Some of financial advisors' biggest preconceptions about switching to the RIA space -- from worries about insufficient AUM to fears about lower earnings and complex technology requirements -- were highlighted in a new report from TD Ameritrade.
But the biggest myth, say advisors, is one that didn't even make the list: Wirehouse advisors tend to think there are two options -- working at a wirehouse or going completely independent, says Lance Lipset, who left Merrill Lynch just more than a year ago to start an RIA in Basking Ridge, N.J. In actuality the independent side is a huge umbrella, under which there are many ways to skin the cat -- working for an independent broker-dealer, an established RIA or hybrid RIA or creating your own company customized specifically for your clientele, Lipset says. I dont think perception has caught up to reality in terms of that.
The TD Ameritrade report focuses on some of the biggest concerns brokers may have about becoming an RIA. These big myths are keeping brokers from going independent, the report says:
- My practice isnt large enough to become an RIA.
- The transition is too hard and I will lose clients and revenue.
- I wont grow client assets the first year after I transition.
- I will have to give up my securities licenses and commissionable business.
- If I go independent I may make less money and lose my retirement plan.
- I will not have access to robust technology as an RIA.
- I wont have access to a broad range of investment products.
- I wont be able to grow as an RIA without a big Wall Street brand-name and budget.
- It will be cumbersome and difficult for me to establish an RIA.
A number of former wirehouse advisors who've since gone independent report that many of these are indeed misapprehensions.
Lipset says he retained 95% of his client base during a transition that took about two months -- after which his team was back to business as usual.
Rather than go fee-only, he opted for a hybrid model, keeping his securities licenses and working with a broker-dealer. And the technology selected for his practice, down to the phone system, is customized to fit the firms needs.
So far growth has not been a problem, he says: The firm hired staff right after the transition and is in the process of opening a third office. But he does concede that size could be an issue for some advisors. There is definitely an economy of scale when it comes to starting your own RIA, he says. You dont want to feel like youre cutting it too close.
Jim Maher of Archford Capital Strategies in Swansea, Ill., left Merrill Lynch less than two months ago to start an RIA, hoping to get better access to investment products and services for his mostly business-owner clients. From a lending standpoint and an investment banking standpoint, we only had access to one vendor -- and we wanted to be able access different partners, Maher says.
One of the biggest myths is that products and services are exclusive to firms, adds Maher, who uses Pershing Advisor Solutions for custodial services and gets other services provided by Dynasty Financial. For practical reasons, he points out, investment firms are increasingly distributing products across multiple platforms: If a [financial services] firm is not heading in that direction, I would seriously question its long-term viability.
For many would-be RIAs, running a business and the day-to-day operations are primary concerns, Lipset says. What are you going to do if the copier breaks? Lipset says. Every wirehouse advisor I talk to, thats always what it comes down to.
An entrepreneurial personality is extremely important for advisors looking to start an RIA, says Ryan Shanks, founder and managing partner of advisor matching service
That's where the wealth of options comes into play. A number of different roll-up and platform firms have emerged to offer advisors a greater range of models, with varying levels of infrastructure and support.
Advisor Greg Erwin of Sapient Private Wealth Management in Eugene, Ore., left Morgan Stanley Smith Barney in late 2010 to start an RIA as a part of roll-up firm Focus Financial Partners.
Although Erwin says there's some truth to the idea that you need some critical mass in terms of bodies and revenue, he points out that if you arent quite big enough, the opportunity to partner with existing firms and RIAs is a new phenomenon.
According to the TD Ameritrade study, one in four advisors chooses to partner with an existing firm.
Which brings us back to that other myth: Among wirehouse advisors, there is a perception that independence means starting your own firm, Shanks says. The reality here is that being independent could mean so many different things and look so many different ways.
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