Transitioning to Independence: Evaluating Your Options (Part 2 of a Three-Part Series)

Welcome to the second in our three-part series on making the move to independence. Last month, we discussed how to effectively explore the idea of independence. This month, we’ll cover the “ins and outs” of determining whether independence will work in your particular situation. Getting it right the first time is important and evaluating your options properly can make all the difference. Read on to get some valuable advice from Jeffrey Haines, senior vice president of ActiFi Inc., a Plymouth, Minn.-based practice management solutions firm, which helps financial advisors navigate all the choices related to independence.

Create an inventory
The first step in the due-diligence process is to inventory all of the products and services you currently provide to clients. You should also think about what products and services you may want to add to your menu. Write this all down because, as you are making your decision, you do not want to miss anything that is an important part of what you are delivering or want to deliver to clients. It also will save time later as you start to review options with potential partners, as some do not provide access to every product or service. In addition, some firms are stronger at certain services than others.

Assess yourself and your practice
Every person and practice has strengths and weaknesses. As you move to independence, you will be responsible for more things than you were as an employee. You should assess your ability and motivation in some key areas to take advantage of your strengths and find partners to help with your weaknesses. Key areas to consider include:

• Client Acquisition and Servicing
• Operations and Technology Infrastructure
• Facilities
• Compliance
• Marketing
• Staffing
• Accounting and Finance
• Transition Project Management

If you have neither the ability nor the motivation to work in these areas, don’t worry; you shouldn’t be dissuaded from the independent channel just because you may not feel comfortable doing the work yourself. Custodians and broker/dealers have resources that can help in many of these areas. You also can outsource many tasks associated with building, growing, and managing your business. Moreover, you can hire people to focus on the business tasks that you least like to perform. As you are thinking about the level of independence you are looking at, consider what you are willing to invest in terms of time and energy to build your ideal practice.

At this point, you and your lawyer should complete a legal assessment. This should include reviewing your existing employment contracts to see if your clients can follow you to your new firm, if you can hire employees from your existing firm, and more. Your attorney also can help you begin the assessment of what type of legal entity (or entities) you may need to create.

Review Revenue Sources
Next, you should assess your revenue sources. If you are charging commissions for securities transactions, you will need a broker/dealer partner. If you are generating any revenue as a Registered Investment Advisor, you will need to find a custodian partner. Today, almost all custodians and broker/dealers can provide access to both options either through affiliated companies or partnerships.

Start identifying potential partners
At this point, you probably have enough information to figure out which business model might be right for you. Then you can determine which organizations to select as partners within your chosen model. Working with a consultant can be helpful in evaluating the various choices. There are numerous creative and flexible options so be sure to talk to potential partners about all the alternatives they can offer. If you are not comfortable with being completely independent, check with potential partners about programs to match you with existing independent advisory firms. You can obtain some of the advantages of independence without taking on all of the responsibility.

Financial analysis
Before you commit to going independent, make sure that you review the transition costs you’re likely to incur. Custodians and broker/dealers often will provide at least a preliminary analysis so you can compare your financial situation today versus going independent tomorrow. Other firms (including ActiFi) can assist with this analysis as well.

Make sure you review various options for your ongoing financials. Again, there is a remarkable amount of flexibility in how you can manage both revenue and costs. You will need to have discussions with potential partners (and your lawyer) to understand the various options and what is the right fit for you. Include discussions about what your business is going to look like over the next five to 10 years. If you only look at it over the next six months, you probably will decide it is not worth it.

Prioritization
Next, it is time to prioritize what is most important to you. Before you make any binding decisions, organize your thoughts and, if you can, create a formal “Request for Proposal”-type process to interview custodians, broker/dealers and/or other partners.

Select partners
The final step is selecting your business and transition partners. The most significant decision is how you will manage your clients’ assets, which means choosing a custodian and/or broker/dealer. Use the inventories and assessments you completed earlier to see how well each can support you. Finally, do not forget to appraise your partner firm’s culture and how well it complements you and how you do business. Just as with you and your clients, trust is imperative.

There have never been more options and resources available for advisors to make a smooth transition to independence. You can find the right path by following a defined due diligence process.

Stay tuned next month for “Making Your Move”—the third and final part of our series on transitioning to independence.

Questions or feedback? Please email us at nextmove@penton.com.