Having grown weary of the limitations often placed on them by their Wall Street-backed firms, advisors have long been flocking to the independent space in search of greater control of and more ownership in their books of business. This trend is so pronounced that we even have a name for these advisors: breakaways. 

More and more, however, we are seeing a different sort of breakaway: independent advisors who flee their current RIAs to start their own or affiliate with another one. 

What's behind new trend? Typically, it's old-guard founder and firm owners who are resistant to the idea of providing their advisors equity compensation—even as those very same advisors have played a massive role in helping them grow their businesses. 

An Uptick In Breakaways  

Both “traditional” and independent RIA breakaways hit record levels in 2018 and 2019, according to a recent report compiled by our firm, ECHELON Partners. For a few reasons, we expect that to continue in the years ahead. 

The first is that the independent RIA market as a whole is blossoming. Last year, acquisitions were up 12% from 2018, according to our data. There is little reason to believe that M&A deal-making will slow in 2020, so expect to see advisors have ample opportunity to exchange their book of business for an ownership stake in a larger firm. 

The second is that forgivable loans issued by wirehouses just as the market began to heat up in the wake of the financial crisis are expiring in large numbers. Nearly 39% of them have lapsed in the last three years, according to our data, with the 14% that expired in 2019 the highest annual total to date. With more wirehouse advisors now free to move around, look for them to explore their options.  

Finally, advisors have more access than ever before to expert, third-party resources in which to help them make a move. At one time, would-be breakaways had to figure out for themselves how to either set up an entirely new business or find an existing one that would be a good fit. That made a risky proposition even riskier. 

Currently, it's a far simpler hill to climb. A handful of firms today provide a wide range of valuable offerings to transitioning advisors, including investment banking services, M&A advice and equity sharing consultation, as well as recruiting, compliance and operational support.

For advisors who don't have much experience running their own business, this level of support not only takes the guesswork out of the transition process, but it boosts the probability that their breakaway story will end successfully.  

The Embrace Of The Employee/Partner Model 

If every advisor has a goal to be rewarded for their hard work and have the opportunity to build enterprise value, then, alongside a growing number of breakaways, it's also likely will see the employee/partner model gain wider acceptance. 

In short, this approach gets to the heart of why so many advisors have become frustrated with founder/owner models: It allows everyone to participate in the growth and profitability of their firms. 

More than that, it also yields more cooperation, ensuring that all interested parties work toward outcomes that benefit them equally. That manifests in many ways, but one of the most important is cost-sharing, especially at the crucial startup stage, when most advisors are worried about the opportunity costs involved in either switching firms or starting a new one from scratch.  

Yet another advantage involves succession planning. An alarming number of advisors don't have an exit plan. That isn't just a problem, it's a crisis, and it haunts our entire industry. The employee/partner model provides a framework for a solution. 

For sure, this approach requires navigating some thorny issues as a group, like the size of each partner's stake, divvying up roles and responsibilities in a way that makes everyone happy, and setting up a compensation plan. 

But as the wealth management industry evolves and becomes more professionally managed, the equity partner model will begin to become an attractive option for the burgeoning number of "traditional" and RIAs breakaways. It is the best way to offer fiduciary advice, to properly serve clients, to add much-needed expertise and support services, and to create real value for an advisor's eventual retirement. 

Carolyn Armitage, a managing director with Echelon Partners, a Manhattan Beach, Ca-based firm that provides M&A advisory, valuation, consulting and investment banking services to registered investment advisor (RIA) firms across the country.