Before Leaping to Independence, Look at Your Motivation

The shift among advisors to independent registered investment advisor (RIA) status continues at a strong pace. At Schwab Advisor Services, the RIA-industry’s largest custodian, 166 advisor-teams representing $12 billion in assets affiliated with the company in 2011. According to Tim Oden, senior managing director of business development for Schwab Advisor Services in San Francisco, Calif., deals with advisors coming from wirehouses have accelerated in 2012 and are driving a greater percentage of the company’s growth.

If you’re considering joining the RIA ranks, it’s natural to focus on the numerous steps involved: regulatory requirements, custody and account transfers, back office setup and so on. But before you declare independence, consider your motivations for the change. Reviewing your reasons before you start the transition can help clarify your goals and give you an idea of whether you’ll be served better under a corporate-RIA or by setting up your own shop.

Freedom, Flexibility, Control

Broker-dealers and wirehouses have their own business models, profit targets and regulatory procedures. If an advisor wants to adopt practices and processes that differ from the affiliated company’s model, the partnership can get strained. “Advisors want to be able to run their own businesses in the way in which they want to run them,” says Derek Bruton, managing director and national sales manager, LPL Financial in San Diego. “They want to service their clients in the way they’d like to.”

Mark Tibergien, chief executive officer and managing director, Pershing Advisor Solutions in Jersey City, N.J., says increased operational freedom is a key motivator for going independent. “If you’re in a captive environment you may be stuck with more proprietary solutions or you may not be able to do certain things because you’re governed by their own sales practices,” says Tibergien. “So that freedom of choice is a big part of it. So, too, is the freedom of who they choose to work with, both of which could be restricted in certain captive brokerage environments.”

Deborah A. Stauring, CFP, ChFC, AIF with Winthrop Financial in Buffalo, N.Y., went independent because she wanted the ability to make quick decisions and to choose the services she and her colleagues provided. “We can select securities and tools that we want without committees and delayed decisions, or no decisions at all, from a large company,” she says. “We are traditionalists and don’t want to be told to buy the latest thing.”

Some advisors’ desired business model simply doesn’t fit within a larger firm. Amy Jo Lauber, CFP with Lauber Financial Planning in West Seneca, N.Y., decided to go independent because she wanted to focus on financial planning that included aspects of behavioral finance. There was a twist, though: She wasn’t interested in managing clients’ investment assets, a key source of profits for many firms.

“I got tired of meeting with prospects who didn’t have any assets for us to manage because everything was tied up in a 401(k) and we couldn’t take them on as a client,” she says. “I said, this is ridiculous. There are tons of people who are starving for good financial information and guidance and there are so few models that can accommodate that. So that’s where I went.”

Nate Stibbs, senior vice president with Triad Advisors in Atlanta cites increased control as the most common reason he’s encountered among advisors affiliating with his company. Independence allows advisors to build their ideal platform, he says, which in turn provides increased control over managing the business, client portfolios and technology. “It just gives you a different dynamic to your business that you don’t otherwise have if you’re at a wirehouse or at a large independent,” he says.

An advisor’s marketing efforts can also benefit from RIA status. Rett Dean, CFP, EA and his partner went independent Riverchase Financial Planning in Lewisville, Texas. One motivation Dean cites was the desire to have more control over the firm’s marketing efforts. He notes, for example, that broker-dealers usually impose constraints on their reps’ interactions with the media. If a rep wishes to speak with a journalist, the broker-dealer’s compliance department will want to see the questions in advance and approve the rep’s responses.

As an independent RIA, Dean can respond more freely to the media, although he recognizes that freedom transfers compliance oversight back to his firm. “Others would argue that you’re taking in that liability yourself and I don’t deny that,” he says. “At the same time, though, I believe and my partner believes that we’re not going to say anything that would potentially create a conflict or put us at risk of having some litigious situation arise. We’re not going to go out on a limb on something we don’t feel confident talking about. We’re not going to go into a subject that we don’t feel we can talk at some level professionally about.”