From the May 2009 issue of Investment Advisor • Subscribe!

May 1, 2009

Walk On

Adding the right breakaway advisor to your team can be highly beneficial. Just make sure the new player is a good fit

The trend of wirehouse advisors joining the independent RIA channel has ramped up significantly in the last several years, and is only increasing in the wake of Wall Street's epic meltdown. Wirehouses have slashed their incentive payments and investor confidence in wirehouses has plummeted. A growing number of very successful financial advisors are looking for a better way to serve their clients and are seeking a new start by joining an existing RIA firm.

A recent Cerulli Associates study found that 65% of wirehouse reps said they would consider going to the independent model if they were to change employers, while only 19% said their preferred firm would be another wirehouse.

The decision to add a former wirehouse advisor to your practice must be made in the context of several key issues. In our experience at Schwab facilitating these marriages of breakaway advisors and existing RIAs, we've identified eight core questions to address when assessing whether you should, or shouldn't, tie the knot.

Question No. 1: Does It Fit Your Business Strategy?

Adding an advisor must make sense relative to your overall professional and personal goals--including revenue and profit targets, service initiatives, and succession planning. If you are looking to add new services or target a new niche, for example, consider whether it's best to look to a new advisor for those capabilities or if another method (such as a strategic alliance) would be more effective.

Also reassess your own role within the firm. Would the addition of a breakaway advisor enable you to transfer some responsibilities and focus your time on other activities? At Gratus Capital Management in Atlanta, for example, the addition of Merrill Lynch advisor Brian Doe in February has enabled owner Hank McLarty to share key duties and enhance his service offering. "He gives me an outlet for new clients who might not be a perfect fit for me--I have a highly qualified, highly professional, and high-character advisor who I can send clients to when I'm not the ideal person for them," he says. "I'm also no longer the sole driver of all new assets and relationships."

Question No. 2: Does It Fit Your Firm's Processes?

Review your existing technology systems and infrastructure to determine if you have the ability to support a new advisor. Can your current capabilities effectively support the advisor's product mix and investment approach? If not, what capabilities would you need to add to be effective? And would the expense of doing this be matched or exceeded by the advisor's ability to enhance your bottom line? According to McLarty, "We were looking for an asset base that was somewhat similar to how we manage money so we wouldn't have to create a whole new system. The systems we use matched up with Brian's types of accounts, so we knew that working with him wouldn't negatively impact our efficiencies or scalability."

Question No. 3: Does It Fit Your Organizational Structure?

Be sure to analyze your existing team structure and determine what role you want the advisor to play. You'll also need to take the advisor's own biases and experience into account. Some advisors are accustomed to a "silo" structure in which the different advisors at a firm operate independently from one other. Some advisors may prefer to continue operating in such a way, while others will be enthusiastic at the prospect of a more team-based approach.

Such issues are paramount for John Burns, founder of Burns Advisory Group in Oklahoma City, who has added two advisors from the wirehouses. Although each operates as an affiliated advisor in a satellite office, both are willing and able to collaborate--a trait Burns says was essential. "We share knowledge, and as a result, we can do better work with clients and prospects, do better marketing and do a better job of getting the right clients and retaining them," he says. "The people who work out best have to want to give as well as get."

Question No. 4: Does It Fit Your Business Model?

RIAs who bring aboard ex-wirehouse advisors tend to gravitate toward one of two approaches: the employee/partner model, or the platform support model. In the former, the advisor joins an existing practice and works as an employee or equity partner. This approach can allow the advisor to very quickly begin serving clients with minimal costs, which benefits both the advisor and the firm.

The platform support model involves an ex-wirehouse advisor becoming affiliated with an existing RIA but often operating out of a separate office, with the RIA firm providing the infrastructure and support the advisor needs to run the office. For this model to work, the RIA needs to have the appropriate resources and capacity in place to provide all the necessary support --including technology, compliance, and administrative and sales assistance--to its advisors. This can be an intriguing option for RIAs seeking to build a brand beyond their local market. Oklahoma-based Burns Advisory Group opted for this model. One of Burns' affiliated advisors is located in California and another is in Connecticut. "The people who want to leave the wirehouse firms want a sense of independence so they can do their own thing, but they might not want to or be able to sink a lot of money into capital infrastructure to go independent," says Burns.

Question No. 5: Does It Fit Your Firm's Culture?

There must be a good fit in areas such as personal qualities, attitudes, and values as well as investment and client service philosophies. Most managers recruit, hire, and retain employees who fit the job requirements (knowledge, skills, and abilities), but it's equally important to find someone who fits with the cultural characteristics of the firm.

A poor cultural fit could significantly damage your relationship with your team and your clients. Don't overlook personality traits such as communications style and people skills, which will give you a good sense of how the advisor interacts with clients.

Question No. 6: Does It Fit Your Ownership and Compensation Model?

RIAs commonly assume that offering ownership to an advisor coming out of a brokerage is necessary--that it's the only way to compete with sign-on bonuses. However, offering instant ownership isn't the only way to go. Ownership is a powerful incentive, but it makes sense only in cases when a professional has the skills and willingness to truly deal with all the responsibilities that are inherent in ownership. An equity stakeholder who lacks an ownership mentality can quickly make poor management decisions that fuel staff resentment.

RIAs may want to consider a straightforward employment offer with a higher payout than the advisor received at her prior firm which is possible because, generally, RIA firms tend to have lower overhead costs. This might make the most sense for advisors who want to be part of an independent firm but are less interested in taking on the risks and responsibilities inherent in owning and running the business.

Also a factor is the ownership of the advisor's book of business. Client control is often extremely important to wirehouse advisors, and many RIAs report that allowing advisors to retain that control and ownership of their clients is highly appealing. At Gratus, for example, McLarty opted for a deal structure that offers ownership only after a test run. Doe's clients remain his clients for the first two years, and both McLarty and Doe have the freedom to walk away from the arrangement during that time. If all parties want to continue after this "free look" period is over, Doe will become a percentage-of-profit partner and his clients will become the firm's clients.

Question No. 7: Does It Fit Your Recruiting Approach?

Identifying ideal prospects from among the many advisors looking to join an existing RIA requires continual recruiting. Networking and asking for referrals are smart strategies. Enlist colleagues and employees, CPAs, and attorneys, vendor representatives, your relationship managers, and even clients in your efforts. You might also emulate your methods for generating client referrals--for example, by inviting possible recruits to events that you're holding in your office for clients and prospects. Also use the services that your custodian might offer. Schwab, for example, has online transition and job listing services that might prove useful in your search. Finally, industry organizations can be useful resources, as can conferences attended by wirehouse advisors.

Question No. 8: Does It Fit With Your Legal Advice?

Assuming you decide to bring aboard a wirehouse advisor, you'll want to involve legal counsel that specializes in these types of transitions to help structure the deal and prepare the documents for the new arrangement. You'll also want counsel to review the agreements that the advisor signed at his old firm (non-competes and non-solicitation agreements, for example) to help avoid any potential disputes.

Conditions in the wirehouse world could be a big ally in your efforts to grow your business going forward. But adding an advisor is an enormous decision that merits tremendous care and poses its own challenges and considerations that must be properly navigated. In short, do it for the right reasons--and then do it right. "A large book isn't the most important thing," sums up Burns. "Your big concern should be bringing in the right people to create better scale, better profits, and stand apart from the competition. If you do that, the money will take care of itself."


Kelli Cruz is director of practice management for Schwab Advisor Services. She can be reached at kelli.cruz@schwab.com.
Reprints Discuss this story
This is where the comments go.