The wealth management industry has evolved significantly over the years, now offering a variety of different business models and platforms for advisors, from traditional wirehouses and independent broker-dealers, to independent RIAs, and increasingly the RIA aggregator and network platforms that support them. As a result, it’s become increasingly challenging for advisors to simply figure which model and path is the best to choose!
In this guest post, Aaron Hattenbach shares his experience working as an advisor in 3 different wealth management models: Wirehouse (at Bank of America Merrill Lynch); RIA Aggregator (with HighTower Advisors); and ultimately transitioning to his own fully independent RIA (his current firm, Rapport Financial).
And so if you’ve ever wanted a comparison between working at a wirehouse, an RIA aggregator, and an independent RIA, from someone who has actually had experience in all three, Aaron’s guest post here should provide some helpful perspective – whether you’re a veteran of the industry considering whether to make a change, or a new financial advisor trying to decide where to start your career.
Conducting in depth research in advance goes a long way in sparing you the potential headaches and risks that can come with moving your practice from one firm to another… given that every time you move your practice to another firm, you run the risk of losing your valuable and hard earned client relationships! And so I hope you find today’s guest post to be informative, as you consider what may be the best potential path for you!
(Michael’s Note: This post was written by guest blogger Aaron Hattenbach, AIF. Aaron is the Founder and Managing Member of Rapport Financial, a registered investment advisory firm headquartered in San Francisco, CA, specializing in advising technology professionals at public and private companies with stock based compensation. Aaron is also a contributor for Business Insider’s Your Money Section where he writes about stock based compensation and personal finance. In his spare time, Aaron enjoys playing competitive golf, intramural sports and serving as a volunteer leader for Congregation Emanu-El’s Young Adult Community. You can view Aaron’s LinkedIn profile or follow him on Twitter @aaronhattenbach. If you’re interested in setting up a business coaching call with Aaron, go to: Clarity.fm/aaronhattenbach.)
Submitting A Resignation Letter To Leave The Merrill Lynch PMD Program And Form An Independent RIA
It was November 30, 2016. I had been dreading this exact moment, playing out how the conversation would go, what I would say to my manager, and how he would react to the news. So, when I finally entered his office and revealed my decision to resign from Merrill Lynch, I took a deep breath, paused, sat back and awaited the barrage of questioning that I had diligently prepared for in the months prior.
Our conversation lasted give or take no more than 20 minutes, during which we talked about the financial advisor program. He asked for constructive feedback—ways to improve the Practice Management Division (PMD) program and increase the rate of success amongst participants in his branch. At the time, there was substantial negative buzz at national about the PMD program and its low rate of success, and our branch was one of the worst performers in the country.
While Merrill has yet to publish official pass rates for the PMD Program, previous participants and industry professionals posting on a number of different wealth management blogs estimate the failure/dropout rate exceeds 95%. An interesting observation I came across online from a former PMD Program Participant suggests that a 95% failure rate may even be too optimistic and is “clouded by the fact that most PMDs who graduate from the program are already on teams and pre-destined to succeed. The actual fail rate is more like 99%.” My experience working in the San Francisco (SC) Branch supports this reasoning.
During my two years at Merrill Lynch I met a total of 2 PMD Graduates! One was a former Client Associate (for over a decade) working with several multi-million dollar producing financial advisors. The other, an experienced advisor, brought over a book of business from a competing wirehouse which helped him meet the aggressive monthly hurdles. Each had special circumstances that led to their graduation. In fact, I didn’t meet, nor hear of a single PMD Program graduate who started from scratch and was able to graduate the program.
While it’s known throughout the industry that in the past, Merrill had built a revered financial advisor training program producing some of the most successful advisors in wealth management, it was failing far too many quality candidates today, and I could see why. Lack of mentorship. Limited support and resources. Aggressive monthly sales goals not aligned with building long term fee-based wealth management clientele, instead favoring transactional immediate (commission) business.
It’s easy to see why both Merrill Lynch and other firms in the mature financial services industry are struggling to attract and retain millennial talent. Stuffy corporate office environments filled with clusters of cubicles where on any given afternoon the silence was so palpable you could actually hear a pin drop! If you happened to cold call to try and generate business it felt like the entire office was listening in and critiquing your phone sales skills. How is it that firms continue to operate this way and expect to compete with the Google’s and Facebook’s of the world offering hip, fun and collaborative workplace cultures and superior compensation packages?
