timeline before the "go-live" date. Part of business planning involves specific time goals to accomplish various aspects of the transition process and these should be worked into a detailed timeline. This permits everyone involved in the project to be on the same page about the end result and the dates for getting there. It is absolutely critical to have the pieces of the puzzle fall into place when planned and create a predictable pattern for the transition process.
Build a communications campaign. This is actually one of the more difficult tasks to accomplish. On the one hand, you want to keep your clients in the loop on your plans. On the other hand, there may be specific restrictions on what your current broker/dealer will allow you to say to clients. Make sure you fully understand what you can and cannot communicate to them, either verbally or in writing. The best way for you to keep your old clients and their investment assets is to make sure you communicate with them effectively and keep them current when preparing them for the big transition.
Ultimately, how thorough you are in planning this transition will govern how successful the process is. The measurement of success may be in the retention numbers or in the look and structure of the new firm. For some, it may be as simple as the feeling of independence and doing what is right for the client.
David L. Lawrence is a practice efficiency consultant and is president of David Lawrence and Associates (DLA), a practice-consulting firm based in Tampa, Fla. DLA publishes a monthly subscription newsletter, The Efficient Practice, which focuses on operational efficiency (www.efficientpractice.com). David is a much-sought-after public speaker on a variety of leadership, financial and technical topics. For details, visit www.davidlawrencespeaks.com.