Options for Independence: The Evolving Landscape

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Despite one of the toughest market environments in a generation, the shift toward independence is here to stay. While the absolute number of brokers going independent seems to have normalized to pre-crisis levels (i.e., before 2008), we continue to see an increase in the number of large teams with bigger books of business making the transition. In many cases, the movement of these large breakaway teams is being fueled by the creation of new independent business models.

Below are some thoughts on the independence trend and four common models that brokers are exploring.

Why go independent? While going independent is not right for everyone, for those considering a transition there are three reasons that seem to rise to the top:

  1. Obtain financial flexibility, freedom, and the ability to build equity
  2. Build and strengthen your brand
  3. Gain autonomy and control

The evolving range of options

For those brokers considering going independent, determining which model is best for them and their clients can be complex. As brokers evaluate their options, they need to consider which model provides the financial freedom, ability to build their brand, and autonomy they are looking for relative to ongoing responsibilities, time commitments and costs. Whether they plan to be 100% fee-based or to retain a mix of commissions and fees, there may be choices within each of these models to support their needs.

While the range of independent models is evolving, let’s take a look at four of the more popular options:

  1. Join an independent broker-dealer

This model may be appropriate for advisors who are:

- Seeking independence with the support of a broker-dealer for compliance and back-office services

- Looking for complete ownership of their client base and control over their business strategy

- Interested in having a mix of commissions and fees

- Interested in networking opportunities that a broker-dealer environment provides

  1. Join an established RIA

This model may be appropriate for advisors who are:

- Looking for independence outside the broker-dealer channel

- Interested in leveraging established practices, procedures, and operations

- Attracted to the culture and strategic direction of a specific firm that is already established

- Open to considering an employee status

  1. Affiliate with a strategic acquirer

This model may be appropriate for advisors who are:

- Seeking independence but want the support of a third party to make the transition seamless and to help grow the business

- Looking for immediate financial support plus a significant ownership position

- Interested in becoming part of a larger entity with the possibility of greater upside potential

- Looking to benefit from broader brand cachet from being part of a national firm/network

  1. Start your own RIA firm

This model may be appropriate for advisors who are:

- Entrepreneurial in spirit and dedicated to serving clients as well as running a business

- Looking to make all decisions about the strategy and operation of the business

- Seeking full control of their P&L, and interested in monetizing the value they are creating at some point in the future

Considerations for all models

Regardless of which model they choose, brokers need to keep several things in mind as they plan to go independent.

  1. Clients willingness to follow

Naturally, one of the most challenging aspects of the transition is trying to determine how many clients will follow. According to a 2009 Aite Group study, “Wealth Management Goes Independent,” the majority of advisors who leave a wirehouse for more freedom retain 75% or more of their client assets.

Based on our conversations [1] with numerous brokers who went independent, here are some points for consideration on this front:

- Be realistic about which clients may come with you. You may be pleasantly surprised by some, and disappointed by others.

- Evaluate your use of proprietary investment products to understand if they are portable. Also, consider the tax or expense implications of liquidation for your clients.

- Do detailed analyses to understand your financial picture if 20%, 30%, or even more of your clients don’t move with you. Also, you may want to look at whether it makes sense for all of your client to follow.

- Realize there may be a ramp-up period as not everyone will come over at once.

- Do everything you can to ensure a smooth transfer of assets. Getting your assets on board as quickly as possible is critical for meeting your time frame for breaking even.

- Consider any agreements you may have with your current employer that may impact your ability to transition clients.

  1. The financial picture

- Revenues -- As an independent, you may be able to keep all your revenues after expenses and taxes. Depending upon your business, your revenues may include: Fees you collect on assets under management, any hourly or project-based fees you may put in place for planning or consulting services and commissions and trails should you affiliate with a broker-dealer, minus handling charges.

- Expenses -- Your expenses will depend on your business model and staffing requirements, and may be determined by such factors as your location, choice of office space, hardware, software, and more. In addition, you will have to consider incorporating the need for relevant licenses as well as such items as insurance, health benefits, and marketing support.

- Break-even scenarios -- “When can I expect to break even?” is a question at the top of every advisor’s list. The answer can depend on your expense profile, which clients come with you, and how quickly they move. Many of those advisors interviewed said you may begin to generate healthy incomes within the first three months if the asset transfer process goes smoothly.

- Long-term equity -- Another very important consideration on the financial front is the ability to build equity in your own business and monetize it over time. As you try to compare firm equity with wirehouse incentives, you may want to account for the fact that recruiting bonuses can often be in the form of company stock plus deferred revenue that may require a net present value calculation. In addition, you may consider talking with a tax professional to understand the tax implications if you are considering a forgivable loan at your broker-dealer.and how that compares with your potential net income as an independent.

Summary

The trend toward independence is here to stay as more brokers consider independence to obtain financial freedom, build and strengthen their brand, and have autonomy and control over their business. While the four options for going independent discussed above emphasize these benefits in different ways, the broad set of alternatives now available is making the move more of a consideration for registered representatives who may have dismissed the idea of starting their own firm in the past.


[1] Based on findings from 17 interviews with Fidelity clients across the four business models discussed in the article. In-depth phone interviews were conducted by The Kelyn Group during May and June of 2009, and during September of 2010. The Kelyn Group is an independent third-party firm not affiliated with Fidelity Investments.

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