The Tab for Independence

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.”