Perhaps you can never be too rich or too thin. But you can have too many choices.
As more wirehouse reps decide to ditch Wall Street and head to independent RIAs, they're finding there are a number of possible routes to follow. They can start their own business, with all the challenges that involves. Or, they can join an existing, traditional RIA. Then again, they might opt for a few newer alternatives: doing a deal with a roll-up firm that buys a stake in their practice in exchange for equity or cash. Or, they can find a firm that takes a portion of revenues while assuming care of all back-office and infrastructure support. “The market is laden with choices now,” says John Furey, principal of Advisor Growth Strategies, a Phoenix, Ariz., firm that helps advisors make the transition. “The challenge is to sift through the alternatives to find the right fit.”
How to decide which path to select? Since there's no one-size-fits-all, we offer the stories of three advisors, each of whom took a different route.
Going for the RIA in a Box
Christopher Tate joined Merrill Lynch right out of college in 1999 intending to stay there for the rest of his career. Then came the turmoil of fall 2008, and its aftermath. “I started thinking I better look at some alternatives before it's too late,” says Tate, who is based in San Diego.
He had his work cut out for him, since he didn't entirely understand the difference between switching to an independent RIA and hopping to another wirehouse. His first moves were focused on staying in familiar terrain, meeting with managers from two other wirehouses. But, at about the same time, he also started poking around, finding out more about the RIA world.
Since most of his revenues were already fee-based, the RIA path seemed a good fit. Almost immediately, however, a conversation with a former co-worker who had started his own RIA from scratch convinced Tate he wasn't ready for the expenses a pure startup would entail. With about $55 million in assets, he figured he simply lacked the resources — and the inclination — to take care of all the tasks involved in starting and running his own company. “My strengths lie in being an advisor, not setting up computer systems,” he says. “I was thrilled with the idea of plugging into another RIA system and getting up and running the day I started.”
Shortly after, Tate spent most of one day talking to a business development advisor at Fidelity, where he got a crash course in RIA basics. Then, a former colleague suggested he meet with a Schwab representative “who knew all the RIAs in town,” he says, and who introduced him to several possibilities.
First consideration was how much Tate would have to fork over to get the back office support he needed. In some cases, that was based on assets, in others, on revenues. And there were other questions. Would he have office space provided for free? Would he get sales support? What investment platform could he use?
One firm, a small boutique RIA, proposed that Tate plug his clients into one of its existing discretionary portfolios; in return, Tate would get 75 percent of the fee. Tate was unimpressed.
His impression of Concert Wealth Management was more favorable. In return for a share of revenues, Concert would supply soup-to-nuts infrastructure — from back-office support to legal help and software licensing. He could use their discretionary portfolio if he wanted to, or create his own. And he could rent office space with five other Concert advisors at a building three miles from his home.
It was a deal he couldn't refuse. In May, about eight months after starting his search, Tate opened up Concert Wealth Management San Diego, his new practice.
Growing On Their Own
Before the financial upheaval of 2008, Eric Thurber and his five-person team at Morgan Stanley had built a sizeable practice on Silicon Valley's Sand Hill Road, serving venture capitalists and the entrepreneurs they invested in. (He started in 1998 at what was then Solomon Smith Barney). Watching the disaster unfold around him, Thurber knew he didn't want to risk losing everything he had built over a ten-year-period at the firm. So, he and his two partners huddled together and decided it was time to leave. But, they realized, they needed to stay together so they could continue offering the wide range of services — estate planning, investment management and so on — they already provided to clients.
Initially, the partners started investigating five other wirehouses and banks, all of which offered tempting upfront bonuses. But, ultimately, Thurber and his partners decided the wirehouse investment platforms were not what they wanted. In early 2009, they began looking into going independent and calculating what that might involve. Briefly, over two or three weeks, they talked to a handful of RIAs in the area about coming on board. But, in short order, they came to a conclusion: They needed to build their practice on their own terms. With $740 million in assets, they had the resources to do it and do it well. “We realized there might be more risk personally, but with the right platform for our clients, we'd be better off,” he says. “I guess we didn't want to be half pregnant.”
