A TALE OF TWO BREAKAWAYS
One Successful, and One a Cautionary Tale
One advisor lost 30% of his book. What can you do to avoid that outcome?
Independent RIAs are the fastest growing segment of the financial services industry according to the Cerulli Associates RIA Marketplace report[i]. “While the wire-house assets are shrinking 1.9% per year, the independent RIA channel is expected to increase from 26% to 28% in 2020”, wrote Kenton Shirk at Cerulli. Much of this growth is fueled by financial advisors leaving wire houses and broker-dealers to pursue independence, either on their own or with a partner such as Dynamic Advisor Solutions[ii], who provides a turnkey platform and outsource services to wealth managers seeking independence or wealth managers and firms who have outgrown their infrastructure.
RIABiz recently published a story[iii] by guest columnist and COO at Dynamic, Craig Morningstar, who paints a picture of two different paths to independence. One story has a happy ending and the other provides valuable lessons for advisors.
“There is no “one-size-fits-all” solution to going independent, because everyone has distinct needs and skills. In my years of helping brokers transition to independence, I’ve seen the worst outcomes among advisors who leaped to a purely independent model without deeply considering whether they had a taste for entrepreneurship and the ability to truly manage things on their own”, wrote Morningstar.
He continues, “Surprisingly, this can happen despite all the due diligence in the world with custodians and technology providers. They can answer the questions of how things work — and they tend to emphasize the ease of the transition — but they can never answer the question of whether you personally will be able to do the work involved.
One good idea is to reach out to others that have already made the transition to several different forms of independence for firsthand feedback and lessons learned.
I recently worked with two advisors who changed to different models. Their experiences in making a change show what can happen, good and bad, to advisors attempting to successfully modify their practices. For this column, we’ll use the names Bob and Troy.
The Success Story
Bob spent 12 years working at a wire-house. He left because he wanted more independence, control and ownership. He did considerable research before making a switch; he interviewed firms, considered going solo, spoke with custodians, let clients know he was considering a change, and learned about the many different technology solutions needed to service and retain clients. Bob, a natural skeptic, didn’t believe what he was told by many service providers focused on making a sale. After evaluating his situation and doing solid financial analysis, Bob concluded it made better business sense to outsource as much as he could, allowing him to stay focused on clients during the transition.
Bob joined a “tuck-in/joiner” firm that managed back and middle office functions. With the change in firms, he pared back his book and focused on his strongest client relationships. The overall result was a 10% reduction in clients, with an overall net revenue gain of over 40%. Since the transition, Bob has been able bring in larger clients across several custodians and focus on growing his book, generating referrals and expanding his business. Bob’s business is profitable, focused and debt free, with good recurring revenues.
The Cautionary Story
Troy has been in the industry 11 years. He started in a wire-house, then moved to an independent BD (IBD) after a few years. He made the first move to increase his payout to 90%. What he didn’t realize about an IBD was that he would no longer have access to many of the major resources an advisor needs to be successful. His investment and product support mainly came from product providers and vendors, hardly objective sources. Whatever the IBD didn’t provide at a marked-up cost to Troy, he had to provide himself.
With his first switch of firms, only a few years into the business, he lost 30% of his book. Troy believed the second change to a single custodian with all their wonderful technologies and a 100% payout could resolve the problems he experienced being independent. Because of his independent experience with the IBD, he was also confident in his ability to effectively provide and manage technology, operations, multiple vendors and compliance matters (the one-man-band solution). Custodians emphasized the ease of their solutions. Troy believed what he was told, and two months into the change, 40% of his clients had not moved to his new solo RIA firm.
Troy was very proud of his solo RIA firm but all of the wonderful technology and solutions he planned to bring to his clients quickly overwhelmed him. He hired staff but training and implementation took over a year. With all of the transition issues, inexperienced staff, technology and compliance issues to work on, Troy lost another 20% of his clients in the first year. The fixed costs of staff and technology quickly became apparent, with the decreasing client base and sliding revenues.
Instead of generating a profit, Troy’s business operates at a loss. If Troy is able to stay focused on business development and client service for the next few years, he may be able to turn a profit eventually and begin paying back his business debt.
While there are many differences between Bob’s and Troy’s experiences, there are also a few similarities. Both Bob and Troy offer the same solutions and custodian to their clients. But that’s where the similarities end.
Bob’s business has better profit margins, incremental fixed costs, minimal staff, and the ability to focus on the core issues of client relationships and expanding his client base. He is also able to provide superior and cost-effective technology solutions for his office and clients. Troy’s business has high fixed costs, high labor costs, and distractions pulling him in many directions. He works longer hours than Bob with lower financial reward and limited client acquisition effectiveness.
There are simple business points to extract from these two stories. If you’re considering a change, seek solutions that deliver better profits, not just payout. Understand what your costs will be with any solution, starting with where you are now. Outsource your non-core business, primarily back and middle office needs, so you can concentrate on what you do best. Don’t always believe what those trying to get your business sell you. Base your decisions on research and analysis, not hype, emotion or what you believe a situation to be. Just as there can be a downside to staying in your current firm, there is a downside to moving that can be minimized by careful planning and wise choices.
In addition, many of the top custodians have resources that can be valuable. One very helpful tool that I’ve come across is the economic estimator offered by Fidelity Institutional Wealth Services. It provides you with a customized perspective on the economics of three common independent models — starting an independent registered investment advisor (RIA) firm, partnering with a third-party (e.g., rollup or acquiring a firm) or joining an independent broker-dealer. It’s worth a look as you can quickly explore the three options. Fidelity also makes available a more detailed version of the tool if you work with one of the custodian’s transition consultants. You can take a much deeper dive specific to your book of business and work-style preferences.”
About Dynamic Wealth Advisors
Dynamic’s Advisor Solutions is recognized as a premier provider of essential resources to professional wealth management practices. Its turnkey practice platform includes asset management and enables wealth advisors to save money and focus on clients while positioning themselves for success and growth. With myVirtualPractice, a suite of wealth management practice solutions, Dynamic hands the professional wealth advisor the keys to a comprehensive custom-built virtual office and practice complete with staff, back/middle office, accounting/billing, compliance and even a Virtual Assistant. The wealth advisor need only add clients and a laptop, and they are up-and-running instantly. For many breakaways and independent wealth advisors, being part of a nationwide community of like-minded professionals is one of the most valuable components of their affiliation with Dynamic.
Craig Morningstar is COO at Dynamic Advisor Solutions and Dynamic Wealth Advisors, with decades of experience as director, president, COO, CCO and CEO of RIA firms, and TAMPs. He helps Dynamic bring robust consulting services to its wealth managers on topics such as compliance, RIA business development, and practice management. He is a keynote speaker and author on business culture, development, and marketing.
[iii] RIABiz, Contrasting two breakaways: one a success story, one a cautionary tale: https://riabiz.com/a/2010/8/30/contrasting-two-breakaways-one-a-success-story-one-a-cautionary-tale