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.