One broker lost 30% of his book. What can you do to avoid that fate?

August 30, 2010 — 4:24 AM UTC by Craig Morningstar, Guest Columnist, breakaway resource

1 Comment

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.

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 wirehouse. 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 wirehouse, 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.

Lessons learned

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.

Craig Morningstar, COO Of Dynamic Wealth Advisors, is an experienced director, president, COO, CCO and CEO of RIA firms, and TAMPs. He also has experience as a registered rep with wires and IBDs. He is a compliance and RIA business development consultant and keynote speaker and author on business culture, as well as an executive sales trainer for professional service providers.



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Jeff Spears said:

August 30, 2010 — 3:10 PM UTC

I couldn’t agree more. The only experience I would add is that breakaway advisors underestimate the time and value of management, which is understandable since their legacy managers weren’t much value-add. Legacy managers focus on increased profitability (lower payouts to advisors) recruiting (always a prettier girl) and compliance. I can’t blame the breakaway advisors for not assigning much value.

Great article.


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