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Before Leaping to Independence, Look at Your Motivation

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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.”

Economic Factors

Economics can be a major motivator, according to Bill Van Law, president of Raymond James Investment Advisors Division. From an operating perspective, he notes, affiliated and captive advisors can find themselves paying for corporate services that they don’t need and that don’t benefit their clients. Part of those paid-for services includes promoting the corporate brand, says Tibergien, but that affiliation can have little value for many successful advisors. “Many practitioners who get to a level of maturity find that they don’t need to have a big brand name anymore,” he says. “They want to create their own brand. And, so, the cost of whatever they’re giving up in override is not worth the retention of the brand because they’ve created their own brand.”

From a longer-term perspective, independence allows advisors to build value in their firms that is more easily monetized in a future ownership transfer. Non-independent advisors who retire and transition their business, particularly at wirehouses, are shifting income, says Van Law. The typical transition arrangement is that they receive a percentage of previous income over time on a downward sliding scale. This is ordinary income versus an outright business sale that can generate a lump sum or potentially qualify for preferential capital gains treatment. Consequently, Van Law notes, such sales are not nearly as attractive economically as building an independent business and selling it.

Less Regulation? Maybe

In Dean’s experience with the RIA structure, he and his partner have fewer regulatory obstacles in dealing with news media. Stauring also cited the desire for a reduced regulatory burden in her firm. She previously had been dual-registered and found that arrangement’s compliance regime was time-consuming and burdensome. “The independent RIA route was important to us in order to concentrate more on the client base than the regulators,” she says. “We were taking up so much time developing processes and satisfying compliance from two regulators that it didn’t make sense anymore. Also, the cost in staffing needs and technology and dual registration was unnecessary and wasteful.”

Not all advisors switching to RIA-status should expect a lighter regulatory burden, though, and advisors who want or need assistance with compliance might be better off affiliating with a corporate RIA or outsourcing their compliance management. Tibergien believes it’s a “great myth” to think that things are easier from a regulation perspective as an RIA versus operating within a broker-dealer.

“People who go in with the notion of regulatory arbitrage are often surprised by the degree to which compliance takes on a bigger role in their lives,” he maintains. “One way in which it takes on a bigger role is that now that they’re independent they are absolutely on the hook for their own compliance and oversight versus having that performed by the broker-dealer. So, that is one motivation that I think is not valid.”

Compliance poses an additional burden for smaller independents because staff resources in those firms usually are stretched thin. Given the changes in the industry’s regulatory changes, Stibbs believes firms face a “massive” increase in compliance and regulatory costs across the board and that can be a challenge. “I think as an advisor you’ve got to have the depth of scale, you’ve got to have the depth of infrastructure internally to be able to manage the compliance within a separate RIA model,” he says. “For a lot of solo practitioners I think it’s a challenge, frankly. For larger firms, for teams, ensembles, I think it can still be a challenge but you’ve got to have the depth of staff, you’ve got to have the depth of internal resources and compliance to be able to manage that on-site.”

Is It Worth It?

Despite the challenges, the advisors interviewed for this article are unanimously satisfied with their decisions to go independent, even when their incomes decline for the short term. Lauber’s summation captures the consensus: “At first it was very difficult (especially registering as an RIA) and slow-going, but now that I’m rounding the two-year mark, I’m very, very busy and am easily meeting my stated goals.”


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