Although the registered investment advisor market is far more mature than it was 10 years ago, the space continues to experience significant growth and increased market share from large wirehouse and bank models. Let’s look at some statistics.
The traditional wirehouse/bank advisor-managed asset channel market share has declined by 10% since 2007, according to the Cerulli Report on U.S. Advisor Metrics of 2017. There were 147 “breakaways” who transitioned to independence in 2018, which is a significant increase from the same period in 2017, according to Echelon’s RIA M&A Deal Report.
In addition to the active breakaway market, there were 44 merger and acquisition transactions in the fourth quarter of 2018 alone, in which advisors were acquired by other RIAs. The movement to independence and advisors being acquired is surging.
There are two main reasons for these phenomena: Most advisors are in their mid- to late-50s, looking to retire within the next five to 10 years and want to maximize enterprise value. Assets-under-management wealth is expected to rise from $63.9 trillion in 2017 to $101.7 trillion by 2020, according to PwC AWM Insights.
Advisors want to have the freedom and flexibility to provide the best possible client experience as true fiduciaries and differentiate themselves in order to compete for more wallet share. With overall wealth increasing in the U.S., there will be continued demand for the services that independent advisors deliver.
For those considering taking part in RIA market share growth and/or maximizing their succession plan with an eye on ensuring that their clients are well taken care of, there are several compelling reasons to consider.
It’s important to acknowledge, however, that many advisors have indicated that becoming independent can create some initial anxiety from the perspective of transitioning one’s book of business. In a 2018 Schwab Independent Advisor Sophomore Study, “94% of independent advisors said the freedom to do what is best for their clients is the most important reason to go independent. In fact, on average, 87% of clients make the jump with advisors when they turn independent.” Outside of these facts, there are 10 common considerations for making a move.
Ten reasons to consider advisor independence.
For an advisor, once frustration weighs more heavily than passion, the reasons for leaving become clearer. In general, there are 10 issues a financial advisor should consider before pursuing independence:
1. The pride of owning your brand and defining your company culture. Instead of being an employee of a larger company and adapting to that company's culture, choosing to go on your own allows you to create your own culture that can be passed on to the next generation of advisors.
2. Product offerings. Firms can be strict regarding what investments are allowable. Striking out on your own allows you to choose which ventures and investments are offered to your clients, instead of being forced to offer only what your firm allows.
3. Growth by acquisition. You might be interested in maximizing your new firm’s enterprise value through acquisitions of other teams and building your client base inorganically and quickly. This can be negotiated in the open market as opposed to being offered a default retirement plan that may not maximize your financial outcome and legacy.
4. Overly restrictive compliance. Large firms are required to build their compliance programs around the entire universe of brokers that they oversee. They couldn’t possibly build a customized compliance program for, say, 15,000 advisors as this would be a daunting and cost-prohibitive task. If one bad apple spoils the bunch, then the firm must add new restrictions across all its advisors to manage to the lowest common denominator.
The independent advisor can design a more customized compliance program to better serve the needs of their clients. This does not mean you don’t have to comply with SEC or FINRA rules. But it’s your policy, not the firm’s policy, that will allow you to operate as a true fiduciary to your client. There are plenty of excellent legal/compliance firms that specialize in the RIA marketplace and can guide you on how to operate within the confines of SEC or FINRA rules, specifically to how you want to serve your clients.
5. Institutionalized marketing. Large financial services firms control their marketing, social media and messaging efforts. That might mean you have very little voice in the message and brand that you’re looking to create. Pursuing your own independent advisory firm allows you to control marketing messages, and create a culture and brand that exemplifies your unique value proposition so that you don’t blend in with everyone else. This is increasingly becoming important in a highly competitive environment.
6. Ineffective software and tools. Employers often choose software and systems based on cost and input from a few individuals. You might feel the tools provided by default have little to no utility. Instead, you want to find the products that provide the best client experience and allow you to operate efficiently. All the major custodians have integrated the best third-party technologies, so advisors can build a customized technology suite designed to maximize the experience for the specific types of clients they serve.
7. Restrictive covenants. Employers often change their policies, which can affect one’s livelihood. This change can include covenants that restrict an employee’s actions during and after employment. In some cases, it includes a “garden leave” clause whereby an advisor has to have left a firm for several months before having the ability to transition clients to the new independent firm. This can create tremendous anxiety, but it can be mitigated by leaving before this happens. Rather than sign the agreement, you might choose to move sooner rather than later so you can make your own rules.
8. Compensation and benefit changes. Firms can change their compensation structure or benefits packages in order to add money to their bottom line. If your employer makes a change that benefits them and not you, such as forcing incentive compensation into long-term deferred stock or constantly changing your compensation “grid,” you might choose to create your own financial destiny by walking away.
9. Headline risk. Certain firms can develop reputations for questionable practices, which create “headline” risk. This can lead to events such as scandals and cause negative press for the firm. This could result in the perception of guilt by association. Starting on a pathway to independence might be the only step you think you can take to maintain a positive reputation with clients.
10. Maximizing revenues and enterprise value. As an RIA or RIA/hybrid, you’ll receive 100% of your fee-based revenues and anywhere from 80%-90% for commission business. This is a far cry from being subject to a “grid” payout where you’ll be required to cross-sell other products to maximize the grid as opposed to properly serving clients in the open market as a fiduciary. In addition, you’ll be able to control your own profit and loss, which will help you maximize enterprise value when it’s time for a succession plan.
Is Independent Advising The Right Decision?
Any of the above reasons might be a tipping point at which your passion becomes greatly diminished by your frustration. However, owning and running a professional enterprise does not fit all personalities. There are certain traits that are associated with being successful as an entrepreneur, manager and technician all in one person. If you’re seeking to stay passionate about your work and dedicated to your clients and brand, your choice of transitioning to independence should be an easy one.