A new channel to independence emerges, complete with soft-landing service providers

May 10, 2011 — 2:20 PM UTC by Frank Pizzichillo


Elizabeth’s note: A few weeks ago, Mindy Diamond wrote a column for RIABiz about what differentiates the successful breakaway from someone who’s better off in a wirehouse. See: The six traits that separate successful independents from wirehouse denizens . This Leading Indicator column by Frank Pizzichillo is a rejoinder, describing a middle road for breakaways who want to be a company owners — but not go through startup headaches.

The world of financial M&A is no longer confined to mahogany boardrooms and upscale Wall Street addresses. Today, the financier and facilitator of your independence is just as likely to be located in a neighborhood office park or suburban strip mall. See: M&A market reaching a new normal based on RIA-driven deals, say competing reports from Pershing, Schwab .

The third and often-overlooked option for breakaway brokers is the tuck-in RIA. While most breakaways consider establishing their own RIAs or joining an independent broker-dealer, a growing number are looking within the already existing RIA community for a firm to join as a tuck-in.

The tuck-in strategy offers many of the entrepreneurial advantages of establishing your own RIA without the need for building infrastructure from the ground up. It’s a road less traveled, but one that appears to be gaining more and more traction as the RIA business model evolves and matures.

New service providers emerge

One sign of that maturation is the new breed of service providers that are emerging with the sole purpose of enabling a soft landing for breakaways looking to join an existing RIA. One such facilitator is Soft Landing Firms (www.softlandingfirms.com), headed up by Ryan Shanks, the founder and CEO of Finetooth Consulting.

He sees himself having two clients — the breakaways and the RIAs taking on the tuck-in role.

“As RIAs mature, there’s often a philosophical shift that occurs where the firm’s focus broadens beyond mere organic growth and it begins to explore growth via acquisition,” says Shanks. “It simply makes good business sense. These practices have invested in building the scalable systems and infrastructure necessary to support expansion, so why not integrate a wirehouse advisor or team that’s a strong fit?”

Ryan chose the words “strong fit” very carefully, and he was right to do so. I’ve seen many deals look great on paper — firms and reps that were natural economic partnerships — the elusive but coveted “win-win.” But spreadsheets and pro-formas lack egos and personalities. When the human element enters, so do complications. And often, these “natural partnerships” fizzle when the humans behind the spreadsheets emerge.

Success stories

But there are success stories…plenty of them

One firm that has embraced the identity of the tuck-in is Stratos Wealth Partners, based outside of Cleveland. The resulting growth of the firm has been dramatic, with a footprint that today not only covers all of Ohio, but has expanded into Southern California, Connecticut, Pennsylvania, Virginia and North Carolina. Stratos uses Shank’s company.

“The economics of starting a new RIA from the ground-up can be daunting to many breakaways,” notes Jim Lupica, co-founder and managing partner of Stratos. “We provide them with the infrastructure, office, administrative support and core platform to have their business up and running with minimal effort.”

It’s a path to independence that provides minimal upheaval but may be more appealing than an IBD to the truly entrepreneurial advisor.

Lupica cautions, however, that breakaways need to be realistic about payouts and the costs associated with independence.

“I see too many advisors make the move to an IBD solely on the basis of a high gross payout. Unfortunately, they rarely take a detailed look at the expense side of the ledger to calculate their true net income. If they did, my phone would be ringing off the hook.”

Equity and chemistry

Adds Lupica, “By joining an existing RIA like Stratos, advisors not only receive equity in the firm, but they provide themselves with a clear succession/transition plan for their business. At the end of the day, however, it all comes down to chemistry.”

“Every other aspect of a potential tuck in or merger can align but the cultural and philosophical fit will dictate the success,” agrees Mary Ann Buchanan, president of Buchanan Consulting, another firm that aids tuck-ins.

She says the biggest roadblock for brokers who would consider joining an existing RIA is the difficulty of locating like-minded people and similar corporate cultures.

“Custodians try to facilitate the process, but a breakaway is in a different channel and will likely never meet the RIA with the best cultural fit and business practices,” she says. “The inherently silo-ed organizations create inefficiencies for the breakaways and the RIAs to find each other.”

For those of you contemplating a break with your current broker-dealer or are looking to grow your existing practice through hiring, you might want to pay close attention to the words of Robert Frost — “I took the road less traveled by, and that has made all the difference.”

Frank Pizzichillo last wrote for RIABiz in The Leading Indicator: The story of an intern, a broker and what might be the longest breakaway sales cycle ever. At Englewood, N.J.-based MarketCounsel, he is director of business development.

Mentioned in this article:

Regulatory Attorney, Consulting Firm, Specialized Breakaway Service
Top Executive: Brian Hamburger

Brinker Capital
Asset Manager for RIAs
Top Executive: Noreen Beaman

Finetooth Consulting
Consulting Firm
Top Executive: Ryan N. Shanks

RIA Match
Specialized Breakaway Service
Top Executive: Mary Ann Buchanan

Stratos Wealth Partners
RIA Seeking to Hire Advisors
Top Executive: Jeff Concepcion

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