Which got me thinking about the wealth management industry as a whole—an industry that is being turned upside down by pricing pressure, technology, and the slow but necessary evolution from product selling to finally advising clients as a fiduciary investment professional.
With the proliferation of available business models to financial advisors today, it’s no simple task to research and select with a high degree of confidence the appropriate firm and business model most fitting for the particulars of your practice. There are literally thousands of options to choose from these days: Independent Registered Investment Advisors (RIAs), Hybrid RIA/Broker Dealers, RIA aggregators, Broker-Dealers, Wirehouses, etc. Which has given rise to an entire profession of advisor consultants, professionals hired by an advisor seeking greener pastures. These advisor consultants, including wealth management practitioners and M&A specialists in the advisory industry, have their finger on the pulse. After gaining an understanding the inner workings of an advisors practice, they can then shop the advisor around to the best suitors, evaluate platforms, culture, payouts, and signing bonuses.
Sharing My Story: The Inspiration For This Article
Over the past few months, a handful of former colleagues and friends in the advisory business have reached with questions, curious about my transition from Merrill Lynch to launching and now running an independent RIA. The questions have covered everything from the percentage payout, to the steps I took to set up the entire infrastructure of my firm, Rapport Financial.
I probably take for granted the sheer difficulty and knowledge base required to leave an institution the size and scale of Merrill Lynch, which provides just about everything an advisor needs, to building and operating an RIA from the ground up. It’s a daunting process, even for someone like me, a youthful 30-year-old with 5 years of prior experience working for fully independent RIAs and an RIA Aggregator, and 2 years at Merrill Lynch. I can’t even imagine what’s it is like for the typical wirehouse advisor, leaving a firm like Merrill Lynch after an entire career there, and embarking on the build out of the infrastructure previously provided by their predecessor firm! These are certainly unchartered waters for most wirehouse advisors.
In this article, I will walk you through the 3 business models I know intimately from having worked in them:
Then I will profile the makeup/DNA of a successful advisor, and the mentality required to succeed in each model. Many advisor consultants and coaches write generic books about how to become a million-dollar producer, how to sell to the affluent, and more tips related to running a successful wealth management practice. While the suggestions and strategies suggested work at a higher level, it’s of greater importance that an advisor understands how to best leverage the firm and model they ultimately select to operate a practice within.
Large Wirehouse Bank: Bank Of America Merrill Lynch (BAML)
What kind of advisor thrives in the wirehouse model? The generalist rainmaker/networker. This is someone that buys into and relentlessly champions the enterprise. He or she utilizes their internal partners to cross sell clients on other services the bank can offer its clients.
Based on my experience, the “generalist” advisor who wants to be the connector that brings the widest range of solutions to clients should strongly consider operating a practice in the wirehouse ecosystem.
Two Words: Production Credits (PCs)
This is one of the few businesses in the modern era of specialization where operating as a generalist still serves you best. As an Advisor at ML your job is to uncover opportunities and refer them to your internal specialists at the bank where you can earn referral fees (that is, if the referral is successfully converted). Your value at the firm is determined by one metric: production credits (PCs). Production credits are a fancy term for the revenue you generate for the firm.
On day 1 you are taught to “sell the enterprise.” Most of the advisor training focuses on positioning you as a strategic referral partner to the bank. BAML has 8 different lines of businesses, which means that there are a number of ways for you to make money. Maybe a friend is looking for a home loan? Or a former colleague is looking to establish a 401k for their small business. At Merrill, you have the ability to sell pretty much any financial product available in the marketplace. And you make money if they buy that product or service from you or with/through your internal partners at the bank.
Forget specializing in fee-only wealth management and financial planning at Merrill Lynch, unless you are an established advisor with $1M in annual fee based production. But even if you are a $1M producer, it doesn’t necessarily make sense to be in the wirehouse model. Think about it. You’re taking a below-industry-average 42% payout on your revenue. (NOTE: % payout assumes $1M+ annual production, and it’s actually lower at 32% – 38% for sub-1mm producers, even lower still for PMD participants with 3 payout tiers based on monthly production numbers.) And why are these payouts so low? Because you’re effectively paying the salaries of all the internal specialists listed below that are employed by BAML to maximize the ROI of your business through cross selling your wealth management clients on a variety of products and services.
