Financial advisors considering an independent move should cast aside any delusions that it’s easy, according to RIA coach and entrepreneur Penny Phillips.
Phillips and advisors Michael Brown and Brian Flynn launched a new practice management-focused RIA aggregator
Despite an influx of private equity capital that’s fueling record consolidation in wealth management, advisors often need more education about the options available to them and the realities of making the transition to independence, according to Phillips.
Phillips explained what’s driving advisors to go independent and the substantial challenges awaiting them. The conversation has been lightly edited for length and clarity.
FP: How would you describe the movement toward independence in wealth management?
Phillips: When I think about this movement, what I think about is the fact that our industry hasn't moved as quickly as, perhaps, the rest of society, as fast as the consumer has moved. What I think advisors started to realize over the past decade, especially, is that consumer preferences changed, the way consumers wanted to interact with service providers changed, yet nothing about the structure of the firm they were working at changed. It started to become difficult for them to feel as if they can meet the needs of the client — and I just don't mean wealth management needs, I mean, experience needs — by staying where they're at. When I think of independence, I think immediately about the changing consumer and the fact that we're a little bit behind meeting that.
FP: What are the main factors that usually cause advisors to go independent?
Phillips: The million-dollar question, right? We have a lot of advisors leaving the traditional wirehouse channel, but we also have advisors leaving the traditional insurance BD firm and other BDs. And I would characterize it this way.
No. 1, I would say flexibility. And I don't mean flexibility in terms of the advisor wanting to be able to do whatever they want. I mean flexibility in terms of being able to meet the consumer and the different demographics of consumers they serve in the way that the consumer wants to be served. So, in other words, if they have a younger client and the client wants to perhaps pay a subscription fee for services, simply having the flexibility to be agile and adjust to providing services and pricing the way that's aligned with the client.
The second thing I would say is ownership. And I think we've seen this a lot with folks leaving the traditional sort of wirehouse channel or insurance BD channel. At some point, I think this realization has hit advisors that, despite putting everything into building these businesses and practices, the firm, the mothership owns the client relationship at the end of the day. Decades ago, the world was simply different and our industry was very firm-centric: ‘When E.F. Hutton speaks, people listen.’
It's the complete opposite. Now, when the client speaks, we listen. And so the advisors have realized there was a misalignment with ownership and wanting to own, not just their clients, but the firms that they've built. There was that need there to have that.
The third and maybe most important — and I probably should have said this first — objectivity. It's really difficult right now to make the argument that you are an objective holistic planner. When you work at a firm that sells proprietary products — and I'm not saying it's bad or good — I'm simply saying it is very difficult to make that argument, especially when advisor contracts are designed to incentivize advisors to sell certain products over the other. Now I'm not saying advisors necessarily do that. And most that we know do operate under a fiduciary standard.
However, there is that reality. And if you're disclosing it to a client, the truth is you can't say that the firm that you work at is truly objective. If there was a push for a certain product, or if you get paid more on something for manufacturers versus not. And I've noticed that clients even don't fully understand that difference between firms that manufacture their own products and firms that don't. And I think that's why the RIA space, obviously, and the independent space is so attractive to both the advisors and their clients.
And then, finally, we'll bucket all the rest under cultural misalignment. I think advisors recognize that — and we'll take this comment, audience, with a grain of salt — but recognize that the value that the firm, especially local leadership, let's say, once offered to them is no longer there. And so they're perhaps giving up basis points to pay the home office or whatever it is and realizing, ‘Well, you know, I'm really doing all this work myself. So, I'm having to pass these additional costs onto the client when I shouldn't have to.’ And they're starting to feel that misalignment with the value proposition of the firm they joined maybe 25 years ago.
FP: How long does it usually take advisors to make the transition once they have decided to go independent and what are the main challenges?
Phillips: It varies wildly. And I think part of that is because of demographics and psychographics of advisers. And, and here's what I mean by that. I think for the older generation of advisors, it has taken a very long time for them to come to the conclusion that they want to go independent and then ultimately make the jump than for the younger advisor. I have noticed, I'll say for Gen-X and younger, that, once they start to feel that cultural misalignment or they start to feel like the objectivity is questioned, the decision happens pretty quickly for them. But now, if you are a good advisor — and most of the advisors we know are — they will do a solid amount of due diligence. And I would say usually that's six months to a year of trying to get a handle on the independent space and understanding what their options are.
But I've noticed that the decision has started to come faster and faster for the younger gen. And that is aligned with what we know about demographics broadly: The younger generation is less likely to stay at a place where they feel like they're not aligned to the overall mission where there's cultural misalignment.
The challenges — being at the center of transitions now with Journey — I think we don't talk enough about just how challenging it actually is to go independent. It's a tremendous endeavor. I think advisors spend a ton of time trying to find the right firm and — to some extent — feeling this red shiny object syndrome, like, ‘This firm’s in the news. I want to look at them and they sound great.’ They're doing a lot of deals when what they really should be thinking about is, how much do I understand my own book of business? How close are my relationships with my clients? What is the language that I'm actually going to use to articulate why I'm going independent and what the value proposition is?
It's those challenges that the advisor ends up running into. No. 1, the thinking that assets are going to move very quickly and it's going to be really easy for them to just hit the ground running — I think we should set better expectations for advisors about how long that process takes and and give them a language to be able to articulate to clients why they're doing the transition and, realistically when they'll get back to doing quote unquote business as usual. The challenge really is around if you've been in a wirehouse or broker-dealer for a long time with proprietary tech and everything being built for you — you have the challenge of actually going through a transition, which is incredibly stressful psychologically.
