This is a story I often hear. Advisors dreaming of independence seek greater flexibility and freedom. Yet with greater freedom comes greater responsibility. If you’re considering breaking away, it may be prudent to first ask yourself: “What am I breaking away from?”

How you answer this question can make all the difference in how successful your transition is. Advisors who move toward something positive are far more successful as independent business owners than advisors who break away from something negative. Many advisors go independent because they want higher payouts. This might seem smart in the short run, but in the long run it’s no reason to take on a transition.

Independence entails a host of tradeoffs. The best reason to break away is because you seek a business environment that will allow you to better serve your clients.  Only then will you be able to fully weigh the risks and tradeoffs, and find the best business model and platforms for the level of service you want to provide.

The Risks
I met an advisor team last year that well exemplified the risks of independence. They had left a large wirehouse and formed an independent firm. Then the market downturn hit--client assets fell, managing the ship was more time-consuming, and the drains on overhead became unbearable. Long story short, this team ended up forgoing their dreams of indie life and went back to Wall Street.

You can imagine the disruption: First, you persuaded clients to follow you into independence, and then just a short period later you’re admitting that this was a mistake.

This story underscores how important it is to find the right model. Every business and industry experiences periods of retraction. Larger corporations provide a certain level of stability, because their infrastructure is built to withstand volatility. In contrast, an independent RIA firm with six employees could nosedive if it has to lay off just two people. 

If you understand the business risks at hand, you’re better positioned to seek out the type of support and resources that can help mitigate them. For instance, depending on the type of services you provide, you may be more exposed to compliance risks. There are human resources risks--hiring and firing employees has significant financial repercussions. There are also legal risks to consider between you and vendors you have contracts with.

The Benefits
I’ve known many advisors who choose not to break away for these very reasons. The tradeoff is that for large corporations to efficiently scale compliance, human resource and legal operations to cover a large number of advisors, they must enforce uniform policies and procedures. Advisors in this world must adapt their businesses to fit into these prescribed parameters.

For instance, a few weeks ago I met with an advisor team that has built a very successful practice by taking on the role of “personal CFO” for clients. This means that, in addition to buying and selling mutual funds and bonds for investors, they are also helping clients acquire, say, a marina or an airplane. They manage their clients’ real estate holdings, bill paying, contract negotiations, etc.

This type of family office level of service is simply not feasible in the wirehouse world. For large firms, keeping a check on 20,000 or more advisors who are paying bills and buying artwork for clients just doesn’t work.  There are too many liabilities involved, particularly since family office services isn’t the core business of wirehouses.

Another prime example is advisors who want to start their own hedge fund or mutual fund. At a wirehouse, which makes its own proprietary products, this is just a complete no-go.

Many advisors also specialize in serving the investment needs of business owners. Imagine an advisor whose client is the CEO of a local biotech firm. One day, this CEO says, “Craig, we’re looking to acquire another business--can you help us with that?” At best, the wirehouse advisor can only refer this CEO to a distant colleague.  Wirehouse advisors aren’t involved in mergers, acquisitions or raising capital--that role is reserved for investment bankers. Again, the entrepreneurial advisor’s hands are tied in the wirehouse model.

The Tradeoffs
The challenge of independence is running a successful operation--your way. Last week, I visited a large RIA firm in Santa Monica, Calif. This team had chosen independence because their previous wirehouse experienced too many distracting challenges during the financial crisis. Initially, they went independent and signed up with a traditional, discount brokerage custodian.

The problem is these advisors serve sophisticated, high-net-worth investors. They needed the lending and trading capabilities they were used to at their wirehouse. The custodial platform they had chosen, however, was geared for serving mass market clients. Not only were the products and capabilities not a match for this RIA, but the culture and service model was wholly different from what they and their high-net-worth clients were accustomed to.

This advisor team had admittedly taken for granted the global resources and capabilities that their previous firm provided. As with our earlier example, these advisors ended up moving their clients a second time to get the right fit. First, they moved clients with them to independence, and then they moved clients to a new custodian that better matched their needs.  Aside from the overall disruption to the business, the team also had to absorb another round of unexpected transition costs.

The Choice
Advisors who start their own independent broker-dealer or RIA firm undoubtedly enjoy the greatest freedom to customize their businesses. But they are often on their own when weighing the pros and cons of business models, vendors and resources.

Without an experienced partner who knows and understands the industry landscape, advisors with this level of independence must make a substantial investment of time and money to implement and consistently enforce best practices, policies and procedures. Remember, the more customized and fiduciary services you provide, the higher your potential liability. The more financial services you provide for high-net-worth clients--preparing taxes, bookkeeping, mortgages, property/casualty insurance, etc.--the more liability.

Ultimately, reducing business risks while expanding service capabilities is the task of the independent advisor. The only “wrong choice” of business model is the one that doesn’t allow you to balance both of these objectives--and truly reap the rewards of being your own boss.

Craig Gordon is the director of RBC Correspondent and Advisor Services. RBC Correspondent Services provides clearing, custody and execution services for independent broker-dealers. RBC Advisor Services offers custodian, brokerage and wealth management solutions for RIAs serving high net worth clients. RBC Correspondent Services and RBC Advisor Services are divisions of RBC Capital Markets LLC, member NYSE/FINRA/SIPC.