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Industry Spotlight > RIAs

If You're at a Wirehouse, Run the Independent Numbers

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Most of us view life from our own unique perspective. We make decisions based on our experiences and education and sometimes our intuition enters the picture. Last week I had a conversation with an independent advisor who related an interesting story to me. Although I have pondered this issue a number of times before, something clicked inside me this time. Here’s the story.

It seems this advisor was being recruited by a manager of a regional brokerage firm. The manager told this advisor that he would no longer have to worry about paying his own expenses and that he would have the full support and resources of the brokerage firm behind him. To the manager, it seemed reasonable that this independent advisor might find the offer attractive. But to a person who has tasted independence and has found success there, accepting this manager’s offer would be akin to taking a step backwards.

What was really interesting was when the advisor told this manager that he was already receiving a 90% payout. The manager just stood there like a deer in the headlights. Was it possible that this manager was unaware of the higher payout of an independent? Then it hit me. I remember when I worked with a large brokerage firm many years ago. I knew what I was told. I drank the Kool-Aid, so to speak.

For example, they would pay the same commission on every product of a particular type, even if these products paid different commissions. They call that a haircut, but I didn’t know any better. Then I joined a regional firm that had a slightly higher payout. Later, I joined an independent broker/dealer with a 90% payout. Wow, 90%! I didn’t know that was possible. How could they survive on only 10%? Now, as an RIA, I receive a 100% payout.

For those who are currently working in a wirehouse or bank system, pay close attention as we do a little math. Let’s say you could transition $10 million of your current book if you became an independent advisor. Further assume you receive a 90% payout and your average velocity (the average percentage you receive on assets) is 1.00%. You would gross $100,000 in the first 12 months. Could you live and run a business on this? If you had $20 million, you would receive $200,000 a year.

The point is that at some level of assets, you could very easily pay your own expenses and realize a much higher personal gross income. Besides, you would also be building a business which would someday provide you with a very nice retirement. Are you ready to sacrifice the gold watch? Once you taste independence, you’ll never want to go back.