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.