by Phillip Flakes
Phillip Flakes is managing partner of StarPoint Consulting Group (www.starpointnow.com), which is dedicated to pairing financial advisers and investment professionals with the best broker-dealers, RIAs, and clearing firms for them.
During the past few years, an unprecedented number of financial advisers have transitioned their practices to the independent model. If you aren't one of them, more than likely you know someone who has or is thinking about doing this. Often, their decision to make the move falls into one or more of these categories:
- The promise of higher payouts
- More control over how they run their practice
- Ability to offer more or better investments products and services to their clients
- Dissatisfaction with their current broker-dealer and the overall corporate culture
According to a February 2012 study by Fidelity, nine out of 10 financial advisers who make the move to a new IBD or RIA are happy with their decision and, of those, nearly half indicated they knew immediately it was the right move for them. However, taking a closer look at these numbers, we're left to ponder why an almost equal percentage of survey participants (45 percent) were initially unsure that their action was the right step.
What factors were present that made the difference between the approximate 45 percent that knew it was the right move for them and a nearly equal number who had reservations?
Transitioning a financial advisory practice to an independent broker-dealer or RIA can be a scary proposition. A lot of uncertainties are involved, such as: How many of your clients will follow you? How much will your income be affected and for how long? Will you be happy with your new firm? Will the new firm provide the type of support you need to make a smooth transition? Do you have what it takes to be a successful business owner?
The difference between being able to make a successful transition or floundering-stressed about whether your decision was the right one or not-is to be prepared. Prior to selecting a new IBD or RIA, it's important to explore your options, ask lots of questions and, above all, determine the things that are important for you to have at the new IBD. This also means identifying the things that you don't like about your current broker-dealer.
Once you have listed the "must haves" and "don't wants," you will have a better idea what you want and expect from your new firm. Following is a list of six items many transitioning advisers view as being important. Review and determine the priority of each to you.
Maintain Production Level
A reduction in revenues can be expected when transitioning. Find out from the IBDs you are interviewing how much less the average adviser makes when transitioning. Although the percentage of your payouts may increase, you will have additional expenses, especially as you set up a new office. What does the new firm estimate these costs to be? Are they giving you any start-up money to help you make the transition? What will they provide? What won't they provide?
This is a big one. Without your clients, you are back to square one. Besides, your new IBD will more than likely expect you to move a certain percentage of your clients or assets under management by a predetermined date. It's important to find out if they provide assistance with moving your clients. If so, what kind and for how long? Prior to leaving your current firm, make sure you have a client retention plan in place. However, legally you cannot start talking to clients about your move to the new firm until after you have made the move. Make sure you check the contract you have with your current firm to see if there are any penalties associated with your leaving.
Marketing and Advertising
This is a source of contention for many advisers. They want to grow their business, but their broker-dealer offers little or no support, financial or otherwise. And, when they try to do it on their own, they are often shut down by the compliance department. Question prospective firms to find out what kind of marketing and advertising support they provide, if any. It's also a good idea to talk with the head of their compliance department to find out what types of marketing and advertising they allow. Also, when you submit documents to them for approval, what can you expect the turnaround period to be?
Paperwork is always a blight to be handled whether independent or not. Find out what processes the prospective firm uses, how much support they provide to you, and who your contact will be within the firm to answer any questions that may arise. If the support they provide is minimal, you may be better off using an outsourcing firm rather than hiring additional help.
More and more technology is a big-ticket item for any successful financial advisory practice. Most broker-dealers will have a system available for their advisers to help them do their work more efficiently and provide clients with sophisticated documents that will assure them they are being well taken care of. Find out what system the prospective firm uses and if it isn't one you are familiar with, who will be training you and your team to use it and how quickly will this be done.
Time and Money
Expect to spend time and money when transitioning your business. It takes a lot of time to set up a new office, talk to and move clients, and get up to speed on new products, procedures, and technology. Plan on working more hours than usual the first year. Ask the new firm for a timeline so you know what to expect when transitioning. As for money, there are costs involved with setting up an office and, of course, there will be a period of time when you will involved with moving your existing book of business. More than likely, you will be too busy to prospect new clients at this time. Again, it's important to know what the new firm will or will not provide you.
Knowing these things up front will help ensure you don't regret your decision to change firms, nor feel you've been left to "go it alone" once you've signed the papers to join them.
Once you have reviewed the above list and prioritized each of the items-and you may want to add to it-you're ready to find a firm that will best fit your needs. With thousands of IBDs in the United States to select from, finding the right one can be a daunting task.
Placement firms can help shorten the process. By providing a placement firm with the criteria you have established when prioritizing your list of "wants," they can provide you a list of IBDs, RIAs, and/or custodians that would be most appropriate for your book of business and your desired business model. They will then initiate introductory calls for you with your top choices.
Make sure you have a list of questions ready when talking to prospective firms. Their responses will help you determine if you want to move forward with learning more about their company, or not. Once you have settled on a firm, it's often a good idea to visit the home office. Remember, it's not a done deal until the agreement is signed. By visiting their office, you'll have an opportunity to talk with the professionals you will be dealing with on a daily basis, should you decide to join them. Ask to meet the head of the technology department, back-office administrator, and the compliance officer.
If you feel comfortable with the firm's culture and its processes, it's time to negotiate a retainer package that meets your expectations. Based on past placements and current market conditions, a good adviser placement firm will advise you on the offer you receive and offer to help you further negotiation, if necessary.
Overall, if you are considering moving to a new firm, it's important to know what you want, and then to be realistic about what you can expect from the new firm prior to making the move to independence. By asking the right questions upfront, assessing the support you will get from the new firm to ensure you make a smooth transition, and selecting a firm you feel confident will provide the things you are looking for, you will join the 45 percent of advisers who knew immediately that independence was the right move for them.