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Is now a good time to go independent? With the market continuing its unnerving slide and the state of the economy still uncertain, it's a perplexing question. On the one hand, the larger payouts that independents earn are a big plus when individual investors are reluctant to trade and asset values are declining. "It's one way to increase your take-home pay," says Dennis Gallant, director of intermediary research with Cerulli Associates, a Boston research and consulting firm specializing in the financial services industry. On the other hand, independence means exactly what the term implies: You'll be largely on your own, and you have to understand how much administrative work you'll be taking on.

That said, wirehouse reps continue to take the plunge. Total assets under management among independents jumped to $48.5 billion in 2001 from $37 billion in 1999. (Independent firms outperformed the market in 2001, too, with a median decline of 5.3 percent in the value of client portfolios compared with a drop of 15 percent in the S&P 500.) And, in addition to offering higher payouts, going independent these days can untangle some of the complications of working at a wirehouse. You usually have greater flexibility in choosing products, and you don't have to answer embarrassing questions about whether your research is tainted by investment banking ties.

At the same time, however, it's not a free lunch. You're running your own business, and that means all those things you used to take for granted now have to be done by someone else--namely you. Depending on your situation, that can mean everything from setting up a computer system and billing clients to ordering paper clips and hiring support staff, not to mention weightier business issues like long-term business planning and competitive analysis. "You have to be a business manager and a professional, and the two are very different," says Philip Palaveev, a senior consultant with Moss Adams, a Seattle CPA firm specializing in financial professionals.

Then, there are legal considerations. If you have an employment contract forbidding you to take existing clients with you, you can wind up with legal fees of anywhere from $1,500 to $100,000 in reaching an agreement with your former employer, although recent NASD rulings regarding temporary restraining orders have made it somewhat less likely that your firm will sue you for taking clients with you. Plus, if you have a promissory note or forgivable loan with the firm and still owe money when you leave, you can bet you'll wind up in legal proceedings to force you to pay up. It's no wonder, then, that reps take an average of 18 months before deciding whether to make the move, according to Mark Goldberg, president of New York-based independent broker/dealer Royal Alliance.

OK. Say you've determined you'll do it. What can you expect your costs to be? Generally, overhead is higher than a few years ago. In 1999, it was 38.4 percent of revenues, vs. 44.1 percent in 2001; that's largely due to an increase in salaries paid to support staff. However, overhead costs also depend on what type of independent firm you choose to be. If you affiliate with a broker/dealer, which will generally offer services similar to those of a wirehouse--clearing, research and compliance--you take on less overhead. If you choose to become a registered investment advisor, you're on the hook for everything. To cite one example: for a rep with $800,000 in gross commissions or fees, overhead would be 42 percent of revenues for RIAs vs. 33 percent for broker/dealer affiliates, according to a recent study by Moss Adams. Generally, the bigger you are, however, the lower your overhead will be as a percentage of revenues. For firms with $30,000 to $100,000 in revenues, it's 56.6 percent; for firms with over $1 million, it's 41.8 percent.

Deciding whether to take the independent broker/dealer or RIA route is the next big decision. For the person used to the panoply of services provided by a wirehouse in particular, joining a broker/dealer is often the preferred tack, since your broker/dealer will not only give you ongoing services but will probably also send a transition team to your office to help you get set up. At the same time, you'll be able to sell pretty much whatever you want, which is what especially attracts people like Bill Fuentes of Fuentes & Associates Wealth Management Team in Woodland Hills, Calif. Last July, he left Wachovia Securities to sign on with Royal Alliance. "I have clients talking to me about mortgages, all kinds of products I couldn't sell before," he says. "In this environment, it's a good thing to open your doors to many different client needs." For those reasons, it's the second most popular path for reps to take: There are 66,000 independent broker/dealer reps, compared with 95,000 reps in traditional firms.

Generally, independent broker/dealer reps work on commission, using a clearinghouse associated with their broker/dealer to make transactions. (See page BD28 for more about clearing.) But, in reality, it's not quite so straightforward. A growing number of independent broker/dealer firms allow their reps to conduct fee-based business. In fact, about 11 percent of independent broker/dealer revenues come from such business. And the bigger the firm, the more you'll likely make from such fees. For reps with more than $500 million in assets under management, fee-based pricing accounts for almost 70 percent of assets, according to Cerulli.

Not all broker/dealers encourage their reps to offer fee-based pricing. Some, however, push it. Identifying which approach you want to pursue, in fact, is one of the most important criteria to use when deciding which of the 707 independent broker/dealer firms will be a good fit for you. "Most reps look for a philosophical match" when shopping for a broker/dealer, says Palaveev. That can mean anything from an emphasis on financial planning, to a belief in index funds vs. variable annuities.