The available teams of Merrill Lynch Internal Specialists include:
- Managed Solutions Group
- Wealth Management Banking
- Enterprise Specialist
- Alternative Investments
- Insurance Specialist
- Structured Products
- Corporate Benefits and Advisory Services
- Custom Lending
- Retirement Group 401k Consultant
- Practice Management and Team Consultant
- Estate Planning and Trust Specialist
- Goals Based Specialist
- Municipal Marketing
- Wealth Management Banker (mortgage)
- Merrill Edge (retail platform)
BAML is a bit more discreet about its cross-selling strategy than a competitor like Wells Fargo, which averaged an impressive 6.1 products per household. However, BAML, like its competitors, sees cross-selling as a viable method to grow revenue. And if the existing compensation incentives in the form of referral fees for cross-selling aren’t enough motivation for advisors at ML to send business to the 8 different units, back in 2016 Merrill Lynch instituted a new policy requiring its brokers to make at least two client referrals to other parts of parent Bank of America Corp in 2017 to avoid a cut in pay. Merrill and other wirehouses understand its clients are stickier and less prone to being poached by the competition when they hold several products and services with the bank. With this mandatory referral policy, you face additional penalties for refusing to refer to other business lines within the bank. Ouch!
But why, with what we know about the current state of the wirehouse – strict compliance departments, lower payouts, a rising tide of breakaway brokers due to low employee morale, advisor silos that lead to lack of collaboration and idea sharing, and less than ideal workplace cultures… would an advisor at a firm like Merrill Lynch more often than not choose to switch to another wirehouse like Morgan Stanley or UBS instead of spinning out to become more independent?
This is a question I often struggled with prior to working at Merrill Lynch. Time and again before Merrill, I had been told by my independent advisor colleagues and friends that the wirehouse model was ridden with conflicts of interest, and wasn’t a client-friendly business model. Even with this message becoming mainstream, and the financial crisis bringing to center stage the many issues with banks, wirehouse advisors still continue to favor moving their business to a familiar wirehouse competitor, rather than go to an independent channel. But as I discovered during my time at Merrill Lynch, there’s actually a reasonable explanation for this—which I’ll go over with you.
Wirehouse Ecosystem Explained
It’s crucial to understand the way a wirehouse advisor operates. There are currently over 14k advisors at Merrill Lynch. Most aren’t running fee-only wealth management practices. From an economics standpoint, you can’t really blame them. It wouldn’t make much sense to do so. You’d be leaving money on the table. For example, say your client needs a product or service that the bank can offer. More often than not when a client needs this product, they would rather purchase it through you than a complete stranger. There’s familiarity and presumably a level of trust between the advisor and client. And “someone” is going to get paid when that internal referral happens… so why not make it you?
A large part of a wirehouse advisor’s value proposition comes from their ability to leverage the enterprise and its breadth of products to deliver value to their clients. Value can come in different forms. However, what I saw as the most common form of value-add by an advisor in the wirehouse model was being able to offer relationship-based pricing discounts to valued (larger) clients.
For example, Merrill Lynch offers a client with $1M in assets at the bank a fairly significant discount off the stated interest rate on a home loan, saving a homeowner potentially thousands of dollars over the lifetime of the loan. After implementing the discount, a client would be hard pressed to find a similar rate at a competing financial institution. Unless of course they have a relationship with a similar size at another banking institution. We can all agree that saving a client money is a great way to demonstrate your value! But this relationship-based discount pricing model isn’t unique to Merrill. Other institutions, even those with stellar reputations and a loyal customer base, like First Republic, also use relationship based pricing programs to encourage clients to do more business with the bank.
Wirehouses Create Advisor Dependence On The Firm…
Unfortunately for a wirehouse advisor, while cross-selling your clients can be a lucrative and effective strategy, it also makes your business less portable when you decide to change firms. This is even more the case for a wirehouse advisor departing and hanging his or her shingle with an independent (whether an independent RIA or an independent broker-dealer).
As discussed earlier, the objective of a bank’s cross selling strategy is to create stickier clients—first for the bank, second for the advisor. Stickier clients present a significant risk to a departing advisor trying to retain his or her client relationships and bring them to their new firm. A Merrill advisor whose clients have a combination of loan management accounts (LMAs), home loans, 529s, savings and checking accounts, and credit cards to go along with taxable and retirement investment accounts that the advisor manages have now become the “ideal client” for the bank, but not for you the departing advisor. And a huge paperwork problem for the departing advisor!
