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.)
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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.