For many successful financial advisors working in a captive model, the question is not whether they will break away to independence but when.
Changing demographics, evolving client preferences and the proliferation of playing field-leveling technologies are encouraging even more advisors to leave “Big Box” wealth management firms and venture into the world of independence. While many reasons exist for going independent, the journey may not always be smooth. To better navigate the road, advisors looking to breakaway may need a bridge to independence.
The trend of advisors shifting to a more autonomous model has been well-documented over the past decade. Cerulli found that the number of wirehouse advisors had declined by 10% in the 10 years ending in 2022. Independent broker-dealers aren't reaping the benefits of this shift since the same study found IBD headcount down 20% over the same period. So where is everybody going? While some may have retired, many others have gone the RIA route, with Cerulli reporting the number of RIAs increasing by nearly 66%.
Why Make The Move
The reasons that so many well-established advisors and practices are leaving the wirehouses are well known. Most of these once venerable institutions are now owned by money center banks. Distinctive and defining cultures have been so watered down as to be unrecognizable. Many advisors feel that the primary focus of these firms is wallet share and cross-selling opportunities.
Payouts have also dwindled over the years as advisors continue to subsidize the tremendous overhead of these corporations. Post-pandemic, the benefits of office towers, marble lobbies and fancy conference rooms are hard to justify, even though advisors still pay a premium to be associated with the global brand. In a world of remote work, virtual meetings and distrust of large institutions, advisors are looking to do right by their clients while keeping more of what they earn.
Over the past 10-15 years, the RIA space has evolved to a point where sophisticated practices can provide all the support and services their clients need without being part of a bank. Third-party providers, fee-based product solutions and innovative technology have all helped level the playing field, creating an RIA ecosystem that makes independence a viable choice for many.
For most advisors, the journey to independence begins with a desire for the freedom and flexibility to run their businesses as they see fit and to act in the best interest of their clients. Shaping their own businesses, choosing their clients and providing a more holistic and personalized service experience are all motivating factors pushing many toward independence. The ability to build equity in their own business, instead of just adding to a bank's bottom line, makes independence even more attractive. However, there are issues and potential risks with leaving the relative security of an employee model.
Valid Concerns Must Be Addressed
Some complexities along the way to independence require careful consideration and planning.
In a 2024 Schwab Advisor Services survey of recently independent advisors and those considering independence, 56% pointed to compliance and the legal/regulatory environment as the top challenge to becoming independent. Of those surveyed, 40% cited client retention during a transition as an issue, and 39% said the cost and ability to finance an RIA firm could be a problem. These are all valid concerns that must be considered before deciding to go independent. Weighing these and other factors helps advisors determine the kind of independence they want to pursue.
Independence Should Mean Choice And Flexibility
A critical decision an advisor leaving a bank, wirehouse or large independent broker-dealer must make is whether to register their firm as a standalone RIA under their own ADV, a hybrid RIA registered with the SEC and FINRA or join an existing RIA. The best answer will differ for each advisor and depend on their goals for their newly independent practice.
For true entrepreneurial advisors who want to build a fee-only business from the ground up and are prepared to run it entirely independently, a standalone RIA may be their best option. These small business owners must be ready to find office space, hire staff and decide on the best third-party technology tools. They will also have to give up any commissionable business and assume all the compliance responsibilities mandated by the SEC and state regulators.
Those with a significant amount of commissionable business or who want the option to use these products in the future may be better suited to become a hybrid RIA. This will require them to maintain their FINRA designation and be subject to additional regulations. But it will allow them to offer clients the full spectrum of investment solutions to best suit their needs. For advisors looking to leave their current situation but unwilling to take on the additional work and risk of operating a standalone business, they may partner with an existing RIA.
There are many RIA firms in the marketplace that advisors can partner with. The best will offer open architecture platforms that allow advisors to select the support their practice needs and provide the infrastructure and resources to help them manage and grow their business. Unlike running a standalone RIA where everything is on the advisor’s shoulders, a partner firm can take on much of the compliance burden while offering transition, back office, marketing and technology support and services. By joining an existing firm, advisors may also solve another common problem for solo practitioners: succession planning.
Finding The Right Bridge
Most advisors looking to forge their future in the independent space will need the help of a firm that can work with them to bridge the gap and hit the ground running. Advisors contemplating a move should seek out a firm that is consultative in its approach and asks the right questions. By being an active listener and learning the advisor’s goals and challenges, the firm can suggest the correct business structure and deliver commensurate services and support to ensure success.
The best partner firms should support multiple models, allowing advisors to be either RIAs or IARs, depending on their long-term goals. They should be able to assist with financing, determining compliance needs, developing a go-to-market brand and making the transition process as smooth as possible to ensure high client retention and satisfaction.
Advisors who are leaving large institutions are looking for cultures, connections and relationships that have been lost over the years. They need to be careful they don't trade in a captive situation for one that doesn’t live up to the promise of independence.
Jason Inglis is chief revenue officer at Sowell Management, a firm that provides advisors with what they need to run a successful and compliant advisory business while empowering them to focus on client relationships and building equity in their personal brands.