We’ve all seen the wealth management industry barrel toward independence in recent years as more and more wirehouse advisors lose patience for conflicts of interest, reject constraints on product offerings, and shun profitability mandates.
The “breakaway” story—from wirehouse brokerage to independent registered investment advisor— has become a familiar narrative, yet many advisors feeling trapped at large institutions may still be hesitant to make the move simply because they are overwhelmed by the thought of plotting a transition.
It’s true, the transformation can be daunting, and no one should be fooled into thinking it will happen overnight. But any advisor stagnating out there, clinging to an outdated business model that gives deference to proprietary products, should take solace in knowing that laying the proper groundwork and conducting a thorough analysis go a long way toward smoothing the road to independence.
Mounting Discord in the Channel
Wirehouse advisors on the fence about going independent should consider what it means to break away. For many, this process is a slow build, where frustrations mount over policies and procedures layered upon onerous rules and regulations which often fail to recognize advisors’ individuality and years of experience. Some advisors with above average revenue become “outliers” as they outgrow a wirehouse model, typically designed as a one-size fits all platform. Others become discouraged by institutions that fail to keep pace with the rapid changes in digital technology for marketing, planning and effecting transactions.
Independence presents an extraordinary benefit to the breakaway firm, as advisors can operate autonomously without having to answer to a higher force that thrives on a proprietary business model. Their practice will instead operate without conflicts, with advisors free to offer products based on quality and not incentives—representing the client instead of the institution. Independent RIAs can take charge of their business economics, including their fee structure, profit margin, expenses and overhead. They will experience a continuously evolving ecosystem of custodians, technology providers, and strategic partners, all developing new strategies to better compete and strive for success.
Joining an existing RIA has substantial benefits as advisors can “plug” into already established infrastructure for independent providers, including required technology and compliance programs. There are benefits to working at an RIA set up to operate as a fiduciary, as the new Labor Department rule takes effect, extending fiduciary obligations to a broader range of advisory services. Regardless of whether the Trump administration succeeds in repealing some or all of the rule, as it has moved to do, there is a growing demand from investors to comply with the higher standard. Ideally, an RIA will nourish an incoming advisor, teaching the planning and advisory skills they may lack, but also fueling their entrepreneurial drive, and helping develop their own brand, philosophy, and culture.
Advisors can take alternate routes too, including affiliating with a consolidator seeking to buy or merge advisors. Consolidators usually take a financial stake in the business in exchange for cash or stock in the consolidator entity. Platform providers allow advisors to outsource various components of an advisory platform, including investment management, technology, operations, and certain elements of business management.
Before making the leap to a new firm, wirehouse advisors should thoroughly review their firm’s philosophy and culture, and assess whether it can survive a transition. For instance, they should ensure their investment strategy fits well within the new firm’s investment guidelines. They should evaluate the strength of their client relationships, client by client, considering whether there are circumstances that would prevent clients from moving their assets to the new firm, such as a loss of a critical client service.
Financially, they should know what to expect for net compensation. A firm may require advisors to forfeit specific rewards or compensation their wirehouse offers. Advisors should scrutinize the long-term enterprise value and equity position of the firm, review its growth strategy, establish whether it reinvests in the business and whether it has plans to merge or acquire other firms. On the operational front, advisors need to determine whether existing teammates can grow and evolve into different roles, and what compensation looks like for each role. They should establish whether the firm’s operations, trading, and technology platforms are fully integrated, and whether investing in technology is a priority at the firm.