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!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Well, welcome, everyone. Welcome to Office Hours with Michael Kitces.
For today’s Office Hours, I want to talk about a challenge I’m hearing more and more questions of lately, which is what it takes and whether you should try to switch from an internal job at a financial services firm into being a financial advisor and launching your own often independent practice instead.
So this week’s question comes from a couple of different directions, one from Ezra and one from Corey, that I want to touch on. You both reached out about this recently. So Ezra asked, “Dear Michael, I work at a big retail brokerage firm as a broker in the new client development group. There’s some future opportunities to go into a branch to do more of what I would like, which is financial planning, but I’m worried that they don’t do full comprehensive financial planning that I believe I can provide and impact people’s lives. So this has caused me to start looking elsewhere, but I don’t know where to go from here. Any input?”
And similarly, Corey wrote in recently and asked, “Dear Michael, I began working in advisory firm last fall. I’ve obtained my Series 7 and Series 6 and Life and Health licenses. But even though I’ve only been working since October as an assistant in the firm, I’ve realized that I may be happier working for myself instead. And I’ve been reading all about forming my own RIA, but I’m wondering when you think is the best time to launch yourself as an independent.”
So these are great questions and again, ones I’m hearing a lot more often lately. I think in part because so much of the financial services industry is getting squeezed right now from fee compression that’s potentially causing downsizing at some asset managers and brokerage firms, to all the technology automation that may all apart from survive the fee compression but could put even more people in back and middle office jobs out of a job. And so I’m hearing more and more interest lately from people that are often these more internal operations-oriented jobs to move into the so-called front office financial advisor jobs instead. Both because they’re often what, better compensated, at least in the long run, and because I think they’re truly less prone to being automated away with technology in the long run.
Simply because when it’s your firm and your clients with whom you have the relationship, you tend to have more control over your career and your future. Not that the outcome is guaranteed, but there’s a famous saying that when the value chain in any industry gets compressed with competition, whoever is closest to the client usually wins. And so being the client-facing advisor is about as close to the client as you can get. That’s why we’re seeing very little compression in advisory fees, even though platform fees, product fees, asset manager fees are all getting squeezed, because the advisor is closest to the client.
All of which again, raises I think the question that Corey and Ezra brought up, which is, how do you know when it’s time to go independent and launch your firm and what steps do you take to prepare for this? And something that I’ve seen a lot of lately is, you know, we’ve now been through this with almost 900 advisors launching their independent RIAs through XY Planning Network and then seeing their growth afterwards. So we’ve actually learned a lot about what it really takes to survive and thrive when advisors launch their own firms and kind of what the criteria are for success. And so I found that there are essentially three primary drivers that determine when someone is ready to launch as an advisor: experience, competency, and financial stability.
It Takes 7 Years Of Experience To Launch Your Own Independent Advisory Firm [03:35]
So the first criteria for success is experience. Simply put, I found it takes on average about seven years of experience in the industry before advisors tend to be successful if they go out and try to launch their own firms from scratch. Now, this isn’t just about a “pay your dues” mentality as though advisors in the past took an average of seven years to launch their firms, so don’t you dare launch your firm until you’ve trudge uphill in the snow both ways for seven years like they did. It’s just a recognition that there’s a lot to learn and absorb and be prepared for if you’re going to launch and run your own firm and actually be successful at it. And it just takes a lot of years to learn all the different skill sets.
I specifically actually see there’s kind of a subset of three primary skill sets that you learn heavily through experience that you need to have in place before you launch a firm: operations, relationship management, business development. The operations experience is the most straightforward to get. There are a lot of, call them ops-oriented jobs out there in the industry, and if you spend frankly any time anywhere in the industry, you’ll pick up a lot of this by just being around and involved in the financial service industry.
Ideally, though, you’re actually in a role where you get to do things like insurance and annuity applications and account opening and transfer paperwork and trades for clients so that you really learn the operational guts of how the advisory industry works. Because if you’re going to launch your own firm, someone is going to have to do that for your clients. And if you’re starting on your own, you don’t usually get to afford any staff, it’s going to be you. And it’s a lot easier to deal with all the other stress and work of launching your own firm when you’re not also learning from scratch the difference between an ACAT and a non-ACAT transfer and why that matters and the expectations you set for your clients about how long this transfer is going to take.
So for those who have direct hands-on role in an operations capacity, as it sounds like Corey does, realistically doing this for a year or two may be sufficient to at least learn the core tasks and what it takes to do the job. It’s not a role you’ll necessarily want to stay in indefinitely if you want to move to the advisor level, but getting at least a year or two in such a role is invaluable, I think. I did it for the first 18 months of my career. It was hugely impactful for just understanding the stuff that I’d be working with from that point forward. For those who may be more indirectly just attached to the industry and kind of learning this by osmosis, maybe it’s three to five years to absorb the key knowledge and experience. But you don’t want to be learning with your first clients for the first time how all this stuff works.
