By Craig Gordon
"When I started my own independent advisory firm, the logistics were overwhelming. There's no room for trial and error. So I found an experienced partner to make the transition as painless as possible. I have the freedom to tailor my business to client needs and to create the kind of company culture that could never exist at the big firms. This year, I'm taking my employees to Hawaii for our annual vacation."-- A successful breakaway advisor
All breakaway advisors want to tell this kind of story. But they don't all make it. Getting it right takes time, focus and the ability to forge solid, long-lasting partnerships that will help you hit the ground running and boost you over the unexpected hurdles.
It all depends on the business model you choose but as you begin the process of building your practice, you should be prepared to make a number of decisions that have short and long-term implications. Setting up an independent shop is not just about finding space and switching on the lights-you'll be analyzing and researching important decisions and at the same time managing your existing business, balancing portfolios and servicing client accounts. Having seen countless advisors succeed in the independent space over the course of my career, I know that it's imperative to focus on the fundamentals while also keeping an eye on your future.
What road should you take? Building a new RIA from scratch can cost between $50,000 to $100,000 at a minimum. Plugging into an existing RIA is a less costly option, because office administration and service costs are shared. In general, this approach involves fewer decisions in terms of management, systems and operations.
A rule of thumb in this early phase of the process is to make every key decision based on the needs of your clients. The successful firms I know have been able to replicate select services, technologies and products based on client needs. They have also ensured access to a range of resources by partnering with custodians, technology vendors and strategic investment management partners that are a good fit for their business.
Before committing to any one custodian, you need to conduct a thorough analysis. Consider what you'll need when you begin to expand. And don't make assumptions. Where you are now is not necessarily where you'll be in a few months or a few years.
One independent firm I know wanted to expand their business to provide more capabilities that would help them deepen client relationships. They initially chose their custodian based predominantly on cost. But the custodian only provided a limited scope of resources and wasn't able to provide what the independent advisory firm needed during their transition. They also couldn't trade securities in different currencies, which was a major need of the firm's clients. The lesson: You get what you pay for. Spending money on a crucial service is not just an expense, it's an investment in your future success. Independent advisory firms would be wise to choose a partner with a broad range of services that can meet these evolving needs.
Just as your goals should be aligned with your clients, your partners' goals should be aligned with yours. To find the best technology platform, compliance solution, investment program and reporting tools that can fulfill the level of service you want to provide, make two lists. One is for the features that currently work for you that you don't want to lose. The other is for the features that you're looking to add.
Make sure you check both lists when considering a partner, to ensure that you get the things that you need as well as the things that you want. If you're looking to buy a new car, you might want a state-of-the-art navigation system, better gas mileage or a dock for your iPod. But don't forget to also look for a car that offers the reliability and comfort you might be taking for granted. As most advisors are breaking away from large wirehouses with deep resources, this list of tried and true features can be considerably long. Don't overlook what's already working for you.
While it's important to maintain key features, advisors should also focus on the future. Many practices have carved out a unique niche within the larger financial services industry and as they consider starting an independent practice, they should look at the specifics of their business and find a partner who understands their role. Think about why you're making the change-if you want to expand your practice to provide new services and new support for your clients, consider what resources are necessary to do that efficiently.
An investment advisor team in Florida wanted to shift their traditional full-service business into a family office that could do more for their clients, including providing concierge services, paying customer bills and handling finances. To do that efficiently, they needed to find a partner that offered automation software. Being newly independent, they had no experience choosing from a wide array of choices. Fortunately, they turned to a partner with years of experience sifting through the multitude of solutions being marketed to the growing number of independent advisors. They found a solution that fit the team's needs and enabled them to better serve their clients with the most effective tools available.
How can you keep from flying blind? Find vendors who share your vision for the future and who have the capacity and culture to work with you as a partner-not just as a vendor. Four years ago, an investment advisor I know overhauled their entire technology infrastructure. They dismantled their computer system and rebuilt it over a weekend after years of planning. Come Monday, the system failed. Without the kind of personal relationship they had built with their platform provider, the business would have gone into serious meltdown. Instead, their provider rolled up its sleeves and helped them put out the fires.
Investment advisors should consider size when looking for partners-you don't want to select the smallest firm that doesn't have the resources you've come to rely on. Nor do you want the biggest firm out there that might not be able to provide the attention and service you need in the crucial formative years of your practice. Advisors need a voice in the partnership, and a vendor that is neither too big to pay attention nor too small to do anything about it is the perfect fit.
You also want a vendor that understands the intricacies of the business you're in. If your clients are focused on global trusts or ETFs, your custodian should have expertise there. Likewise, a firm that builds contact management systems for healthcare companies might not understand the compliance regulations that are unique to financial services. A general approach is not always best when picking a partner to get you through the crucial first years.
Once you have everything in place, you need to communicate the transition to clients. Tell them why you are breaking away and how the move will be beneficial for them, as well as for yourself. When it comes to the complicated matter of transferring accounts, many successful breakaway advisors invite clients to a signing party, where they meet face-to-face, give a presentation about the transition, along with packets of account forms. Staff is available to make sure everyone fills out the documents correctly and thoroughly.