From the February 2012 issue of Research Magazine • Subscribe!

Fear of Flying: Jumping From Wirehouse to Independence

Advisors who leave a wirehouse for an independent or hybrid business model may soar, but they must overcome anxiety about the unknown

The career kick-offs of two successful wirehouse advisors were as different as the countries where they were born. Amit Stavinsky started as a lieutenant in the Israeli Air Force. Francis Hoey, from Pennsylvania, was a college track star who, after graduation, traded commodities in Philadelphia.

But in 2010 both FAs — one in California by now, the other yet in Pennsylvania — celebrated an identical career milestone: They had each taken the momentous step to become a registered investment advisor. And both had chosen Schwab Advisor Services as custodian.

Part of a growing trend, Stavinsky, 47, and Hoey, 42, were positive they wanted to transition to the independent RIA model. But along with the happy anticipation and excitement, they were — like other advisors before them — beset by fear of the unknown.

“Think of a 1,000-piece puzzle that you put together your whole career,” says Stavinsky, managing director of investments at Tamar Securities, in Woodland Hills, Calif., and formerly a 14-year advisor at Oppenheimer & Co. following three years with Prudential Securities. 

“One day you decide to stand up and kick that puzzle out the window. You’ve broken apart everything you’ve done, and all the pieces are floating around. The moment I put in my resignation, I thought: a value creation came apart in one instant. My challenge was to put all the pieces back together and create a business [more] for the benefit of the client,” says Stavinsky, now managing more than $165 million in client assets.

For Hoey’s part, the biggest source of anxiety was the requirement to become chief compliance officer of his firm. He says such fear was instilled by the wirehouse from which he’d resigned. He now heads Hoey Investments, in West Chester, Pa., with $65 million in assets under management.

“Growing up in the broker-dealer world,” says Hoey, previously a Merrill Lynch advisor for 12 years, “they’d tell you that the SEC or FINRA are coming to your door every day to shut you down. They have a very fear-oriented culture, which makes you believe it’s too hard to go out on your own.”

Nonetheless, breakaway brokers are continuing to leave large firms in favor of going independent. Most RIAs are opting for dual registration — as both a fee-based RIA and an FA affiliated with a broker-dealer that’s compensated per transaction. Being a “hybrid” affords a wider choice of product.

According to research firm Cerulli Associates, in Boston, those who are dually registered accounted for more of the 2009-2010 RIA-channel growth in both assets and advisors.

“The RIA is an appealing business model for many because clients perceive RIAs to be more objective than wirehouse brokers,” says executive search consultant Mark Elzweig, president of Mark Elzweig Co., in New York City.

“It’s a trend that’s slowly gaining momentum,” he adds, “but I think the breakaway broker thing is really exaggerated. The wirehouse model works for most advisors because it’s a turnkey situation, a convenient place to do business. Advisors don’t want to research health care plans or when their sales assistant leaves, go out and hire a new one. They want to bug their branch manager about it.”

For Hoey and Stavinsky, however, working at wirehouses had become increasingly uncomfortable. They say they felt restricted and unable to provide as many product choices as they would as independents.

“In a wirehouse, you operate in a very confined environment. It’s almost like working for McDonald’s: You can buy the hamburger only from McDonald’s, the buns only from McDonald’s, the fries only from McDonald’s. As long as you buy everything from McDonald’s, everything is fine,” Stavinsky says.

Advisor Hoey in 1998 joined his father Frederick Hoey Sr.’s longtime Merrill practice in Exton, Pa., after working elsewhere in the firm for a year. He took his first step on the road to transitioning to the RIA space when, in 2008, he left to join a small broker-dealer and opened an office in West Chester, Pa.

Why? “The amount of trouble that Merrill Lynch was getting into [during the financial crisis] was not meeting my clients’ best interests,” he says. “The products they were getting involved in were more for the benefit of Merrill Lynch than the client or broker. It grew to a point where they were the dominant factor in the relationship.”

Hoey had anxiety, however, about becoming an RIA, especially when it came to compliance. The RIA model would require him to oversee that key area, as well as deal with acquisition of technology and research. That’s why he chose to join the already-established b-d, Cambridge Investment Research, and not pursue RIA registration.

Yet things went poorly, chiefly because the firm failed to have the expertise and research to which Hoey was accustomed at the wirehouse, he says.    

“It wasn’t a good fit. After two years, my staff and I had to move on. I decided that I needed to go to the RIA model,” he recalls.

One big attraction this program offers is that advisors receive 100 percent of fees billed to clients. Further, though they may be forfeiting the big signing bonuses wirehouses typically pay, independent RIA practices can, in time, command hefty sale prices.

In contrast to Hoey, Amit Stavinsky segued directly from a major firm to the RIA model. To be sure, his move was not without angst.

“I was concerned about throwing away that security blanket and starting from scratch,” he says, “But I wanted to reduce risk for my clients, have a big value proposition and be able to get product at institutional rates. I wanted to gain independence and make more money.” 

