Financial advisors who break away from large wire houses and seek independence are taking a big leap of faith that everything will turn out right. They are believing their clients will follow them and that they will be able to work with only high net worth individuals and their business will make them a lot of money.
But what if it doesn’t just fall into place? When should an advisor ask others for help?
Ethan Eden, a former independent advisor and founder and CEO of Market76, a technology and data platform for consumer financial services firms, said that the most important thing financial advisors should do when considering going out on their own is “ to figure out what unique value proposition they are going to bring to the table for clients.”
It isn’t enough for their clients to love them, Eden said. “People forget how much extra work goes into making a business. Working at a big firm allows you to focus on it.”
For those considering going independent, it is important to think through all aspects of the business before making the move. That means surrounding yourself with individuals who can give you legal advice, help you set up a client management system, do administrative work like pay rent on office space and buy insurance.
“If details are a pain for you, maybe you need a partner or maybe your partner is your firm,” Eden said. “Even in a good economic environment, starting a business is hard. You want to get help from as many people as possible as soon as possible.”
Eden, who helps about 2,000 advisors develop their technology platform, said he is amazed at how many advisors don’t seek help. “If you look at the people who are most successful in what they are doing, it is not just about revenue and assets. The people who are most successful, almost unilaterally, have a support network for their business, defined and well formed,” he said.
Debbie Nixon, owner of Masterful Advisor in Tampa, Fla., advises financial advisors who want to become independent to grow their business to where it can sustain six months of administration costs before making the transition.
She helps them make the jump from large firms and work through what is missing in their business plans.
Most financial advisors want to leave their large companies because they feel constrained and they want to do a better job serving their clients. Others want to focus on a niche market and are not getting that opportunity where they are at. Many are so linearly focused on wanting to do what they do best they ignore the items that could really help them get back to building client relationships, which is the part of the business they love the most.
With independence comes a host of tasks most people are not prepared to handle, like accounting, administration and the basic fundamentals of running a business, she said. These are the things she helps advisors work through.
“I look at the core foundations of what a person wants to accomplish and what they are doing that’s working well for them and what is not working for them,” Nixon said. “Then we figure out why it is not working and what can they control or shift so that they can get past that stumbling block. I refer to it as a blind spot.”
Nixon likens the move to independence to playing golf. Individuals who start playing golf sometimes focus on the parts of the game that don’t matter as much, like the latest gadgets that will make the ball go faster and farther or that will increase accuracy.
“People are inundated with tips and tricks. Well that’s great, but if the fundamentals aren’t there, the biggest or best golf club there won’t help,” she said. “Go back to essential practice elements. Learn to swing a club. It means starting where you are. If that person is new, it means learning to putt. It is much more fun to hit a driver like Tiger Woods, but it is a lot harder to do that.”
She added that, “what most of us try to do is reach too high too fast. We stop ourselves when we could have started at a more realistic level, made smaller steps and incremental improvement and gotten there faster.”
In the advisory field, everyone wants to work with high net worth clients, she said. “But you have to earn your way to that person; there are trust issues involved. You have to start with a narrow target, like what industries you are most knowledgeable about, where you have a better chance of success.”
This works better than the scattered approach most people try.
While many tasks of going independent are daunting, there also is a lot more freedom to do what is in a client’s best interest, said John Burns, CEO of Exencial Wealth Advisors in Oklahoma City, Okla. “It’s an exciting proposition. The most daunting issues revolve around the core issues of running a business. If you move from being an advisor working for a wire house, you are still under a compensation arrangement. You don’t necessarily have to think of profitability like you do a business or think through how to grow your business or create business value.”
It’s a lot harder to go independent today, Burns said. He left a large insurance company more than a decade ago.
“You have to work harder for clients than we did at that stage. They are demanding more and we are providing a lot more services for the same fees,” Burns said. “Clients are a lot more strenuous, difficult and important. Scaling your business is paramount. If you don’t have that in a big way you are not going to be able to grow and develop business value or develop the talent you are going to need to handle what the market’s demanding,” he said.
Burns encourages financial advisors who want to go independent to join an established business so they don’t have to reinvent the wheel. When you partner with someone else, you have more capabilities and better scale.
Burns encourages financial advisors to look hard at why they want to become independent and what’s in it for their clients. “What do you want to accomplish for yourself and try to do it in a manner that lets you spend time on what you like doing. Spend a little time on investment research issues and more time and effort with clients and developing your business,” he said. “If you can structure your transition on your own or with an outside partner, that allows you to focus on where your talents are and you are likely to have a more successful and financially rewarding transition and will create real enterprise value for yourself.”
Plans seem to have done a great job keeping coverage as affordable as possible, and enrollment in remains high.