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The transition process is still too rough for gusher of breakaway advisors

Aggregators are showing the way in smoothing the bumps

Monday, August 24, 2009 – 4:57 AM by John Furey Guest Columnist
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John Furey: Breaking away can still be a rough passage

The trend of brokers breaking away to become RIAs slowed down just when it seemed poised to take off last year. This development is somewhat mystifying because the option of becoming a registered investment advisor has never looked better and the alternative has never looked worse.

As one disenchanted advisor told me “my [wirehouse employer] no longer provides solutions to grow my business; it hinders my ability to retain clients”. Despite the disenchantment with operating under a wirehouse brand, the breakaway trend did not accelerate.

Last year alone, about $25 billion in client assets transitioned from 300 “captive” advisors to the RIA channel. Although this number is impressive, it is still relatively small compared to the thousands of books of business in motion annually and the actual size of the wirehouse/bank channel of $6 trillion.

There seems to be a disconnect here that is mysterious and troubling, especially for custodians, aggregators and advisors that are designing business models aimed serving RIAs. There are many theories from retention bonuses to recession-induced paralysis to attempt to explain the stunted breakaway movement.

I think the explanation for the reluctant behavior of wirehouse brokers may be simpler and more in control of the RIA servicing partners than it appears.

As the former head of Schwab Institutional’s [now Advisor Services] “Advisors Turning Independent” program, I have had the opportunity to see what works and what doesn’t in transitioning brokers to independence. When I first started helping advisors navigate their way to a new platform five years ago, the breakaway tools of leading RIA custodians such as Schwab and Fidelity amounted to do-it-yourself guides and a page or two of helpful hints on a public website.

Sticks and glue

Advisors had to pull together solutions with sticks and glue. While custodial sales and support organizations played a role in helping the breakaway, many of them couldn’t meet the breakaway’s unique needs such as the ability to handle fee and commission business, transfer cost basis information, and provide an integrated advisor desktop platform.

Faced with these challenges, only the most fearless entrepreneurs at wirehouses were leaping to the RIA channel earlier this decade. At the time it was presumed that this dynamic was permanent and some people still believe that may be true.

But the stakes for smoothing out the breakaway bumps are now much higher. A larger, more mainstream class of breakaway prospects came along as wirehouses continued to stumble and the regulatory environment changed. But the emergence of this fertile recruiting pool came with a catch. These advisors wanted the benefits of the RIA channel without the responsibilities of being a business owner.

Because these thousands advisors control literally trillions of dollars of assets, a multitude of custodians, broker-dealers and other holding entities have decided that bridging the gap to these thousands of captive advisors is worth a go. This effort is still a work in progress.

Despite the new capabilities built by custodians and support organizations, the disconnect remains because would-be breakaway advisors still carry most of the burden of setting up their shop. Custodians do a great job with education, practice management, and transferring assets. Lawyers provide advice to minimize legal risk. Technology providers help automate front and middle offices that isd as good or better than wirehouses.

At the end of the day, it’s up to the advisor to pull all the pieces together and execute the transition. Even worse, the advisor is left playing project manager and this neglect has consequences. Service to clients suffers and there is no time to devote to business development.

Revenue trough

Bottom line: Transition management is a full-time job. Many advisors who made a transition experience a “revenue trough” for six months pre- and post transition due to the distractions of setting up a new shop.

The good news is that help is on the way in 2009 and beyond. An upstart industry is springing up that is serving as the middleware between the broker application and the RIA app. This industry is creating an infrastructure aimed solely at insuring safe passage for breakaways from the wirehouse world to independence. After all, breaking away is a one-time event and it is inefficient for advisors to build competency in transitioning their book.

Upstarts such as Hightower, Concert Wealth Management, and Convergent all aim to aggregate practices and they have experienced growth that charts like a hockey stick, surprising many industry observers. Sure, they have good platforms for advisors but, they also possess outstanding strategic planning and transition capabilities.
Their backing includes some of the brightest professionals from the wirehouse channel. Clearly, the addressable market has expanded and they have responded. This trend will continue as many established firms such has Focus Financial and United Capital continue refine their offers, too.

There are additional niche providers who are starting firms to address the need for strategic planning and insuring a smooth transition. I’ll use my own company, Advisor Growth Strategies, LLC as an example. We are literally stepping into the breakaway breach and providing chief operating officer services during the transition. We are like the pilots who board ships to ensure safe passage into an unfamiliar harbor.

Industry consultants like us now offer advisors an unbiased evaluation and “sit on the advisor side of the table” – somewhat of the same approach as RIAs and best in breed fee based consultants do with their clients. No more countless hours evaluating technology. No more sales pitches. Less time spent building business plans and economic models. As one advisor put it “We can give the keys to you to drive, which allows us to focus on clients and winning new business”.

Recent reports from custodians and a recent RIABiz article showed that improving markets restored some momentum to the breakaway movement. But for breakaway of advisors to really take off, the industry specific to providing safe passage needs to continue to mature with a multitude of platform and transition options for the advisor.

This need is being seriously recognized by an emerging class of industry experts. We’re figuring it out and it bodes well for the explosion of breakaways that we all expected to come along sooner.

John Furey is Principal and founder of Advisor Growth Strategies, LLC, an independent consulting firm providing customized solutions for wealth management firms and advisors seeking to grow their business. John can be reached at jfurey@advisorgrowthllc.com.

Editor’s Note: After years spent on the front lines of Schwab’s efforts to recruit brokers to independence, it’s hard to imagine anyone has observed more of these transitions than John Furey. He plans to write columns for RIABiz and I believe that he can bring a much-needed voice to the discussion about the nuts and bolts[and psychology] of breaking away. Contact John directly with your thoughts or e-mail me about what aspects of breakaways you would like to learn more about. Brooke@RIABiz.com

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