What’s your definition of independence?

Recent events in the news may have some advisors questioning if they are really independent or not. Hightower has been in the spotlight for taking multiple former advisors from their firm to court – alleging that they wrongly took client information from Hightower when establishing their own firms.

To many advisors' ears, these stories sound all too similar to the tales of wirehouses suing advisors for taking clients with them from a captive environment to an independent one.

Advisor independence has been treated simplistically in the media as a binary choice between the wirehouses and the RIA model for years. But in practice, there are many gray areas in operating as an independent RIA, especially when a solo advisor joins an RIA aggregator.

Knowing the truth of how independent you truly are is all about doing your homework before you decide to join an RIA.

Here’s how to leave the wirehouse with your eyes wide open so you know exactly what you’re getting into.

Do Your Homework
The reality is that you wouldn’t bring a prospect into a meeting, do zero homework on their situation, and then suggest that they point their money simply anywhere in the market. When you talk to a prospective client, you do your due diligence, and you craft a financial and investment plan that fits what they’ve indicated they want.

When looking at options as an independent advisor, you have to do due diligence on the landscape as a whole and research what type of independence the various entities can offer to you.

Making the wrong choice and getting less independence than you thought you were getting puts you at too much risk and could even derail a promising advisory career entirely. If you try to leave a firm you thought was independent and instead get tangled up in a legal fight with a large company with significant financial backing that can get their message and version of events in front of your clients more effectively than you can, you’ll be in a very uncomfortable position very quickly.

Part of doing your due diligence is entering any agreement with the understanding that businesses all need to make money to be successful. If a firm is incentivizing your move, they aren’t doing it out of the goodness of their hearts. They will be expecting production and profitability from you in exchange, and they won’t take kindly to it if you don’t deliver your end of the deal after you join.

Aside from that, there may even be an expectation that you stay with a firm for a period of time to recoup that initial investment they agreed to make in you. If you need to stick it out five years with a firm before you have to repay the amount they offered to bring you onboard, you need to be absolutely certain that you and your clients will be better off five years from now than you are today.

Keep in mind, though, that you need to do what’s in the best interest of your clients. You can end up changing your mind to do what’s best for them; however, be aware of the legal ramifications you could bring on yourself if you do decide at some point in the future that a change is needed.

Know Who “Owns” Your Clients
Speaking of your clients, understanding your employment agreement with an RIA firm is the clearest indication of who actually owns the relationship with your clients.

While it’s often said that one of the benefits of joining an RIA is that you “own” the relationship instead of the firm, as is common with a wirehouse, that isn’t always true when you get down to the legal definitions.

First things first, will you be considered an independent contractor or an employee of the RIA firm? How your relationship gets determined by the firm will in turn determine your relationship with clients.

In short: If you’re an employee, the RIA firm probably gets to claim that those clients really belong to them, not to you. And that’s why some advisors have found themselves in hot water recently when they left to create their own businesses.

While it may be tempting to say that your clients are yours because you moved them over from the wirehouse to the RIA along with you, that may not be the case unless your contract explicitly says so.

You can think of it like owning a house. When you own a home, you do it all – the landscaping, interior repairs, and pay the utilities.

If you go from owning a home to moving into a condo, however, you’re no longer responsible for all that. You still live in a “house” but the person responsible for it has changed.

As a final word on this subject, for all the talking down that RIAs sometimes do about the independent broker-deal industry, that side of wealth management has always honored the fact that their advisors are independent affiliates. There’s no confusion about structure. RIA firms and their advisors would do well to take a page from that notebook and talk about “independence” with the clear definition it deserves.

Where Firms Need to Focus
But maybe the most important part of the independence discussion shouldn’t even be focused on what individual advisors do and don’t need to know. Instead, we may want to focus our attention on the RIA firms and the aggregators who are trying to recruit more and more advisors to their firms.

Firms need to focus less on restrictive advisor employment agreements that give wirehouse-like power to retaining clients, and instead make sure that their focus is on retaining their advisors.

And how do you keep advisors with your firm? You do it just like you would with investors. You provide them with fantastic service that makes them feel unique and empowered. When advisors are given the resources they need for success, there’s less concern about them leaving and starting a competing firm, because they aren’t looking for reasons to leave.

Rather than spending money to lawyer up and defend yourself against advisors who might take some of their clients with them to a new firm, spend money to be additive to an advisor’s career to keep them with you.

You’ll likely spend less money in the end and keep more assets (not to mention great people) with you at the same time.

Ryan Shanks is CEO and co-founder of FA Match.