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The risks and rewards of becoming an independent advisor

Feb 27, 2023

A business card from a top wirehouse used to open doors for investment advisors. Now, not so much.

Big-name brokerage firms are increasingly connected to public scandals and regulatory scrutiny. Wirehouses are also getting dinged for credibility issues, commission practices and product limitations. Clients must be wondering: Are they getting objective financial advice? Or advice that benefits the firm?

Even when they’re innocent of wrongdoing, the extra attention is distracting and discomforting to clients. And advisors have little power over the situation — unless they leave.

Breakaways from big firms are accelerating. Over 4,200 experienced advisors changed firms in H1 2022, according to reporting in Forbes. Wirehouses were the biggest losers.

Going independent is a big move. Is it worth it?

The benefits of going independent

By going independent, advisors expect to gain flexibility, equity and transferable wealth.

Being your own boss has obvious perks, like setting your own schedule and goals. Independent advisors are also free to pursue products and client groups they’re passionate about. They can hyperspecialize their practice toward a certain asset class or lifestyle, or they can answer broader financial needs.

Independent advisors set their own fees for services and assets under management (AUM) and they can establish more flexible payment terms than larger firms. Their brands can match their personalities and priorities and they get to set the pace for growth. Instead of chasing someone else’s quota, they aim for personal goals.

As entrepreneurs, independent advisors take on more risk. But they also have a bigger slice of the rewards. Some would argue, a fairer share.

Advisors can often grow more quickly when they aren’t bound to bureaucratic referral programs. Their margins can be higher too, since they don’t have as many big-ticket costs, such as real estate and salaries.

And equity becomes transferable wealth. Advisors have the potential to sell their businesses for multiples over the retire-in-place incentives offered by wirehouses.

These benefits aren’t new. Advisors have been able to operate independently for years. The movement gained traction in the late 70s when the Certified Financial Planner Board of Standards, Inc. (CFP Board) created a body of knowledge and certification for the profession. But back then, wirehouses carried clout and had technology and marketing budgets — and those often outweighed the risk.

The risks of going independent

Today, the barriers to private practice are much lower. But it’s not devoid of risk.

As an employee, advisors might feel like they’re running their own business. However, there’s a lot happening behind the curtain that they never have to worry about. There’s payroll, insurance, technology, compliance, real estate, legal, cybersecurity … and the list goes on. If advisors don’t understand the cogs that keep the business running, they could introduce severe business risks.

Advisors need to research the reasons behind business practices before they write their own rules. One misstep (e.g., a bad email or marketing piece) could put their entire livelihood at risk.

Legal risk is especially high during the transition. Advisors need to retain clients and transition assets smoothly, while navigating legal obligations to their employer.

And the biggest risk is being unprepared. Most breakaway horror stories could have been avoided with planning.

How to plan a smooth transition

When going independent, it’s best to surround yourself with professionals who give you objective — and even hard-to-hear — advice. You want to get the maximum benefit from every decision, from where you set up office to how you structure the business.

Because of the sensitivity around captive employment arrangements, a legal advisor is a good place to start. If advisors start contacting service providers without protection (such as attorney-client privilege), the news that they’re leaving can get back to their employers.

“Advisors want to own the timeline,” says Brian Hamburger, president and CEO of MarketCounsel Consulting and chief counsel at the Hamburger Law Firm, in speaking with Wipfli. “Once their employer finds out about the move, they take away one of the most advantageous assets of the transition: the element of surprise. Many advisors socialize their plans to crowdsource advice and get affirmation but soon find themselves terminated.”

Keeping plans close to the vest can help you retain accounts. Work through several retention scenarios and project how AUM and revenue are affected. Understand the cash flow implications of gaining or losing assets. Figure out how you’ll bridge the gap if you lose clients.  

There’s a lot to figure out: strategic planning, talent management, technology and compliance. A team of specialists can help you make good decisions from the start. They can also help you manage the business, so that you can focus on managing assets (or whichever parts of the business you enjoy).

It’s a difficult transition — but not impossible. And Wipfli can help. We can build your legacy together. Learn more.

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Ronald S. Niemaszyk
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Paul T. Lally
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