Over six months, Thurber and his partners threw themselves into the process, spending afternoons, evenings and weekends at one partner's San Francisco home doing research on everything from the best hardware to buy, to office real estate and investment platforms. At the same time, says Thurber, they “leaned on” their custodians, as well as other RIAs, for advice. “We didn't want to reinvent the wheel,” he says.
Thirty minutes after officially resigning from their employer in August, they officially launched their firm, Three Bridge Wealth Advisors. “We turned on the switch and we were off,” he says.
Hitching Your Star to a Going Concern
Louise Frances had been with Wachovia and its predecessors for ten years when the market crashed and it was taken over by Wells Fargo. “When your company is in survival mode, it's difficult to focus on the needs of your clients,” she says. “I felt there had to be another way.”
Frances started doing research into the alternatives, reading newspaper and magazine articles and looking into local companies, focusing on both the independent b/d channel and RIAs. Afraid that word would get out, she avoided meeting directly with any firms. After three months, attracted by the higher fiduciary responsibilities of the RIA route, she decided to focus on it exclusively. With $30 million to $50 million in assets, she figured, the most sensible alternative was to join an existing firm. Starting her own business would just be too costly. And there were other considerations, too. “I wanted to be part of a productive team and be at a place where you can take a few vacation days and have someone to cover the phones for you,” she says.
Her first step at that point was to search Internet job sites. On Monster.com, she saw an ad from a local firm, Godfrey Financial Associates based in Latham, NY. As it happened, the president and founder, a solo practitioner, had been looking to bring on another colleague for three years. After one conversation with the president, Frances realized she'd struck gold. The two women seemed to agree completely on investment philosophy and client service. And she liked the company's customized approach to financial planning, a much more personalized process than Frances had been able to offer before. She also checked into the company on her own, talked to the Chamber of Commerce and did some more reading online. “I was working at a company that was in the news for all the wrong reasons. Godfrey was in the headlines for all the right reasons,” she says. “That impressed me.”
After about five meetings, Frances was offered a slot as vice president. She started there in July.
So, you're thinking of leaving the mother ship and becoming an RIA? How do the experts suggest you go about choosing the right route?
First step is deciding whether you want to run your own business — not just a practice, but a full-fledged company. That means setting up a lot of crucial systems that were taken care of by your wirehouse, like compliance, technology platform, research. It also involves being responsible for hiring and firing, and many other day-to-day responsibilities.
Advisors with a book below a certain size — $100 million or so — probably don't have the muscle to start from scratch. But, plenty of advisors with bigger practices also opt against it. Barbara Herman, an executive recruiter with Diamond Consultants, points to a wirehouse advisor with more than $300 million in assets who recently decided to join an existing firm. “He knew he wasn't entrepreneurial enough to take on the business side of operating a company,” she says.
You can avoid those entrepreneurial headaches by joining an existing firm, but that means you also will have to give up the opportunity to establish your own brand. And, you'll need to embrace the culture of that established practice, including the investment philosophy and platform and client service model. “When joining an RIA, it's less about the products and service and more about the culture,” says Tim Oden, a managing director of business development for Schwab Advisor Services. Your best bet is to interview at least four or five firms, although some advisors do get lucky, like Latham, NY-based Louise Frances (see main story) who joined the first RIA she approached after leaving Wells Fargo.
You'll also need to make sure you know what you're worth. Although some advisors with big books join RIAs and immediately get an equity stake, that's not the norm. “It's rarely something awarded out of the gate,” says Herman.
If you decide that you'd prefer to sign on with one of the newer alternatives, like HighTower Advisors, Focus Financial Partners, or Concert Wealth Management, you'll be faced with a different assortment of considerations. In general, roll-up firms, such as HighTower, give you upfront money, in exchange for a percentage of your profits. Companies like Concert won't provide money right away, but will give you everything you need to start and run a practice.
Ultimately, you need to understand your own objectives. That's especially complicated for teams. Oden, for example, points to a group of wirehouse advisors, managing a combined $400 million in assets, who recently considered going independent. Much to their surprise, during a series of conversations with a business development expert at Schwab, they discovered they had very different views about what they wanted. Two felt strongly that they didn't want to work within the constructs of any other firm, while the others liked the idea of joining forces with an established name. In the end, they split up. “They had conflicting objectives,” says Oden. “They just didn't realize it at first.”