by Jonathan Henschen, CFS and featured in AdvisorBiz.com
Primary Motivations and Practice Valuation
To begin with, it’s important to understand why so many financial advisors at wirehouses or regional firms are choosing independence. The top four reasons are:
1. Monetizing the value of their practices
2. Owning and controlling their destinies
3. Marketing without excessive compliance burden
4. Higher payouts and commissions
A compelling case for independence also comes from this data provided by the Tiburon CEO Summit XII:
- Independent advisors are growing client assets at 14% – 18% annually; for full-service brokers the comparable rate is 11%, while for retail banks and trust officers it is 3%.
- Over 110,000 licensed practitioners are independent advisors (82,000 independent reps; 30,000 fee-only advisors) vs. 92,000 wirehouse brokers.
Note: Current valuations are running at around 1-x trailing revenue for a transactional book of business and 2.3X for a primarily fee-based (reoccurring revenue) book of business.
For wirehouse advisors seeking independence, choices of advisory affiliations fall into three categories:
- Advisors using their broker/dealer’s IAR for investment fees and may or may not be allowed to receive hourly fees for advice.
- Advisors can use their broker/dealer’s IAR, but are allowed to have their own RIA (Registered Investment Advisor) for fee-for-advice business only. The advantage is getting all your hourly fee for advise, with no payout grid applied. Further, if the broker/dealer disallows advisory-hourly fee for advise compensation through its IAR, your RIA is the only way of getting those hourly fees.
- Advisors may use their broker/dealer’s IAR or their own RIA for investment fees, plus hourly fees. What’s more, dual-registered models (that is, affiliation with a broker/dealer while also having one’s own RIA) are also commonly available, with some permitting outside advisory sources, such as Schwab, TD Ameritrade or Fidelity.
- Higher payout, up to 95% or flat monthly fees, rather than grid.
- Unlike fee-only firms, dual-registered advisors rely on compliance support from broker/dealers with a vested interest in representatives maintaining full regulatory compliance. What’s more, those advisors may use their broker/dealer’s resources to reduce or eliminate compliance risk.
- Advisors holding advisory assets at Schwab, TD Ameritrade or Fidelity, for example, will never have to move their business and re-paper if they change broker/dealers. Contrast that to reps’ advisory assets being subject to ACAT Transfers if held by a broker/dealer clearing firm such as Pershing or NFS during a change.
- Dual-registered advisors have access to broker/dealer outsourcing options, which accelerate the growth of client assets while minimizing infrastructure investment.
- With their own RIAs, dual-registered firms can maintain name recognition apart from their broker/dealer affiliation. That kind of “name-branding” communicates independence and objectivity to clients and prospects.
If the time is right, however, the process can be outsourced to vendors who can establish your RIA and provide ongoing compliance and administrative support.
Other Issues, Other Choices–Size Does Matter!
Advisors looking for a broker/dealer that fits their specific needs typically focus on smaller-to-mid-sized firms with 600 or fewer reps. Typically, those are firms that:
- Excel in relationship-building with Advisors
- Offer fast, nimble compliance turnaround
- May have internal administrative capability to do billing and performance reporting for a flat fee or 5-10 bsp. charged on Advisory assets held at outside sources like Schwab or TD Ameritrade, which saves you the time and expense of doing this yourself. Larger firms that allow you to have your own RIA, usually require you to do your own billing and performance reporting.
A Further Word about Name-Branding
At smaller firms, name-branding can be done through the broker/dealer’s clearing arm. JP Morgan or National Financial Services (the independent clearing arm of Fidelity), for example, are brands clients are familiar with; but name-branding also works with well known firms such as Schwab, TD Ameritrade or Fidelity Institutional.
If you need to add product, such as a smaller, newer third-party manager, smaller firms are much more likely to oblige than larger firms. But if mainstream products are what you’re after, larger firms will likely have them or may be open to adding them to their roster of managers.
Lately, compliance seems to be why so many wirehouse advisors are interested in going independent. For instance, one recently told us how difficult his firm made marketing.
“A group of advisors wanted to print lunch menus on their seminar invitations,” he explained, “But compliance nixed the idea before it even got to the launch pad, which is frustrating, to say the least”
Some wirehouse advisors come to us revved-up about going independent, but wanting everything else to be the same! The same technology; separate account managers; expenses and wrap platforms. The whole nine yards!
Bottom Line: We point out that as an independent, you’ll be an entrepreneur with payouts up around 90%! But that means you’ll also have to be self-sufficient; paying ticket charges, and taking on additional expenses since you are now self employed. On product choices there will be some give and take, where if they don’t have the same manager, they’ll likely have one or several with a similar style and perhaps better track record.
Self-Directed Fee Accounts?
While independent advisors haven’t had self-directed accounts and third-party managers marketed to them for as long as wirehouse advisors have, over the past two years we’ve seen a big push among broker/dealers in SMAs (Separately Managed Accounts) and UMAs (Unified Managed Accounts)–with UMAs providing advisors the additional option of a tax-overlay manager, which is especially helpful for wealthier clients.
And we notice that the most popular SMA/UMA platforms are Envestnet and Lockwood, with Envestnet having pricing advantages over Lockwood. Some firms have numerous internal advisory platforms with possible pricing advantages.
Administrative fee concerns typically come up for advisors choosing advisory accounts. If you’re not an active trader and are open to paying separate ticket charges on stocks, bonds, ETFs and non-NTF funds, you can easily find administrative fees in the 5 -10 bsp. range. These cover billing, statements and record keeping, and performance reporting.
Many wirehouse advisors who consult with us are accustom to all-inclusive fee accounts covering all ticket charges and administrative fees under one administrative charge. Many independent broker/dealers offer those accounts, with administrative costs in the $50,000 to $100,000 asset range from as low as 15 bsp. to as high as 40 bsp., tapering down with increasingly larger holdings. Administrative costs of 15-25 bsp. should be your objective in pricing.
Also, when advisory is done through clearing firms, such as Pershing, 12b-1 fees are often times passed through to the rep; but when it’s done through outside advisory sources like Schwab, 12b-1 fees are not passed on to the advisor.
A word of caution. Be sure to ask if restrictions are imposed on discretionary trading in an advisory account. Some firms have no problem with reps having discretion while others simply do not allow it.
Advisory Options: Complexity and Trade Offs?
When wirehouse reps are delving into the many Advisory choices the Independent Channel offers, the choices and options available to advisors these days can seem complicated and confusing. The Independent Channel is all about numerous choices and objectivity so that the client is getting more for less without an agenda from a parent company or proprietary motives.