From the financial advisor’s perspective, the virtue of emerging advisor technology (i.e., “FinTech”) solutions is the opportunity to operate the firm more efficiently and reduce overhead costs by automating various back- and middle-office functions of the firm. Which means the most likely outcome of FinTech “disruption” is not to eliminate financial advisor jobs… but to reduce the needs for and opportunities of other non-advisor roles in advisory firms (that are more repetitive and more conducive to being automated away).
But from the perspective of those back- and middle-office employees, the emerging risk now is whether or how secure their jobs may be in a more FinTech-driven future. Which in turn raises the question: would it be better to shift into a more “front-office” client-facing role as an individual advisor. And if so, the next question is: When is it the best time to make the switch, and launch your own practice as an independent financial advisor?
In this episode of #OfficeHours with Michael Kitces, we discuss the three key skillsets would-be advisors need to gain experience and ultimately expertise in before even considering launching on their own as an independent advisor, ways to gain the competency and confidence needed to be able to serve clients (and get them) in the first place, and why it’s so important to have the financial stability – or even a pile of cash socked away – to be able to pay your own living expenses in the first few years while you build your advisory business.
The first step in preparing to launch as an independent advisor is gaining the expertise and experience to ensure that you’re able to operate and grow your new business to begin with. Initially, that means having the operations know-how to (to name just a few examples) open accounts, transfer assets, and place trades… because someone is going to have to do it, and that someone is almost certainly going to be you when you start your firm on your own! It also means learning to actually manage client relationships, which encompasses communicating effectively the nature of the advisory relationship, letting clients know what to expect, and setting boundaries. Finally (and perhaps most importantly), you also need to have experience in developing business in the first place, because no matter how great your advice may be, you won’t be in business for very long if you can’t convince anyone to hire you to begin with!
The next essential piece of the puzzle is competency. Offering financial advice is a sacred duty, and no matter how good your intentions may be, you have the potential to do severe, life-altering damage to your clients if you don’t make sure you really have the knowledge and know what you’re doing. For many, this means getting your CFP certification (and possibly additional post-CFP designations as well), because simply passing the minimum Series 7 or Series 65 regulatory exams isn’t enough, and earning the right to put those three letters after your name will not only give you credibility in the eyes of prospects, but will help you have the confidence you need to convince people you know what you’re talking about in the first place!
Lastly, you absolutely must have your own financial house in order, and the financial stability to be able to handle the foregone income when you go out on your own. Which usually means either having enough cash saved up to cover your living expenses for at least three years (because that’s often how long it takes for even experienced and competent advisors to earn enough to live on), or a dual-income spouse or other additional income source. As even though a career as an advisor can be potentially quite lucrative, it still takes time to get to that level, and it’s simply not feasible if you don’t have a cushion to make it through the first few lean years to survive long enough to get to the higher income levels of the future.
Ultimately, the key point is that finding success to launch as an advisor isn’t something that happens overnight. It requires years of preparation to gain the knowledge and experience, to not only provide advice to clients but to make sure all the day-to-day operational tasks happen in the firm as well. At the minimum, an advisor starting from scratch will need their CFP certification, an average of seven years of experience in operations, sales, and relationship management, and the financial stability to cover three years (give or take) of living expenses. Because that’s the sort of foundation that will offer the best odds of succeeding in a career that holds tremendous potential rewards in the long run… both from a financial and psychological perspective!