December 8, 2010

Transitions (I): Three Key Questions About Going Independent

Industry guru Mark Tibergien offers some easy tips on how to make the big decision

Few have given more thought to the running of a financial planning practice than Mark Tibergien, CEO of Pershing Advisor Solutions. The long-time consultant and observer of the advisory profession has a unique vantage point to observe the profound growth in the independent channel.

While the move to establish an RIA firm continues to be an attractive path for advisors who want more control over their business and a greater share in the profits, Tibergiensuggests that advisors mulling this move need to get to the root of what’s motivatingthem.

“Ask yourself, ‘Am I leaving something—or am I joining something?’” he says. “If you are honest with yourself, you may find that you are simply alienated by your current broker/dealer, and not ready to commit what it takes to make a successful transition from employee to business owner.”

In fact, Tibergiensays it’s the evolution from employee to owner that is often most central to advisors’ success. “When advisors work within a wirehouse, they have everything done for them,” he explains.

“The transition to ‘Now I own it’ often comes as a big surprise,” says Tibergien. “Advisors tend to focus on getting the full payout when they go independent, but they have to parcel that income out on overhead, and adjust to managing the entire office on their own.” 

How Will You Know?

If you’re hiding your firm’s brand name from clients, you have a good sign it’s time to leave the wirehouse or current broker/dealer. “Perhaps you have reached the point in your practice where you are not relying on that outside brand to help you,” he explains.

“Maybe you’re not leveraging your broker-dealer anymore because the platform is no longer relevant to your business. Or, perhaps the way the firm is structured, your broker/dealer cannot support you in the direction you want to grow. Also, in today’s scandal-plagued industry, you may find yourself affiliated with a firm whose tarnished name is no longer a draw for clients.”

Three Questions

If you’re interested in making a move from a wirehouse to open an independent Registered Representative and/or Registered Investment Advisor, Tibergiensays answering these three questions can help guide your decision and pave the way for a smooth transition to independence:

Do I have the entrepreneurial mindset?

The thrill of business ownership isn’t for everybody. “Just because you’re in the investment-advisory business doesn’t mean you’re an entrepreneur,” says the executive. “Similarly, being a good salesperson doesn’t mean you have what it takes to run your own business.”

Do I have the economics to sustain independence?

Tibergien says advisors doing $1 million gross have the economics to go independent. “What you want is enough to pay for what you need now and something left for profit to pay to yourself,” he explains.

“That way, at worst, you’re doing just as well as you were in the wirehouse, but you have the additional benefit of increased control and the expectation that your business will grow.”

Can I save money as well as make money?

Take a detailed look at your current wirehouse-based advisory practice and relate how you operate now to your proposed independent model.

“Advisors who are big and strong enough to go independent have proved they can make money, but because cash flow will be an issue after they go independent, they must also know how to save money,” Tibergien explains. “Take a financial inventory to determine how long can you go with less income.”

Tibergien also suggests compartmentalizing each issue that could impact cash flow and resolving them one-by-one.

“If you are concerned about clients following you to your new practice, consider what you can do without breaching your firm’s rules to take their temperature before you leave,” he explains.

“From an operational standpoint, take stock of the systems you have to create to establish a suitable cash flow — and understand that takes time. Because clients don’t transfer on Day One, and fees are delayed and due only quarterly, you need to have some reserve in order to pay rent and salaries,” Tibergien explains.

Clearly, going independent isn’t a “must” for every advisor. However, if you plan on becoming part of the growing number of advisors seeking independence, your success likely will be proportionate to the time and money you invest in the planning process.

In future columns, I’ll share words of wisdom from other industry experts on business model choices — including choosing a broker/dealer or starting your own, joining an independent RIA or starting your own, becoming a hybrid firm, choosing a custodian and much more. Stay tuned!

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