Cutting Through The Advisory Clutter

by Jonathan Henschen, CFS and featured in AdvisorBiz.com
March, 2011:

Our recruiting firm specializes in placing advisors with independent broker/dealers. My objective with this article is to clear up some of the confusion I’ve been hearing from my clients about the choices being tossed at wirehouse and regional-firm advisors these days–and why those choices may or may not always live up to reality! 

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:

But there’s more! For the first time, independent reps outnumber wirehouse brokers, with half of all independent advisors planning to sell their businesses to partners or employees at retirement. As a result, a third of wirehouse reps view independence as a way of making their practices–and their own futures–more marketable and more secure. 

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.

Affiliation Choices

For wirehouse advisors seeking independence, choices of advisory affiliations fall into three categories:

As noted, reps at independent broker/dealers may have the option to have their own RIAs for investment fees. Other advantages to dual registration include:

So, when does it make sense to have your own RIA? Many industry professionals suggest having at least $40 to $50 million in advisory assets. Otherwise, why not simplify matters by sticking with your broker/dealer’s RIA! 

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:

At the same time, wirehouse advisors often come to us seeking name-branding, financial back up, marketing and practice management only available in large firms. The downside, however, is compliance, which can be much stiffer in large broker/dealers than in small-to-mid-sized firms. 

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.

Compliance Matters

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.