Going independent? Already selected your new venue? Then you’ve already made some very big decisions about making a change and the kind of change you want. But now the nitty-gritty work begins that will determine just how successful you are at building your new business. Where will your office be? What kind of technology do you need? When can you contact your clients and what can you say to them? How and when do you change your registration? What do you do first?
“No matter how you slice it, it’s a lot of work. It is daunting,” says Andrew Daniels, managing principal, field development, Commonwealth Financial Network in Waltham, Mass.
Fortunately, there are plenty of experts who can help to shepherd financial advisors from traditional brokerage settings to the independent world. To help you develop a fail-safe checklist, Research magazine picked the brains of experienced transition guides and spoke with advisors who recently moved to the independent channel. Some of the items on the to-do list will vary depending on the form of your new business—whether you become a registered investment advisor or a hybrid advisor working with a broker-dealer.
Everyone we spoke with agrees the readiness is all: “It’s all about planning,” says Daniel Bernstein, director of research and development at Market Counsel in Englewood, N.J. “Have a written out plan of action.” That way, when the inevitable bump in the road suddenly appears, you’ll be ready.
1. Set a Timeline
When preparing to make a transition you may sometimes feel as if you have two jobs—running your daily business plus preparing for the next step in your career. You’ll need to prioritize what you need to get done and when. Develop your timeline with the key people who are helping you with your transition. If you’re planning on becoming an RIA, that would probably mean a consultant who can walk you through basic set-up issues, including selecting a custodian for your assets, filing new papers with the right regulator, legal support, and office setup. If you’re transferring to an independent broker-dealer offering a suite of turnkey solutions or joining a pre-established RIA, you’ll still need legal advice. Finally, and perhaps most important: Develop a brand with a message. On average, assume the process will take about four to six months, says Jim Guy, chief marketing officer of Cambridge Investment Research, in Fairfield, Iowa.
You should also leave plenty of wiggle room in the timeline. That way you can accelerate the process in case something goes wrong, says Market Counsel’s Bernstein. For example, your current employer may change a policy that would hurt your business.
Or perhaps word of your plans may leak; then the firm may quietly prepare to divvy up your accounts, or, worse, you could get fired.
If you have a timeline in hand, you know everything that needs to get done—you just need to make it happen much faster.
2. Get Your Legal Ps and Qs Right
The most basic rules on how to change firms are quite clear, thanks to the Protocol for Broker Recruiting, an agreement launched eight years ago and now boasting more than 600 industry participants.
The protocol governs the dos and don’ts of changing firms, from defining what brokers can and can’t say to clients during the process and what you must supply to the employer you are leaving. The protocol, however, doesn’t address every issue that may arise, especially for advisors working under contracts and with outstanding loans. Jim Eccleston of Eccleston Law Offices in Chicago says you need an expert to go over your current contract as well as the contract with the new firm. “The old firm may give you problems now, but the new firm may give problems later.”
Chris Wilmerding of Westwood, Mass., who recently left a wirehouse for Commonwealth, says you need to interview prospective lawyers carefully. The first lawyer he spoke with told him: “You have to be incredibly careful. We just don’t really know what will happen.” Wrong, says Wilmerding, who now manages an investment advisory practice under the name Thayer Partners. Savvy lawyers do have a good handle on how the process will work and you’ll spot them by questions they ask about your clients, investments, how important your accounts are to the branch, and whom you report to.
Wilmerding says the lawyer he eventually selected choreographed every aspect of his exit, telling him: “This is what you’re going to say. You’re not going to sit down. You’re just going to walk out.” He even wrote the resignation letter.
3. Transfer Your Registration Expeditiously
One headache you don’t need: a delay on moving your registration. “Registration goes hand-in-hand with moving clients,” says Eccleston. If you’re going the RIA route and you have under $100 million in assets, you’ll need to file papers with every state in which you work with more than five clients. Otherwise, the Securities and Exchange Commission will be your regulator (at least for now; that could change under new proposed rules). The standard paperwork — known as Form ADV — is comprised of two parts, one a check-the-box format that gives details about your business and clients, the other a brochure for clients that has 26 pages of instructions. It’s pretty easy to make mistakes. “If you’re not registered you can still talk to clients, explain what you are going to do,” says Market Counsel’s Bernstein. But you can’t actually sign them up as clients. “It might take a month that you are working pro bono in essence.”
4. Figure out Your Overhead for the Front and Back Office
This is the key to your profitability. Traditional brokers may receive 35% to 45% of their commissions and fees; RIAs get to keep 100% of revenues while independents typically keep 85% to 90%. Unlike the traditional broker, independents pay for overhead, including rent, staff, compliance, insurance, computers, and the stamps for your snail mail. Keep that overhead low, and you’re bound to improve your earnings.
Steven A. Rosner of Rosner Capital in Hillsdale, N.J., left a wirehouse to set up the home office he had always dreamed about through United Advisors. But the money doesn’t come rolling in instantly. Advisors who have made the transition recommend that you have at least three months—even as much as six months—of overhead cash in the bank. You may think you know exactly who will come join you in your new venture, but everyone says you can count on being wrong. Even if most of your clients agree to follow, money won’t begin coming through the door until the second full month that you are open for business.
Depending on how much freedom you prefer, you can figure out each issue on your own or move to independent firms that offer turnkey solutions. United Advisors, for example, offers a complete menu of options for anyone going independent, says Damian Peter, president. But independent firms like UA streamline their costs much more effectively than wirehouses. The offerings are scaled to broker needs so the broker business is not contributing to investment banking or research or other areas that don’t directly touch the investment advisory business.
Figuring out compliance can be particularly sticky. Mitch Vigeveno, president and chief executive officer of Turning Point headhunters in Clearwater, Fla., says some advisors prefer to join other practices under an OSJ—an Office of Supervisory Jurisdiction. The firm they join takes care of the compliance needs. On this point, RIAs need to be particularly careful to set up checks and balances for their practices, says Market Counsel’s Bernstein. The person who sets fees with clients shouldn’t be in charge of depositing the checks. “That’s how fees get skimmed.” Custodians like Fidelity and Schwab will certainly take good care of client money but they won’t inspect your auditing system or ensure that your compliance is up to snuff. RIAs need to ensure that happens on their own.
5. Get Your Message and Branding clear
So you’re all ready to go. Now you need to have ready a clear message to share with clients. “How will you define yourself as an independent,” asks Commonwealth’s Daniels.
“Safety. Stability. Service.” That became the mantra for Chris Wilmerding when he began calling clients with news that he was now hanging a shingle with a new name and address. Clients will have many questions about the move and want to know your thinking. The branding process is also an opportunity for advisors to rethink the kind of business they would like to develop going forward. Advisors “may decide they don’t want to bring all their clients. They may want to leave certain relationships back at the wirehouse or refer to another advisor,” says Peter of United Advisors. Steve Rosner decided that he wanted to focus more on client service, so he handed most of the money management to professional managers.
6. Rehearse. Everything.
The first 48 hours are the most critical and difficult time you can imagine. As an independent, you’re in charge. You need to have your branding down cold. You also need to know how your computer works, how to enter new clients and the different kinds of assets and products they may own. “Margin accounts, check writing, trust accounts—each one of those has various paperwork [requirements],” says Daniels. Rehearse, rehearse, rehearse. The details are many and only one thing is guaranteed: Surprises will abound.