Paperwork is an issue often overlooked by financial advisors that leave one institution for another. Each client has different accounts with various features that you as the advisor will need to effectively and accurately establish at your new institution. Unless the departing advisor has previous experience as a client associate (which I fortunately do!) and familiarity with the paperwork and administrative side of the business, they’ll be in for a rude awakening. You the advisor are going to meet with your clients to encourage them to move their relationship to you and your new firm, and want to come prepared with the documentation that will facilitate this transfer. This is a critical moment in the relationship, where if you show up unprepared with either the wrong or incomplete documentation, you run the risk of losing the client’s confidence and trust. Based on this interaction, the client may choose to stay with your predecessor firm. It’s really unfortunate to me that so many advisors place so little value on the paperwork and administrative component of the business. Many advisors out there underpay and churn through the support staff that ends up playing a direct role in their success, especially when making a transition to a new firm!
What can a Merrill advisor do to create the least amount of disruption, friction and client inconvenience upon leaving for a competitor so that they can retain most of their existing clientele? The answer…drum roll please… is that you go to a direct competitor with a big brand name offering the same suite of products and services! In fact, if some of your clients happen to confuse Merrill Lynch with Morgan Stanley or the other way around—even better! As long as they remember your name!
Without explicitly saying so, by moving with you, the client has made it crystal clear who they work with and value. It’s you! Not the name of the firm on the monthly statement. Which is why the vast majority of wirehouse advisors jump from one wirehouse to another. They’ve spent years, more often than not decades of their careers, building a sustainable book of business. And if the advisor isn’t already running a primarily fee-only wealth management practice, the risk/reward proposition of going independent at least economically speaking isn’t worth it.
In other words, it’s not the “wirehouse mentality” or close-mindedness to the thought of going independent that keeps a wirehouse advisor from making the leap to the independent model. Trust me, if it was just a matter of economic sense, wirehouse advisors would more often than not jump at the opportunity to spin out and become independent. And a wirehouse advisor after the great recession of 2008-09 has to operate in an environment that is far from business friendly. Compliance, often half-jokingly referred to as the “sales prevention department”, makes it highly challenging to market and grow your business. Planning on holding a seminar to explain what it is you do for your clients? Anticipate a lot of red tape and pushback. Interested in writing and distributing content to your prospective clients to explain what you believe is going on in the markets? Sadly, you’re limited to sharing the same pre-approved cookie cutter content as the other 14,000 advisors at Merrill. I recently wrote my first piece as a Contributor to Business Insider’s Your Money vertical called ‘I’m an investment advisor who helps tech employees with stock option—here’s the 5-step plan I give my clients.’ It’s safe to say I probably wouldn’t have been able to publish this while at Merrill Lynch.
Oh, and be careful with who you decide to go after as prospective clients, especially over email and LinkedIn. If this prospective client already has an established relationship with Bank of America Merrill Lynch or is in talks with someone at the bank, and you reach out to them, you run the risk of termination. To give you a sense of how powerless it can feel to operate in the wirehouse ecosystem, you’re not even able to post your previous employment history on your LinkedIn Profile! This policy may have changed since I left—but still, come on! If you’re an experienced advisor that’s decided to join Merrill Lynch from another financial institution, your LinkedIn profile would show less than a year of experience in the industry—at Merrill Lynch of course. How would this at all engender confidence with prospective clients viewing your LinkedIn profile and considering working with you?
Independence Gives You Control Of Your Creativity And Customization
If you’re an entrepreneurial advisor looking to grow your business and passionate about providing customized solutions to individuals and families, you’ll find it difficult to deliver this in the wirehouse ecosystem. It’s a major reason why I decided to leave and start my own independent RIA, Rapport Financial. I wanted to have the ability to offer my clients several different fee structures based on the scope of work they desired, which currently includes:
- Full Service Wealth Management—Asset Based Percentage Flat Fee
- Hourly Financial Consulting—Hourly Rate
- Construction of a Comprehensive Financial Plan—Fee ranges based on complexity
If you’re a practicing advisor, you’ve likely experienced, after conversations with a number of different prospective clients, that this is absolutely not a one size fits all business. While some clients need a full-time wealth manager, others may only require a regular check-up and take a more DIY approach to their finances. Other clients may only need a financial planner to build them a personalized and holistic financial plan. Yet Options 2 and 3 weren’t available to me as an advisor at Merrill Lynch. And I struggled with the reality that most of my High Earner, Not Rich Yet (H.E.N.R.Y) peers were unable to meet the strict minimums imposed by Merrill Lynch. Friends and contemporaries were being grossly underserved, and it felt short-sighted of the firm to automatically refer small accounts not meeting the Merrill Lynch advisory minimums to the retail brokerage arm, Merrill Edge, and have them serviced by overworked call center employees – which was a great way to unfortunately ruin what could have been a great client relationship for me down the road.
