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The Tab for Independence

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When Rusty Gebhard left a wirehouse to form his own independent advisory business a few years ago, he had covered every possible angle before pulling the trigger. Legal, real estate, office furniture, computer systems, phones.

Phones. Don’t get Gebhard, president of Houston-based Sovereign Investment Group, started on phones.

“The phone system cost over three grand to lease with $400 to $500 in monthly fees. Three years go by and you’ve spent $16,000. To lease! And what happens when something goes wrong and the technician costs $125 an hour to figure out the problem?” says Gebhard, whose LPL Financial affiliate manages $800 million in assets. “I think I was delusional in the months before the move. To be quite honest, I had no idea how broad and deep some of these costs would be.”

The start-up cost of going independent—what is it exactly? According to experts, the most basic back-of-the-napkin math should take into account legal costs (typically $10,000), as well as the tab associated with office space, technology, compliance and marketing. There’s also errors & omissions insurance, and, if you have an employee, there is compensation. (See sidebars for more on the dollars and cents.)

Philip Palaveev, president of Fusion Advisor Network, also factors in what he calls “breakage”— or lost revenue.

“As you move from a wirehouse to an independent firm, stuff is going to break. Some revenues like commissions that are accessible in a wirehouse cannot be billed in the RIA world. Compensation tied to credit cards, mortgages, savings accounts, CDs—that all goes away,” says Palaveev, who estimates that 10% of a wirehouse advisor’s total gross dealer concessions may not transfer to the independent sector. Plus, he adds, an advisor typically will lose 10-15% of assets under management in such a move. His best advice? Prepare for an initial 15-20% decline in revenue and an expenditure of as much as 40% of new revenue on overhead.

And that spurs a question: Can advisors across the spectrum afford to go independent, no matter their asset level? Opinion is mixed.

From a strictly business standpoint, Palaveev says advisors should reach at least $100 million in assets before going independent. As he puts it: “It’s a critical mass issue. Under that level, and many do try and many do succeed, it’s more of a lifestyle decision than a business decision. Compare this to your own life—living with your parents, renting, buying a house. You don’t want someone who is the professional equivalent of 16 going independent. They just can’t afford it.”

 Christopher Winn, managing principal of AdvisorAssist in Pembroke, Mass., doesn’t believe in a magic number. “You really can’t judge by the size of the business. It’s the effectiveness of the business that becomes most important. We obviously realize that more assets equal more revenue equal more of an ability to grow. But that doesn’t mean you can’t have a healthy profit margin with smaller assets,” he says. “Size certainly does help but it doesn’t mean it’s not doable.”

He also points out that there is a relatively new tier of custodians—including Shareholders Service Group and Trade PMR—catering to smaller practitioners. One other option: joining an already established independent shop. As well, Winn notes, it is “far less” costly to go independent than it was just a few years ago as a result of robust (and free) in-house transition support and financing packages offered by custodians, technological advances and the growth of third-party vendors able to handle compliance, human resources support, benefits and payroll, performance reporting and marketing on an outsourcing basis.

In some cases, the cost of a private transition consultant is even paid for by the custodian. As an example, Finetooth Consulting, a breakaway consultant in western Massachusetts, connects wirehouse advisors with independent broker/dealers and institutional custodians at no cost to the advisor.

“We bring them on as a client, require that they be exclusive to us and we talk to a firm like TD Ameritrade about how they can support this advisor. We usher them through that red carpet first date crap until we find the right fit,” says CEO Ryan Shanks. In the case of an independent broker/dealer, Finetooth collects a finder’s fee of, typically, 6% of an advisor’s trailing 12-month production. In the case of an institutional custodian, the fee is six basis points.

With so many moving parts, it’s tricky to calculate the tab that the breakaway broker faces. As Jeff Zabel, who is responsible for “advisors in transition” sales efforts at TD Ameritrade, observes: “There are a lot of options that weren’t on the table even five years ago. Advisors really don’t know what they don’t know until they engage in the process.”


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