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Practice Management > Building Your Business

Yearning to Be Free

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As distressing as the market cataclysm has been for individual investors, financial professionals in every stratum have experienced multiples of this strain. Not only do they have anxiety from client portfolios that are seriously under water, they must initiate and field scores of calls each day from clients who are at their emotional nadir. Many professionals within firms whose reputations have been sullied must defend the honor of their employers–and their own integrity, by association. The final blow: a tough hit to advisors’ personal financial statements as options and deferred compensation plans issued shrivel under the heat. Many advisors feel that they only can trust themselves to redeem their reputation, their financial position, and their pride in the profession.

Their choices are manifold: form or join an RIA, form or join a broker/dealer, or create a hybrid firm with boots planted in both the broker/dealer and RIA worlds. Already-established RIA firms and independent broker/dealers are looking at the teams and individuals within wirehouses to solve their own talent shortages. As events drive good people to the exits at wirehouse firms, these organizations are fighting tooth and nail to retain those who still retain faith in them.

The wirehouse financial professionals who are contemplating a transition and the firms that covet them have some natural synergies–and the potential for great economic impact. And with each breakaway advisor we meet, it becomes clearer that the decision to leave is not purely financial. A primary complaint of these captive advisors is that no matter how loudly they express their concerns and disenchantment to their current bosses about the way things are done, their employers tend to respond with money–retention bonuses, sweetened payouts, more deferred compensation benefits. Experience tells us that throwing money at unhappy people is not going to make them happy. They might accept additional funds as compensation for pain and suffering, but many recognize that their issues are being buried–until they emerge again.

Ready to Make a Move

Like Dusty Springfield in her plaintive tune “I’m All Cried Out,” many wirehouse advisors are ready to move on. Earlier in their careers, the decision to defect may have been more emotionally wrenching because of the pride and loyalty they felt for the companies that hired them. But, alas, this was supposed to be reciprocated.

These advisors were told by their managers that “independence is for losers.” They were given the impression that it is a harder way to do business, less financially rewarding, and less prestigious than the brand-name firm. Like ?migr?s from the old Eastern Europe who sent home pictures and stories of the glorious free world, breakaway pioneers kept sending messages to their friends “inside” that life is good out here. While the trip over was scary, assimilation turned out to be pleasant. As independent advisors, they may serve their clients as they personally feel is best without being tied to proprietary solutions, and build a business free of firm reputational taint and negative reinforcement.

While many advisors fleeing wirehouses will choose to create their own businesses, established RIAs and broker/dealers with existing infrastructure have a good opportunity to demonstrate their value to breakaway advisors. About a third of the advisors who approach us at Pershing are not interested in the risk or challenge of owning a business, hiring staff, negotiating leases, and performing management tasks that take them away from serving clients.

But the vast majority who hear the siren’s lure to independence are committed to the idea of going it on their own. One reason for this interest may be that when these advisors interview other firms for possible affiliation, the first and second discussions are all about payouts and signing bonuses rather than about how they will be helped to serve their clients better. Unfortunately, many recruiters are not recognizing what is driving advisors to leave their current firms.

The real issues relate to how they will be allowed to practice, the culture of the organization, the opportunity to add the people they want to their teams, technology that allows them to operate most effectively, and the types of investment and risk management solutions available. In the case of advisors choosing to create their own enterprises, they also want help in developing and implementing a business strategy; hiring, recruiting, and retaining staff; and assuring clients that their approach is a better, safer, wiser way to do business.

When You Know It’s Right

Existing RIAs and broker/dealers who want to attract advisors from wirehouses need to get in sync with the burning issues. They also have to develop a process that recognizes the particular challenges of breaking away. Not only do they need to match or enhance the product set that wirehouse advisors are accustomed to, they need to help them communicate with clients and understand the protocols that may have been taken for granted when they were living in “captivity.” Further, if breakaway advisors decide to join or form an RIA, they need to fully understand the role of fiduciary, which will be new for many of them.

In addition, the breakaway advisors must ensure that their preparation for departure does not violate any restricted covenants in their employment agreements. No files, no records, no information should be removed from the office without first consulting an attorney well versed in such transitions. RIAs or broker/dealers recruiting these individuals or teams should also take care not to encourage advisors to breach their privacy rules or contracts.

Beyond the notion of making the initial leap, breakaway advisors must think like a business owner when joining or forming an independent broker/dealer or an RIA firm. They must navigate decisions relating to leases, payroll, technology, and compliance–areas in which they might have no previous experience. They need to plan back from their launch date to ensure everything is up and running from the first day, including a client communication plan, a process for sending out new account forms (and getting them back), and a clear outline of the roles of each partner and associate. The creation of a new business, especially one that has to be set up quickly–and typically over a weekend–is a synchronized event, not an individual performance.

A great example of evaluation and action was reported in the online newsletter FundFire (October 22, 2008). The case featured a $1 billion breakaway wealth management team from Merrill Lynch now known as LLBH Group Private Wealth Management and located in Westport, Connecticut. The article described the extensive pre-planning that ensured their launch as a newly independent firm was successful from the start.

According to FundFire, upon opening their doors for business, LLBH issued a lengthy “frequently asked questions” piece geared toward client concerns. The FAQs included “Where are my assets going?” “How will I know that my assets are safe?” “Now that you are independent, what protects me from fraud?” and “Will you have access to the same investment managers and financial products that you use today?”

In order for LLBH to deliver on its wealth management process, the principals had to ensure that they could execute an objective and sophisticated investment strategy, tax planning, and estate, trust, and philanthropy planning services. Going it alone was a new venture for the four partners–all of whom have long r?sum?s in the wirehouse brokerage world. At their new firm, they agreed that each would be accountable for execution and delivery in specific key areas including corporate executive services, lending, and alternative investment operations; new client asset acquisition and client service; and asset management, investment, and financial planning.

Breaking Your Fall

Both the breakaway advisors and the custodians and broker/dealers who serve them in their new roles are excited by the change, even though the mess on Wall Street damaged everyone in the industry. Both should learn from the mistakes made by the large, captive organizations about taking risk, managing growth, and planning for business continuity.

As the financial services landscape evolves into a newer, dynamic, but safer business model, all of its contributors will find themselves taking a greater role as “protectors of the realm.” But first, the small steps. What business are you in? What resources do you need to manage your business better? Which platform–broker/dealer or RIA–is best suited to the way in which you do business? How can you leverage your custodian, clearing firm, or broker/dealer? Finally, how will you define success once the dust has settled?


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