AS THE RIA MODEL CONTINUES TO GROW, HOW DO ADVISORS DETERMINE WHEN TO BECOME INDEPENDENT?

Over 90% of advisors who made the transition to Independent RIA say they are happy they did so, and if given the opportunity, they would do it again [1]. If that wasn’t enough of an endorsement, their most common regret? Not doing it sooner!

So why do advisors stay so long in a sub-optimal environment, and what is it that finally prompts them to become an independent financial advisor? While every advisor has their own reasons, there are reoccurring themes and pressures that ultimately lead to action or inaction.

PUSHES AND PULLS

As Newton’s first law states: “An object at rest remains at rest unless acted on by a net force.” The same can be said of financial advisors and the business model that they operate in. The status quo often leaves people content and unresolved to take action… unless acted upon by a net force.

The forces acting upon financial advisors at a broker-dealer or wirehouse can be broken into two categories: pushes and pulls. Pushes are made by external forces—typically a broker-dealer, OSJ, or upper management—that make operating more difficult or more costly. The pulls are the allure of something better—a better way to serve clients, build and grow enterprise value, or gain control over the business that they’ve created.

Rarely does a singular push or pull drive action. More often, it is a combination of multiple forces creating a simultaneous push and pull strong enough to set an advisor into motion. For advisors operating out of broker-dealer or wirehouse model, there are four forces that routinely push or pull them into the RIA Model.

 

Factor 1: Servicing Clients
Pushes Product sales that limit an advisor’s ability to best serve their clients Inability to provide truly customized, holistic financial planning services Limited access to outside products and services	Pulls Ability to embrace the fiduciary standard and sit on the same side of the table as clients Ability to service clients the way an advisor best sees fit Access to any products and services available in the marketplace

Factor 2: Technology
Pushes Limited technology, designed to meet the needs of potentially thousands of advisors Limited integrations that create more manual processes and lead to more errors and client frustrations Slow to adopt and implement changes and upgrades	Pulls Ability to create and leverage a tech stack that best serves the needs of the individual team and clients More access to integrations that create efficiencies, reduce errors, and provide a better client experience Ability to adopt and implement changes when better solutions present themselves

Factor 3: Compliance
Pushes Rigid compliance framework that manages advisors to the lowest common denominator Inability to implement creative solutions that may best meet the needs of a unique client situation Limitations imposed by a compliance team that puts the interest of the firm first	Pulls Ability to hire a 3rd party compliance team that puts an advisor’s interest first Flexibility to implement creative solutions to best serve clients Freedom to market services

Factor 4: Economics
Pushes Nickel and dime fees: ie. admin fees, platform fees, affiliation fees, etc. Yearly changes to comp plans, benefits, and incentives Account minimums that leave advisors unpaid for hard work done on clients with future high earning potential Inability to create long-term enterprise value in their business	Pulls Ability to retain 100% of client fees collected Control over which expenses to take on, based on which will provide the most value to the advisor Control of which clients to work with Ability to create enterprise value

BOTTOM LINE

Independent financial advisors are driven to breakaway by the culmination of net forces. When these forces reach a tipping point, advisors find themselves in a situation where it is more costly to stay put than to move. The costs are twofold. There is the cost of attrition brought on by restrictions, fees, and inefficiencies, and there is the is the cost of opportunities missed by not acting sooner.

While most advisors are keenly aware of the pushes and frustrations that they feel from time to time, they are often unaware of the pulls that would ultimately tip the scales. Only by taking the time to vet and understand their options can they get a true sense of when the time is right for them to become independent financial advisors.

Sources:

1. Independent Advisor Sophomore Study March 2018

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IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable at the time of publication. While we continue to make these reports available, we do not update past reports in light of subsequent events. Nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.