Of course, an independent advisor has additional needs, including office space, back- and middle-office support systems and all the other turnkey platforms experienced professionals need to provide exceptional client service.
But thanks to well-resourced independent broker-dealers and super-OSJ groups, it’s very possible that transitioning advisors can gain access to much the same level of services and support, along with office space, at a cost of only 10 percent to 20 percent of total pretax annual revenues. So for independent advisors who do $1 million in revenue (assuming they capture 80 percent), this means it’s possible that their initial net take-home pay is 20 percent to 30 percent higher than that of a wirehouse advisor with the same level of production.
And given the freedom and flexibility that exists in the independent space, it’s not unusual for highly motivated former wirehouse advisors to recapture the total value of their books of business 12 to 24 months after completing the transition -- which will only further elevate the level of annual compensation.
The “back-end” costs of forgoing independence are just as great. When it’s time to call it a day and retire, independent advisors, as true owners of their books, can monetize client relationships in a onetime liquidity event in ways that wirehouse advisors can only dream about.
A successful independent advisor who produces close to $1 million in annual revenue can typically sell his or her book for around two times its trailing-12-month revenue. And assuming that the current trend persists and buyers significantly outnumber sellers in the future, the potential for realizing significant value via the sale of an independent practice will likely only grow.
Wirehouse advisors -- who do not technically own their books of business and cannot sell them on the open market -- do not get this opportunity. And because of that, they could be passing up an additional $2 million (if the advisor generates $1 million in revenue each year). What’s more, the sale of that practice is taxed at capital gains rates, which are far below the top marginal income tax rate of 35 percent.
There’s no question that inertia is frequently the easiest course of action for successful and experienced wirehouse advisors, at least in the near term. But as with most things in life, near-term comfort comes with long-term financial costs. It’s important that wirehouse advisors equipped to make the jump to independence now fully appreciate those costs.
Steven Dudash is president of IHT Wealth Management (www.ihtwealthmanagement.com), a Chicago-based team of experienced wealth management professionals.