A Financial Advisor’s Path To Independent Freedom

One morning about 13 months ago, I was awakened early by several text messages from my colleagues about how the bank that I called home for the last seven years was getting bought out by one of our main competitors. In a strange twist of fate, the smaller bank I worked at, before joining my current bank team, was bought by this same competitor.

I was happy and didn’t have any plans of leaving, even after I got these texts. This was being publicized as a “merger of equals.” I didn’t panic as my financial advisement practice was in a good place and we were growing quickly. It felt different than the previous buyout I had been involved in.

When my bank spoke with us about the merger later that day, leadership gushed about how it would be only positive for us advisors and our clients. However, it soon became evident that the main reasons I loved this bank were going to change drastically; segmentation was going to get stricter and the politics would become more dramatic, as is typical with larger firms. I began to think more proactively about what a better situation for my clients and our team would be.

A month later, we started to look at where we wanted to go. We knew the merger would happen sometime by the end of the year, and we needed to act fast. We quickly ruled out insurance channel firms, as I didn’t think you could act as a fiduciary when a firm has proprietary products. We also ruled out the RIA model because we were too small and needed to affiliate with a well-known firm. So, we started the search for our best option, picking between three firms for each category: the banks, wirehouse firms and independent broker dealers.

The journey was exciting and extremely educational. It brought us to the independent channel after our research had concluded. However, it was by no means an easy decision, and we assessed a lot of factors to make an educated decision. These are the three options all financial advisors, like myself, should look into before taking the leap into independent practice.

Benefits of Banks

The bank channel is the top way to go to if you’re starting out as a financial advisor with limited or no clientele. You will get a sizable amount of referrals, plus you will be actively involved in branch trainings, giving back and ultimately doing the right thing for your clients.

There are several reasons for this. One is that the payouts are not far off from the wirehouse firms, whereas, in years past, banks paid a lot less. The referral opportunities are also great as the bankers have tremendous goals and incentives to get prospective clients in front of you. You really aren’t limited much in terms of “traditional” investment solutions. And then, there are those great signing bonuses banks offer to attract fresh talent.

In my case, the banks we looked at did have “broker protocol,” which allows you to solicit your clients from your previous firm. However, one did not, which made that option a lot less appealing.

There were other reasons why joining a traditional bank didn’t make sense for me. Over the last few years, bank channel opportunities to build a practice have really started to get depressed due to segmentation practices, payout compression and the ever-growing push to get assets to trust services. Trust services tend to have higher fees, and the bank keeps more of the revenue by assigning a trust investment associate instead of paying a higher percentage to an advisor. They also want a banker as the “lead” relationship for the client. The goal is to cross-sell more bank products, while also maintaining a higher retention percentage should the advisor leave the bank. You are treated as just another employee, so you are issued a W-2, not allowing for business creation or business expense write-offs.

While the traditional investment solutions are sound, banks generally feel very strongly about not allowing too many alternative investment options, since their priority tends to be banking services—not spending the costs on expanding their alternative platforms. They use the term “being conservative” as the reasoning for this. The bank channel is also more costly for clients, as they don’t allow for fee compression by penalizing advisors for discounting their clients.

If my practice hadn’t been big enough yet, this would have definitely been an option to consider, because there is no channel where you can receive more referrals. I knew the bank channel very well, and I knew I would do well there. But for me, the cons outweighed the pros at this stage of my career. The banks are best for smaller advisors or non-entrepreneurial advisors, whose practices tend to be transactional by nature.

Power of Wirehouse Firms

The wirehouse was always where I thought I would end up, when I did work in the bank channel. The classic names—UBS, Morgan Stanley, Merrill Lynch—were those I had always dreamed of on my business card. Those names add such credibility, I thought. This time, though, I considered a few important questions:

• What’s the cost of what you’re giving up for that?
• Was it more like the bank or more like going independent?
• Do you receive referrals?

The upsides were very similar to the banks in some regards. First of all, the name is important because clients feel safe recognizing it. It also allowed us to be in charge of the client, while still having full banking services, and it had some great deferred compensation. If you were going to stay at the wirehouse for more than 20 years, the deferred comp could really grow. And the alternative selections were tremendous.

On the downside, solicitation of clients would have created liability, and most likely potential lawsuits, as many firms have left the broker protocol. The ability to move the book would have been heavily at risk. The payout percentage was the same as the banks, yet with no referral flow. As with the banks, you would be a W-2 employee, limiting your business creation and write-offs, and would have no input on your office setup. On top of all that, the banks actually had better solutions and less fee compression.

Overall, I didn’t find wirehouse firms any better than the banks and, in a lot of ways, worse. Not being involved in broker protocol was a huge negative, as I would be opening myself up for potential lawsuits. They also made their compensation difficult to understand with compensation plans changing yearly. While they really showed they wanted me to join, I couldn’t get concrete answers about payouts or what they would provide. It was a lot of “trust us”—which I learned in this business is a scary ask.

I initially had made up my mind to join them, but that quickly changed once I learned more about independence.

The Independent Channel

Independence. It sounds great, right? But what does that actually mean?

Early on, I had almost ruled out going independent; the wirehouse firms and banks had made independence sound so difficult and complex. During the process, I was sitting down with many firms, just wanting to choose a destination and be done with it. I figured, “Why not go out for one more meeting or two within the independent channel?” Coming from a marquee-name bank, I understood that the name of where I was going would be very important in order to make my clients comfortable with the move.

Other factors made the choice even more clear. Most importantly, you were free to do what you felt was in the best interest of your client. The firms were part of broker protocol making it easy to contact my clients. The payouts were basically double what the wirehouse firms and banks offered. (Although, you do have to pay for all of the office needs, such as rent, furniture, phones, TVs and services.) But the net amount after expenses was still 25 to 50 percent higher than the other channels. You could create your own business name, style, communications and everything in between.

If you are not a self-starter or entrepreneurial type, this might be the wrong path. But I saw all of this as positives. You also had full freedom on lowering fees, full exposure to all investment solutions and the ability to customize your platforms. In addition, you had a great compliance department that would do due diligence for your clients and help protect them, along with my own due diligence.

On the downside, the setup of the office and the initial decisions are tough, especially when you are under a time constraint. The marketing and creation take time. You also have to negotiate a lease, which is very different than a residential lease. Having people to call on who have been through this is recommended. All decisions fall on you. There is no deferred comp or 401(k) contributions, and health insurance is on you, too. You need to go out and shop for all of these services individually and this takes time.

I later learned that these issues were way overblown; I enlisted a payroll company that does almost everything, including my health insurance, payroll taxes, human resources, 401(k) setup, etc. My lease and other office expenses are on autopay. I truly enjoyed the process of customizing my office. There really isn’t anything you can’t offload, if you don’t want the responsibility.

Most importantly, when it comes to my clients, I love being able to charge them a lower fee, if appropriate, and not be restricted by what we can offer. It took me only two months to make my final decision to go independent amid the bank merger, but really, my choice was clear all along. And it turned out to be the best choice for me, my clients and my family.