Most of all, Stavinsky wanted “complete freedom in choosing the best investments in the entire universe. That’s not that easy in a big wirehouse,” he says.

It’s scarcely surprising that FAs who exit wirehouses to launch their own enterprises are soured on that particular corporate model. Elzweig notes that working in such a culture likely wasn’t organic for them in the first place.

“The people that leave have the genetic wiring to be business owners. That’s why they leave! If that’s who you are,” he says, “you’re not going to like being managed in a wirehouse.”

Israeli-born Stavinsky moved to the United States in 1992, sponsored by Prudential. He had run his own publishing firm as founder of the Israeli Economic Monthly Review. Thus, familiar with setting up and running a business, he wasn’t fearful about the functional aspects of arranging for and maintaining an RIA’s technology, research and compliance.

Rather, he says, “the human nature of the business is a lot more difficult in the unknown — explaining the value proposition to clients and making sure they understand and will come with you.”

Both Hoey and Stavinsky signed Schwab Advisor Services to custody client assets and help them through the transition process — and beyond.

Hoey especially liked Schwab’s technology platform, which, he says, was “very similar to the major brokerage house. So it felt very comfortable.”

He made the decision to go the RIA route in September 2010 and guided by Schwab, two months later began the paperwork and to transfer assets. Within just two weeks he converted 100 percent of his clients. He got lots of help from a Schwab transition specialist who functioned in the capacity of consultant.

In choosing a custodian, Stavinsky was looking for “the strongest, cheapest way to run my business for me and my clients,” he says. He selected Schwab for its “strength and superb technology.”

Moreover: “They are quick-to-understand problem-solvers,” says the advisor, who also hired Fidelity to custody assets of accounts established later.

Within the first six months, Stavinsky transferred 100 percent of his assets under management. In the process, he also booked additional funds clients held at other institutions.

“We had these client relationships for many years,” he says. “They stayed with us because of us — it wasn’t anything special my old employer did for them. They understood that even better when we explained the new venture.”

Similarly, when Hoey informed clients that he would be an RIA, “nobody was worried. They were actually more attracted to the RIA platform than to Cambridge’s,” he says.

Both advisors registered with the SEC. (Because of an AUM-related 2012 regulatory change, Hoey must now register with the State of Pennsylvania too.) Stavinsky set up as an LLC — limited liability company; Hoey, as a corporation.  The FAs are affiliated with the same broker-dealer, Purshe Kaplan Sterling, in Albany, N.Y.

According to Cerulli, RIA assets grew 16.16 percent over 2009-2010, but the number of practices in the channel fell 1.1 percent. The researcher attributes that drop to weak firms leaving the industry and incoming FAs joining existing RIAs rather than starting their own. Cerulli foresees this trend continuing. Joining a firm of course means not being required to assume the role of chief compliance officer.

And, establishing and running an RIA is costly, as Stavinsky and Hoey will confirm.

“I cannot emphasize this more,” Stavinsky says. “Yes, with an RIA, you make 100 percent of the fees — and a lot more than before. But running a business — salaries, health care and so on, are expensive. And I have Bloomberg [Terminals] in my office.”

For the first four months as a solo practitioner, Hoey strove to keep costs to about $20,000. Though he cites technology programs as “cost-intensive,” he says that “when you decide correctly, they make you efficient enough to enhance your business.” For example, he uses Schwab’s portfolio rebalancer and a reporting system from Tamarac Inc.

Hoey, concentrating on family clients, invests mostly in fixed income closed-end funds and equity mutual funds. He handles all money management himself using six different platforms based on client risk levels.

Stavinsky’s niche is high-net-worth individuals and business owners. Eighty percent of his business is in fixed income investments, and he sometimes hires value money managers.

How did Hoey conquer his fear of compliance? Simple. Schwab put him in touch with three law firms specializing in starting RIA platforms. He interviewed them all and chose the one that best fit his business. It took care of all paperwork, including his ADV Form, as well as registration filing.

Now “any time I have a question about compliance,” he says, “I call, and they answer it.”

As for research, Hoey uses packages form Morningstar and Schwab’s research department. He subscribes to several newsletters too. 

Meantime, on the West Coast, Stavinsky also has a law firm handling compliance. He conducts a good deal of his own research via the Bloomberg Terminal and obtains research from Schwab and Fidelity as well.

 By far the biggest benefit to being an RIA? Both advisors describe it with the same word: “freedom.”

Hoey: “Running the business hasn’t been as difficult as I thought because I do it the same way as at Merrill Lynch except there’s a tremendous amount of freedom to make decisions on clients’ behalf. The RIA model is absent any corporate input. Instead of having three or four different platforms or areas to explore, there’s an infinite amount.”

Stavinsky, in the process of hiring a producing advisor, says: “For the first time in my career, when walk into the office, I’m smiling. I’m very happy. It’s freedom. It’s almost like shackles coming off your hands and legs. The sky’s the limit!”

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