But after leaving Merrill in 2016, I fully understand why the wirehouses restrict many advisor activities. During my 2 years at Merrill Lynch, most of my advisor colleagues often erred on the side of caution, placing more of an emphasis on “being compliant” at the expense of focusing on sharpening their craft, advising clients, and growing their businesses. This palpable fear was enough to make you question every email you sent and phone call you made. Imagine, being an advisor in this model. Your objective should be to focus on delivering your clients actionable and quality financial advice. In the meantime, you’re distracted and worrying about making sure that every little action taken follows detailed firm protocol, otherwise you run the risk of landing in hot water with compliance, which seems to be less tolerant post 2008-09. Forget to send an email via the secured message center? Or maybe you sent your client a small birthday present–under $100 of course–but didn’t log it and get pre-approval with compliance. There are so many small mishaps that could result in termination. It’s enough to make you second guess almost everything you do! And how does this lead to optimal advisor productivity?
Large RIA Aggregator: Hightower Advisors
Who thrives in this model: An ex-wirehouse advisor embracing the fiduciary standard and running a primarily fee-only wealth management practice. This advisor often doesn’t possess experience operating a standalone business in the independent channel, and is not quite ready to form their own Independent RIA and be fully responsible for running it.
Perhaps you’re a wirehouse advisor that generates the majority of your revenue from fee-only wealth management but aren’t quite ready to go at it completely on your own. This is your first go at running an independent practice. Not to worry–there are “RIA Aggregators,” firms like Dynasty Financial Partners, Focus Financial Partners, Commonwealth Financial Network, LPL Financial and last but not least, the firm I’m most familiar with having worked there for over 2 years, HighTower Advisors, that will buy your practice or provide you a wirehouse-like platform and infrastructure you’d otherwise have to select from third party vendors or build from scratch, and offer an attractive ongoing payout.
Below is a list of the components of an advisory practice that a firm like HighTower provides right out of the gate:
- Transition consulting
- Research and Diligence Team(s)
- Facilities, HR and Benefits
- Finance and Accounting
- Marketing/PR/Social Media
RIA Aggregators have increasingly become a popular destination for wirehouse advisors. You may be wondering why this phenomenon is occurring? A combination of the better economics of a large platform with scale, but offering more flexibility and freedom for an advisor to run his or her practice as they see best fit. Add to this a brand name not associated with the damage caused by the great recession of 2008-09, as for many advisors the wirehouse brands that were once an asset on their business card have now become a liability.
Advisors that join HighTower have two options: Join the partnership and become shareholder owners of the parent company (the Hightower Partnership Model), or join the network for a higher payout and access to the platform without an ownership interest in the company (the HighTower Network Model).
As a partner, you have direct access to the executive team, allowing you to interface with them and make suggestions that are valued and at times implemented across the firm. This is a firm where advisors come first. At the wirehouses, advisors look at each another as direct competitors—a zero-sum game of sorts. I personally had this weird feeling in my gut that the guy in the cube across from me at Merrill was secretly rooting for me to either get fired or hit by a car so he could swoop in and take my clients (maybe I’m being paranoid)! At HighTower, this inner competition is directly addressed by the partnership structure, which aligns advisor interests in order to win as a group, thereby increasing the enterprise value of the holding company for the greater good of the advisor base. During my time at the firm, I saw advisors collaborate on best practices, help each other with investment selection, and even refer business to another advisor better suited to handle the affairs of that particular client. In an industry dominated by money, this kind of culture is a rare find!
