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.