By Caitlin Harrison, Esq.
Seeking freedom from corporate mandates and higher profits, advisors of all sizes are breaking away from full service brokerages, or wirehouses, to join regional broker dealers or become independent advisors. New technology and the growth of advisory platforms have now made it possible even for smaller advisors to operate independently and successfully; a move once thought to be achievable only by the largest of advisors.
No longer hindered by limited product offerings and restrictive investment parameters, independent advisors are achieving success through the ability to tailor their services to better serve their specific clients. Going independent gives advisors the freedom to create their own approach to wealth management, recommend products of their choice, retain all of the revenue they generate, and maintain control of and own their own business.
As is the case with starting any business, there are risks associated with becoming an independent advisor and foregoing an association with a wirehouse, which has conventionally been thought of as a value adding relationship. Wirehouses customarily have provided advisors with (1) a steady, predictable stream of income or compensation, (2) an affiliation with a recognizable brand name, (3) the ability to maintain a license and receive commissions from product sales, and (4) extensive back office and operational support. However, the perceived risk in forfeiting these “benefits” can be turned into advantages and opportunities for growth.
As in any industry, leaving an established firm to start an entrepreneurial venture means, at least initially, losing the security of a predictable guaranteed salary and employer-sponsored contribution plans and taking on the risk of being unable to generate enough revenue to achieve comparable or adequate levels of compensation. However, unlike a standard grid model at a wirehouse, where advisors would typically receive between 33% and 45% of revenue they bring to the firm, independent advisors will retain 100% of the revenue they generate and, with the reduction in overhead expenses discussed below, this can lead to higher payouts than would have been realized while they were affiliated with a wirehouse. A number of reports show that an overwhelming majority of independent advisers said they were better off financially after making the move.
Going independent allows advisors to craft their own brand, message, and advisory approach that can be tailored to resonate with the existing clients they seek to take with them or potential new clients they aim to gain. An affiliation with a well-known wirehouse traditionally was thought to give advisors credibility, which created opportunity and access to both clients and products. This concept has changed, however, in a post-financial crisis world, where many investors and individuals seeking advisory services mistrust large banks and financial institutions and prefer to work with independent advisors.
License and Commission
Going independent and becoming an SEC registered RIA with no wirehouse affiliation can result in advisors being unable to retain their licenses thereby compromising their ability to receive commissions from product sales, relegating them to a fee-only model based on the advisory services they provide. One alternative to the wirehouse or nothing option (that is going fully independent) is for the advisors to become hybrid RIAs, whereby they maintain an association with a regional broker dealer. This hybrid model would allow advisors to achieve some additional independence while keeping their licenses active and receiving commissions from product placement. An association with a regional broker dealer can also lead to increased access to products, custodians and operational support without coming under the more stringent mandates of a wirehouse.
While the concept of going independent may have seemed logistically burdensome and cost-prohibitive to smaller advisors in the past due to the loss of operational support wirehouses provide, developments in technology and advisory platforms have made the path to independence feasible and cost effective, allowing such advisors to successfully and profitably operate independently.
Joining a network and utilizing a platform designed specifically for independent advisors provides a streamlined approach to supplementing an advisory business with the services a wirehouse traditionally provides, including support with compliance, marketing, errors and omission insurance, audit services, back office help, and even office space. Outsourcing operational support and joining an advisory platform reduces the burden, both in terms of cost and time, that would otherwise be spent obtaining and maintaining each of these necessary components individually. It is this reduction in overhead expenses that allows the advisor the possibility of retaining a higher percentage of revenue than they would see at a wirehouse.
Dynasty Financial Partners, for example, has developed a platform specifically for use by advisors seeking to operate independently from wirehouses and regional brokers. Dynasty provides financial technology platforms, strategic planning, tax and audit-ready books and records, financial reporting, investment and operational support, marketing and branding, legal and compliance support and access to a community of other independent advisors. Partnering with a firm like Dynasty allows advisors seeking to go independent to receive the transitional help, financial advice, and operational assistance they need to launch an independent advisory firm.