HighTower has both an RIA, HighTower Advisors LLC, and a broker dealer, HighTower Securities, but is a major advocate of the fiduciary standard. What grew out of the depths of the financial crisis in 2008 as a firm dedicated to the fiduciary standard and advising clients as opposed to selling to its clients, has grown into a formidable wealth management firm with more than $46 billion in assets under management and offices in 28 states. I worked directly for a HighTower partner from 2012-2014 as his “right-hand man.” Together we grew the business substantially in a little over 2 years’ time, despite the name “HighTower” not holding much brand cache back then.
In fact, I was hired to transition an advisor from his predecessor firm to HighTower, so I’m uniquely positioned to explain the advisor experience from day 1. Back in 2012, I joined the HighTower partner in opening a new office for the firm in Los Angeles. Together we ported over his clients and readied the paperwork necessary for the transfer. About 15% ultimately didn’t end up coming, which is not uncommon for advisors leaving a firm to join a competitor. It’s part of the cost of doing business. HighTower ended up absorbing the full economic requirements for transitioning and starting-up the practice. While no advisor transition experience is 100% seamless, there’s clearly a lot at stake, so Hightower equipped us with several capable members of the HT transition planning team who were on call and ready to troubleshoot any potential issues with our custodian, Charles Schwab. I’m sure in the years that have passed they’ve made improvements to this transition process, so I can’t comment on its current efficacy. But not having to focus on compliance, and some of the other items listed above that are challenges in the wirehouse environment, allowed for us to focus our efforts on educating clients about the firm, overcoming any potential objections to moving their accounts to HighTower, and providing a white glove level of client service.
After going through the process of starting my own independent RIA, Rapport Financial, in January of this year, I have a greater appreciation for what was being taken care of behind the scenes by the corporate staff at HighTower. I had to replicate many of the actions that were taken care of by the HighTower team, which I will be covering in extensive detail later, for those that decide to go the fully independent route. Stay tuned!
There are a number of clear advantages to joining a quasi-independent firm like HighTower. Since the firm’s inception in 2008, they’ve been able to curate a sophisticated platform of technology and access to some of the industry’s top resources for its advisors. Taking a page from the playbook of their wirehouse competitors, HighTower has also used its massive size and economies of scale to negotiate enterprise pricing contracts below what you would pay going direct with pretty much every outside vendor an advisor relies on to run his or her practice. Everything from best-in-class custodial/clearing firms, to TAMPs, alternative investment research and access platforms, independent research firms, data providers, all with better pricing than what a typical RIA can negotiate on its own. This is the true value proposition offered by HighTower to its advisor base.
But this ironically is also HighTower’s biggest weakness—its dependence on outside vendors to deliver technology and solutions for its advisors. Take for example several high profile and top producing HighTower teams that have recently departed and formed their own independent RIAs, resulting in billions of client assets exiting HighTower’s gates. HighTower’s lack of meaningful IP and defensibility is proving to be a direct threat to its long-term sustainability – as ironically, HighTower succeeds in attracting independent advisors because it doesn’t run like a wirehouse, it has trouble retaining them because it doesn’t run like a wirehouse!
In other words, as described in an RIABiz article, the process an advisor would need to take towards full independence becomes relatively simple after using HighTower as a “halfway house.” And because HighTower relies so much on outside vendors, the entrepreneurial advisor retains the power and flexibility to make a(nother) switch, leave HighTower and simply contract with those third-party vendors directly. In essence, the advisor is able to gain an understanding of the independent channel after operating in the HighTower model for a few years, then makes one final transition to full independence in forming his or her own RIA firm.
Fully Independent RIA: Rapport Financial
Who thrives in the independent RIA model: An advisor embracing the fiduciary standard and running a primarily fee-only wealth management practice. Ideally the advisor also possesses the following attributes:
- Operating experience in the independent advisory channel.
- Niche specialty that allows for differentiation from the competition. After all, you won’t have a big household name backing you anymore, and have to build your own brand!
- A client base large enough to sustain themselves. Or alternatively, the financial flexibility to patiently grow it from scratch.
- Entrepreneurial attitude and willing to put in the many hours necessary to succeed.
- The ability to effectively multi-task and prioritize.
- Or an advisor study group. Or at least some professional friends that can form your “unofficial advisory board.”
Which brings me to the final business model, the one I am most excited to go over with you. This is near and dear to me, as I’m currently living, breathing, eating and sleeping this model. In January of this year, I took a huge leap of faith in leaving Merrill Lynch to launch Rapport Financial, a registered investment advisory firm specializing in stock options advisory and wealth management for technology professionals in the Bay Area.
