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The independent channel seems enticing. But there are several things to consider before making the first step.

By Bill Willis

OnWallStreet – May 1, 2011

When I began my career in the 1970s, the brokerage industry was idea driven. Firms and their stockbrokers attempted to attract clients based on better research and smarter stock and bond ideas. I started at E.F. Hutton, and our famous marketing slogan was: “When E.F. Hutton talks, people listen.” The message was that we had unique and superior ideas. That culture was shared by many firms of that era.

Most of my colleagues were veterans who liked to talk about the good old days- before negotiated commissions. They often felt connected to the firm because their clients’ portfolios were generated by their firm’s specific ideas. If you moved, you and your clients had to feel confident that the new firm would offer research coverage on existing positions. Furthermore, transitional compensation packages were minimal, so changing firms often seemed more trouble than it was worth.

The 1980s witnessed a proliferation of products, which were often proprietary in nature. Limited partnerships were all the rage and these gems were often both proprietary and non-transferable. As the mutual fund complex gained momentum, all the majors created their own fund families and urged their advisors to sell them.

But, the 1990s witnessed a revolt against proprietary products. There was an outcry against firms steering clients to the products they manufactured. Concerned with the potential for conflicts of interest, regulators, advisors and their clients called for open architecture. In the ensuing years, wirehouses shed their proprietary businesses, but urged advisors to create fee-based businesses.

As proprietary businesses faded away, so did firms’ control of advisors and the movement of their clients’ assets. Perhaps over the last several years your wirehouse has been urging you to build a fee-based book. Maybe that is the way you originally constructed your business, or perhaps you have been converted. But now that you have arrived, where do you go from here? Advisors practices are more portable than ever. So now that you have a great fee-based business supported by open architecture, is it time to take it Off Broadway?

Going Independent

Advisors tell us that they are interested in going independent for a number of reasons. First is the appeal of breaking the corporate chains. More freedom, higher payout, and a less overbearing compliance environment are also motivating forces.

Of course, those considering independence have concerns. Will my clients be willing to move from a well-known brand to my start-up firm? Do I want to lead and establish a culture, as well as produce? How do I stay compliant, and what happens if I am sued? Perhaps the biggest concern is: If I do leave the mother ship, how do I form my business and with whom do I affiliate?

A lot of wirehouse financial consultants have asked us for information about becoming a registered investment adviser. The RIA movement is upon us and appears to be gaining momentum. However, this change represents a leap across the cultural Grand Canyon: Moving from a highly organized and culturally established wirehouse world, to the wide open and undefined independent life.

Before taking the independent plunge, it is important to analyze where you stand on your career path. If you are in the developmental phase, you may not have enough assets and associated revenue to make the change profitable. If your revenue is less than $500,000, you may find that fixed cost can easily take net payout under 50%-depending on how you choose to establish yourself. If you want to have a well-appointed office with an extensive support staff, you might be advised to wait until your business matures.

Things to Consider

Consider what aspects of your current firm are driving your success. Is their brand important to you and your clients or could that be adequately replaced by the image of your prospective new clearing firm? Look carefully at your business. If you are active in syndicate or using your firm’s lending capabilities, you may find these resources hard to replace elsewhere.

Last, but not least, are the financial considerations. Most independent transitions offer very little in the way of upfront incentives. Gross payouts are much higher, but you must be able to project your net pay after expenses. Bear in mind that your first year will be fraught with start-up costs and a fairly steep learning curve. If you have decided to move, you should also entertain your traditional competitors and their generous transitional packages. They offer both financial security and an established corporate culture.

If you choose to go independent, you might find a firm that will assist in much of the transition, but establishing and maintaining your culture will be your responsibility. Your success will be tied to your ability to articulate and demonstrate the values and beliefs of your new organization. To succeed as an independent, one must excel as a leader and as an advisor.