September 25, 2012

What Advisors Need to Know Before Going Independent

An AdvisorOne webinar presented guidance on how advisors can decide whether to break away—and if so, some of the essentials to make a successful move

Sallie Krawcheck might have protested otherwise back in 2010 when she was at Merrill Lynch, but advisors are definitely moving from the brokerage channel to the RIA space. So said James J. Green, group editorial director of the Investment Advisory Group at Summit Business Media, which publishes AdvisorOne, during a webinar for advisors who are considering going the independent route.

Green was joined Tuesday by Tim Welsh, founder and president of Nexus Consulting; Tom Giachetti, chairman, securities practice at the law firm Stark & Stark; and David Patchen, regional director at Raymond James Financial Services, as they presented guidance to attendees on how they can decide whether to pursue independence—and if so, some of the essentials they should know to make it a successful move.

Green pointed out that advisors thinking of breaking away have a multitude of options available, whether they truly go it alone, are “tucked in” or “rolled up” by an aggregator, or find “cradle-to-grave” services through an independent broker-dealer or custodian. “There are more companies than ever set up to help advisors go independent,” he said.

Not only are there a variety of ways to pursue independence, but there are services, platforms and products available that make the transition far more tempting. And in the wake of the financial crisis, the branding of a large firm can be more hindrance than help, even as the economies of scale they formerly offered are no longer as valuable as they once were.

Welsh broke things down into specifics, for those still on the fence. Advisors can choose whether to become independent RIAs, independent BD contractor representatives, or dually registered independent advisors, as well as whether to become fee-only or a hybrid of fees and commissions.

He offered a broad list of questions that advisors should consider to decide whether the independent route is really one they wish to pursue—such factors as personal and practice styles, being on a team or working solo, and whether one likes to take risks or be one’s own boss can offer guidance not just on whether to go independent at all but on the path to take to get there.

Giachetti pointed out some of the regulatory and compliance issues involved in going independent. Determining whether an existing wirehouse contract contains a restrictive covenant agreement is the first place to start, he suggested, and added that there were numerous questions to answer in deciding how to form a firm.

Registration with the state or with the Securities and Exchange Commission (SEC) must be determined through assets under management; examination/certification requirements must be taken into account; how many people from the new firm must be registered, and where, are all issues that have to be settled. He also suggested that advisors consider working with an attorney experienced in such areas.

Errors and omissions (E&O) insurance is another matter, since when an advisor leaves a wirehouse his coverage ends. Regardless of which route to independence an advisor takes, Giachetti suggested E&O coverage with prior acts insurance, which can protect against allegations of misconduct dating from before the formation of a new firm.

Even if an advisor is joining a BD and will have E&O coverage provided, it will not cover anything that may have occurred prior to joining the firm.

Patchen pointed out that advisors are more often moving away from the situation at their old firm rather than moving toward a new venture as an independent, and that that can mean the difference in becoming successful.

Instead, he suggested that the circumstances driving a move to independence be used as a “catalyst for you to start doing research,” but warned that without a lot more consideration of what’s involved, advisors could find they have not chosen wisely when deciding which type of independence to pursue.

They also discussed common errors—one of which is not sufficiently researching potential BDs to see if the culture and the people are a good fit. “Do it right, or you will regret it for a long time or be looking again,” warned Welsh. And Green pointed out something that many wirehouse advisors find surprising: the cooperative nature of independent advisors.

The webinar is available online, along with additional resources for advisors considering a move to independence.

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