I’m proud that just 8 months in, I have been able to grow the business to profitability, recouping the original startup costs and am now on the path to generating positive net income after accounting for ongoing costs. In designing my wealth management offering, I’ve hand selected the best attributes of each of models I’ve worked in, curating an offering that I believe is consistent, repeatable, and where I can provide meaningful value beyond simply being labeled an investment manager.
- Operating experience in the independent advisory channel. So, before I dive into the weeds of my current practice, technology, infrastructure and so forth, you should know that I had a head start in the independent operating model having started my career in a multi-functional role for an RIA, Concentric Capital (now Telemus Capital). We were a lean operation consisting of two full time employees, and one part time receptionist/assistant. My role was dynamic and adapted daily to the needs of the business. This was where, through sheer determination, I was able to learn how to effectively carry out all of the operational components of an Independent RIA practice. In any given day, as a boutique RIA, you’ll find yourself making changes to the content on your website, contacting your compliance firm to have amendments made to your ADV, rebalancing and tax loss harvesting for client accounts, submitting documents to your custodian, conducting research, implementing changes to client portfolios, preparing for prospective client meetings, and the list goes on.
- Niche specialty that allows for differentiation from the competition. When I started my career in the industry, I worked with several advisors who didn’t necessarily specialize or choose a profession or other niche to target. With their practices being located in LA, they inevitably ended up advising a number of entertainment professionals. My training at Merrill Lynch made me realize the importance of specialization at least in terms of working with a specific profession or subset of the population as an advisor. “Financial advisor” is a vague term for a financial professional. There are so many different areas we can cover for a client: investment management, retirement planning, stock options, insurance, financial planning, etc. Especially in this competitive environment, it has become increasingly important to specialize and position your clients, centers of influence, and friends to refer business. If they don’t quite understand exactly who you work with and what you do, you make it very difficult for them to recommend your services to an ideal client. Which is why, when I moved to San Francisco, I pivoted from focusing entirely on advising doctors to working with professionals in the technology industry. Shortly thereafter I even narrowed my focus to advising tech professionals with various forms of stock based compensation (options).
- A client base. There are so many different variables to weigh here: personal expenses, income, dependents, savings, business overhead and such. It’s difficult to set a standard for how many clients, or how much revenue you’ll need to break even, or better yet, make a living. And even more difficult to give you advice without knowledge of your particular situation.
But at a minimum, you need a plan for the “income gap” that will likely emerge between what you earned previously, and what you will earn in your new independent RIA, if you’re not already bringing with you a substantial number of clients. Now, if you’ve diligently saved and set aside enough money for a year of living expenses, then you’ve made your life much easier. Giving yourself the time necessary to scale and grow your business will allow for you to focus entirely on providing a quality offering, without the added pressure of needing to constantly sign new clients to stay afloat.
- Entrepreneurial and willing to put in the many hours necessary to succeed. There are times where you’ll be working a 14+ hour day and feel like it’s never enough. When you’re getting started your life will be consumed by the business. But know that the hard work will eventually pay off. You’re building YOUR business. YOU own it. And the long-term compounding of building clients and assets is VERY rewarding in the long run! Currently, I’m (somehow) trying to fit in an hour or two each day to complete the CFP modules and be eligible to sit for the CFP exam as well.
- The ability to effectively multi-task and prioritize. See, you have to remember that in this model, you are both an advisor and business owner. A business developer, manager, and operator. Juggling all of these responsibilities requires good time management skills as a financial advisor, an intense level of focus, and last but not least the determination to persevere no matter what is thrown your way—especially during periods of market volatility when your clients are fearful and demand more of your attention. Which is why I would highly encourage you to consider transitioning your business during a bull market like the one we’ve been in for the past 8 years.
- Or a study group. Or at least a group of professional friends to form your “unofficial advisory board.”
The life of a sole practitioner advisor and entrepreneur can be quite lonely and especially tough without a support system. Which is why I am so lucky to have a group of friends/professionals that I can call my “unofficial advisory board.” When I’m tasked with making difficult decisions, it’s a luxury to know that I have a group in my corner looking out for my best interests. They bring a diverse set of skills to the table: Talent Acquisition, Customer Success, PR, Digital Marketing, Operations, Legal, Accounting and more. Having this group on my team has also proven pivotal in keeping my operating costs low and manageable. While I’ve developed a diverse set of skills from my 7 years in the wealth management business, there have been times when I really needed to run things by my board of confidants for assurance and peace of mind before I ultimately made an executive decision.