But the No. 1 criterion for most reps remains payout, which ranges from about 80 percent to 100 percent. Those are the published numbers, at least. To get your net, you have to include a variety of marketing, transaction, technology, record keeping and other potential charges. Some firms, for example, may have a higher published payout but charge, say, $12 a trade, while others may provide a lower payout but waive the ticket charge. "If you do a lot of trading, it may be better to go with the lower payout," says Gallant.

The other key issue is the level of service, namely: You get what you pay for. The hidden cost of going with an ultra-cheap broker/dealer can range from research reports filled with typos to excruciatingly long waits for registering new accounts. And just because someone promises, say, state-of-the-art technology doesn't mean you'll get it. In fact, according to Cerulli's Gallant, many independent broker/dealer reps switch firms because of poor service.

While you're kicking the tires of the broker/dealers, remember that they'll be giving you the once-over, too. Too many complaints on your U-4 could prompt a broker/dealer to turn you away. You can expect to be thoroughly checked out by the recruiting department. Most reps who sign with independent broker/dealers have a minimum of 15 years experience, and many broker/dealers have minimum production requirements. Raymond James Financial Services, for example, requires recruits to have gross production of $175,000.

Remember that while your broker/dealer firm will take care of a lot for you, you're still an entrepreneur. You do the hiring, you buy the hardware, you pay the phone bill. In fact, independent broker/dealer reps spend about 40 percent of their time on noncore activities, according to Cerulli. And, you also face a tough competitive climate. In the last five years, as more reps have signed on with broker/dealers, the territories of these reps increasingly have begun to overlap. At the same time, there's more competition from the big guys, with their new emphasis on fee-based business and nonproprietary products.

Indeed, Cerulli points out that the trend toward going independent may be slowing a bit. That's partly because most wirehouses have reacted to the independent threat by allowing their brokers to do more fee-based business and use outside products. What's more, "Most of the brokers who wanted to make the move have already done so," says Gallant of Cerulli. And, despite overall gains in total assets under management, the average operating profit for independents declined, from $97,184 in 1999 to $69,938 in 2001, according to a study by Moss Adams, because of higher expenses.

The challenges of entrepreneurship are even tougher for the RIA. That's because if you go this route, you often don't affiliate with a broker/dealer. Instead, generally, you work as a financial planner, aligning yourself with a custody provider like Pershing, Schwab or Fidelity, and your revenues come from a percent--usually 1 percent--of assets under management. And that means you don't have the services of a broker/dealer to lean on. Finding the best software, doing all the back-office stuff, searching for the best research--every function, large and small, is your responsibility. What's more, you will have the Series 65 to study for, pass and pay for--and you probably will still need a legal advisor after that.

The most important issue for RIAs, in fact, is fee compression. To make money, RIAs need to attract wealthier clients and they do so by offering additional services, like estate planning; however, with all the competition out there, you can't increase fees. Something has to give--and usually it's your pay. Plus, you'll probably have to go outside for such things as investment research and access to money managers, further eroding your profits. At the same time, the increasingly sophisticated mix of services requires a more educated, highly paid support staff. (Staffing deficiencies are the second most significant problem affecting growth in RIA firms, according to Cerulli.) The result has been an increase in mergers among RIA firms, according to Cerulli. The number of retail RIAs declined from 11,728 in 1999 to 11,468 in 2002.

Increasingly, the answer for more RIAs is to start out with a group of partners or to sign on with an existing practice. "If you're under $50 million in assets, you really should be thinking about joining another independent advisory, not creating a new one," says Nick Georgis, senior vice president, sales and relationship management for Schwab Institutional in San Francisco.

Last winter, James Christie left his affiliation with NFP Securities to start Freedom Financial Planning in Bridgewater, N.J. But instead of starting from scratch, he hooked up with The Garrett Planning Network, a network of fee-only planners based in Kansas City providing such features as computer support, software, access to attorneys, marketing materials and an intranet connecting the network's 120 planners, so they can ask each other for advice. Christie pays an initial fee of $5,000, plus an annual charge of about $1,100.

Another approach is to consider alternatives to simply billing clients for assets under management. At Garrett, for example, planners charge by the hour, much as a lawyer might do. The result: RIAs don't have to chase after the usual suspects--wealthy individuals. They do, however, need to see a lot of clients to be successful. Founder Sheryl Garrett and an associate, for example, see about 600 clients a year, at $180 an hour.

Another possibility is to use a transition service, like Focus Point Solutions in Portland, Ore. It provides a Web-based system with everything from back-office support to access to money management advice. You can either pay them to run the show, and you operate under your own name, or you can affiliate with the H Group, their own advisory firm, and also get access to brochures, stationery, and other marketing materials plus a host of other services. (In both cases, the fee is a percent of assets.)

The bottom line: If you're itching to leave the wirehouse or regional brokerage where you work today, going independent is an attractive option. The promises of higher payouts and greater autonomy are real . . . but so are the management headaches that any small business owner faces.