And then you have the challenge after 20, 30 years of doing things a certain way, having to learn everything new from the ground up. And just because we talk a lot about how great tech is in the RIA space and all these great platforms doesn't mean it's easy for people to learn or use the technology. So I would say it's two challenges: It's underestimating the stress of a transition and then acclimating to new tech and integrations. And, and depending on where you go, sometimes you have support with that.
FP: Over the next 10 years, breakaway advisors moving to independent channels represent an estimated investment opportunity of $529 billion in assets when taking into account the practices’ growth and retirement timelines, according to market research firm Cerulli Associates. As an advisor coach, how would you suggest they distinguish among the increasing number of options available to them in terms of RIA platforms, consolidators, custodians and independent broker-dealers?
Phillips: We need to do a better job of educating the independent advisor about — there are so many options in the RIA space. There's this idea of, ‘We'll go independent and we'll just run our business exactly how we want and compliance will be better and everything will be great.’ The reality is, first of all, the whole compliance thing. You can't escape compliance, no matter where you go, but there's a wide sort of spectrum of options: One being the independent employee model, where you sell your business a hundred percent and you become essentially an employee of an independent business; all the way to the entire other side, where you go out and launch your own RIA and are responsible for everything.
And then everything else in between when an advisor is thinking about making that decision. The first thing I want them to think about is, I want them to imagine the role they want to play over the next — let's say it's 10 years — that they have 10 good years left in this business, or seven good years left in this business. I want them to imagine the role that they want to and don't want to play in their own business.
We have this obsession in our industry about training advisors or wanting to train advisors to be the CEO. And what we fail, I think, to really explore is the fact that, first of all, being a CEO is really hard. It has nothing to do with being a financial advisor, two totally different skillsets. And most advisors don't actually want to be the CEO. As a coach to advisors, one of the first things I do with them is give them permission to explore whatever role they want to play in their own business.
And perhaps that's spending the next 10 years being a rainmaker, perhaps that’s spending the next 10 years just advising, or perhaps that is spending the next 10 years stepping into a true CEO, sort of, chairman role. When you get the answer to that for yourself and clarity for yourself, that can help you back end into one of the RIA options.
The other thing I think that advisors really need to think about — and again, this is another thing that we need to reframe for them — is this idea that, if you're really doing it right, you're going to sell internally to G2 [the second generation] on your team. I’m maybe one of the only people right now saying: That's just not realistic for most advisors in the business right now who are approaching sunsetting. Transferring trust to a next gen advisor takes a tremendous amount of time. Finding talent that has the ability to not just advise but take over a CEO role is very, very difficult.
So the other thing I would say to advisors is, it's okay to let that dream go. You can still create a beautiful continuity plan and succession and happiness with your clients and legacy for yourself. Even if your name isn't on the door for the next 50 years. And for those advisors, their decision should 100% be around cultural fit and rapport and camaraderie with the firm in that case that is either acquiring them or buying them out over time.
FP: In your opinion, which areas of the breakaway advisor market are underserved or at least sometimes overlooked?
Phillips: This question does not get asked enough. My answer to this has been, over the past few years, the same answer: It's the insurance BD advisors. It's the advisors who were really, really successful 30 years ago selling insurance. And — just to reframe — selling a product that nobody wants to think about at a time when nobody wants to buy it.
In my opinion, having consulted extensively in that space, what has happened in some of these insurance BD shops is, these advisors have evolved and developed into now being asset gatherers and wealth managers and financial planners. Nobody in the industry pays attention to them. And, I sort of like that, because I'll pay attention to them. I think the minute we start realizing just how strong these advisors' relationships are with their clients because of their risk management — that relationship with them. I think we're going to see more attention on that segment of the marketplace.
FP: We’ve seen the rise in independence but we’ve also seen record consolidation in wealth management, just like in so many industries these days. What’s the outlook for the independent movement in your opinion and what will be the impact on giant incumbents in wealth management?
Phillips: This is no surprise to anyone, and people have been talking about this for the past couple of years: We're seeing it. You said it, we're seeing consolidation. And I think what we're going to end up seeing in the RIA space — we're going to see a couple of major players eat up the marketplace essentially and be there. We're already seeing that in the major acquirers. And maybe there will be some standalone stragglers who want to do their own thing. But the truth is, it's just incredibly difficult — from an operational efficiency standpoint, from a profitability standpoint, from an oversight standpoint — to run a standalone business as a solo-preneur.
That's true in any channel; it's especially true in the RIA space. Once firms hit a certain point, they realize they can gain more efficiency and scale and capacity by an umbrella under one of these bigger organizations. I think, within independent firms — not non-RIA, but all independent firms — we're actually seeing that same thing. We're seeing the super OSJs [offices of supervisory jurisdiction] that are buying up and consolidating solo-preneur advisory teams and centralizing core functions.
Ironically, we're also seeing that in the insurance BD space where teams are growing and then advisors are simply joining those teams. And so the movement is not unlike what we saw years and years ago and in the wirehouse space. But we're definitely seeing it. And I think, for advisors that are going independent and are deciding to run, you know, ‘We want to run our own RIA.’ I think that immediate relief of, ‘Wow, I have control over my own destiny, and I love owning the business,’ slowly goes away and the feeling of, ‘Oh my gosh, it's really difficult to gain scale’ creeps in within year one.