Forming an unofficial board of friends and professionals isn’t easy though. People are busier than ever! Especially the successful people you want on your board of advisors. So how do you convince extremely busy and successful professionals to make time for you and serve on your advisory board? The answer—be available to them through transitions, difficult decisions, and life’s inevitable ups and downs. Or simply be there to listen when they need to confide in someone. By not keeping score and giving of yourself to others, you end up building interpersonal equity that you can eventually tap into if you happen to need it.
And there’s a way you can tie this in directly with your business pursuits. For example, connecting a family looking to protect their assets with a knowledgeable Estate and Trust Attorney. Or introducing a Tech Professional friend with stock based compensation to a CPA well versed in the taxation of stock options. There are so many ways you can be helpful to friends and people in your network. And I’ve personally found that by being active in the community, volunteering, and helping others, I’m now the happiest I’ve ever been in life. Oh, and without any expectations, and by being selfless the byproduct has resulted in business opportunities, friendships, and strong relationships.
Not surprisingly, the fully independent RIA business model, while offering one of the highest payouts among the models described, is also the path least taken. An advisor choosing to be a sole practitioner ends up assuming all of the responsibilities of running a business including:
- Head of Sales
Remember, you’re building an entire business from scratch! You call all the shots, select the vendors, and build an offering designed to attract and retain clients. While there are service vendors you can outsource some of the responsibilities of the organization to, you’re directly in charge of selecting these parties and running all of the day to day operations of your business. This is an ambitious undertaking I absolutely wouldn’t have considered without the combination of having both a book of business and the direct operating experience.
Update On Where I Am Now
I’m 8 months into running my RIA, Rapport Financial, and things are off to a great start!
When I left Merrill Lynch and started my own independent firm, I complied with the Broker Protocol and was able to retain 100% of my client relationships—which is quite rare. I’ve since added 7 new clients, equating to 1 new client relationship per month. While I’m not quite meeting my aggressive client and asset gathering goals, I’m making progress each and every day towards building a brand and business that I’m both proud of and confident will pay significant dividends in the future.
I’m enjoying the benefits of being my own boss, and having the authority to take the business in the direction that I believe best serves my clients. At Merrill Lynch, I felt forced to provide a one-size-fits-all offering, and corresponding wrap fee for investment management. Now I’m able to offer prospective clients 3 different ways they can work with me depending on their personal financial needs:
- Hourly Financial Consulting
- Flat Rate Financial Planning
- Full Service Wealth Management
I’m also excited to announce that I signed a contributor agreement with Business Insider to write about Stock Options and Bay Area Start-Ups for their “Your Money” vertical.
Why The Fully Independent RIA Model Works For Me
I come from an entrepreneurial family. My vision for Rapport goes beyond simply a financial planning and wealth management offering. I see Rapport eventually evolving into a financial wellness brand. Schools from K-12 and even colleges fail us in not making financial literacy and teaching good financial habits a focal point of our curriculum. As a result, too many people are drowning in student loan debt, credit cards, and other forms of debt.
Back to my decision to start an RIA. This wasn’t driven by finances. Ironically, I made more money at Merrill Lynch than I’m making now. But I’m way happier than I was at Merrill. I felt that my entrepreneurial spirits weren’t encouraged at Merrill. As time passed, I found it became increasingly more difficult for me to get excited about going into work, in what I felt was an antiquated business model, where my older advisor colleagues were holding onto their legacy brokerage clientele. I desperately wanted to build a more customized offering that wouldn’t limit me to working with individuals that met the Merrill Lynch Wealth Management asset minimum of $250,000 to establish an account.
I can understand why advisors shy away from the fully independent model, given the sacrifices necessary to make this work operationally and financially. But having operated previously in the RIA Aggregator, Wirehouse, and now fully Independent model, I’ve finally found the model that gets me out of bed each morning excited to help people meet their financial goals.
So what do you think? Have you had experience working in different wealth management models? How do you think they compare? What paths do you think are best for different types of financial advisors? Please share your thoughts in the comments below!