The second skill set that you need from an experience perspective is relationship management experience with clients. And by this, I mean very experiency what it takes to actually manage a relationship with the client. Practice management guru Philip Palaveev wrote a great article about this in the past year. And as he frames it, actually proactively managing a relationship means learning a bunch of key skills, like how you actually define and communicate the scope of your agreement with your clients about what will you do, what will you not do so that you can deliver on what you promise. If you’re not really clear about managing what clients are expecting to get from you or not, it makes it very problematic to keep them as clients. And it’s a skill set that you learn by actually managing clients for a period of time.
Likewise, it’s not only setting sort of the full expectations of the relationship but just the ongoing expectations of the relationship. This is where you help your clients understand what kinds of results are reasonable to expect. “No, we’re not going to give you 15% returns every year. We’re not going to make you rich in the next five years. We can’t guarantee you won’t ever experience a decline in your portfolio. What we can do is help to ensure that you have a reasonably diversified portfolio and a strong chance of participating in the growth of the markets in the coming years and can help you stay the course along the way.”
And then managing the relationship is also about managing what Philip calls the rules of engagement. So does the client know what’s appropriate to email you about or not versus what should be a phone call versus what should be a meeting? Have you set expectations with clients, “When you call me, I will call you back in 3 hours or 24 hours or 3 business days?” If you don’t set those expectations then clients’ demands, whatever it is they’re going to demand, which you may not be able to live up to. So you quite literally have to manage those expectations as well. And if you don’t learn how to do that well, the relationship tends to devolve because you’re not delivering on clients’ expectations because you don’t even know what they are because you haven’t had a conversation about it.
And in this area, I’d include that part of managing the relationship well is also knowing how to deliver your advice in a way that will actually stick that clients will act upon. Because what you’ll learn quickly as a financial advisor in a client-facing role is that it is really enough to just tell a client or write in your plan, “Here are recommendations,” and then have all your clients immediately act on it and implement the advice. There’s a lot that goes into learning how to deliver advice in a way that clients will actually implement. And that’s crucial because if it’s your firm and your clients aren’t implementing it, implementing your advice, they won’t improve their situation. If their situation hasn’t improved, they won’t see value in the advice relationship and they won’t keep your firm and eventually, you’re going to get fired.
And the reason, again, that all this matters from an experience perspective is that it takes a while to really learn and practice these skill sets in real life with real clients to the point that you master them enough that you can go out on your own. This is an area where I think advisors usually need about three to five years of experience in a client-facing role. That might be two or three years where you’re in a second chair, mostly listening and watching and may not be saying much yet, and then another two to three years where you’re doing in a more lead role with at least some clients that you’re managing yourself. But this is hard stuff to learn. And it’s really hard stuff to learn when you’re out on your own and your business is depending on it because you’re learning as you go. So getting some experience in advance, actual client-facing relationship management experience really matters.
The third type of experience that I think is crucial if you want to go out on your own is business development experience. In other words, sales experience. I know that sales has become a bad word in our industry, particularly some parts of our industry, but the truth is that whether you’re trying to sell a product for a commission or you’re selling your own advice for a fee, no client will engage you until you can convince them that you’re worth paying and delivering something of value. And you know how to convince them that your advice is worth paying for? You have to sell yourself and your value, and the value of your advice. It doesn’t matter how great your advice is if you can’t convince anybody to pay you for it in the first place. And so getting some level of business experience, business development experience is crucial if you want to actually launch your own firm and get your own clients who will pay you.
Now, some advisory firms have their own business development, sales training programs. You can put yourself through a business development or a sales training program on your own. You can mentor yourself under another advisor who’s good at business development and learn from them. So to each their own. But you have to learn to do this. And if you’re scared to learn business development and sales in a firm then trust me, it’s not going to go well when you go out on your own and you have to get all your own clients and you’re still scared to do it. So if you have sales fear, better get the experience and learn now where you are than go out on your own and find yourself unable to get any clients when you have to and your business is on the line.
Now, the one caveat I would note when it comes to business development is, a growing number of firms these days have non-compete or non-solicit agreements. Which means the early clients you might get when you’re learning business development, you may not be able to take with you when you finally go out on your own. Sometimes it’s feasible to bring along your prior clients, which is great. Keep the relationships you invested into. It’s revenue when you launch your firm, but you may not be able to. And that doesn’t have to be a deal killer. If you’re going to build your own client base for the next 10 or 20 years and service them for the next 30 years, you can learn business development for a year or 2 and then start fresh when it’s time to launch.
But at a minimum it means, well, first of all, read your employment contract now and know whether you’ll be starting over when the time comes. But even if you will, don’t wait on trying to practice your business development skills. Because when you go out on your own and your income is zero, the pressure is immense. And that’s not a good time to start figuring this out from scratch.
So in the end, what this all adds up to, you know, one or two years of business operations experience, three to five years of relationship management experience, at least a year or two of business development experience, sometimes the last two happen in parallel. I find that it’s often about seven years of experience before advisors really have the skills under their belts to launch on their own and actually make it. At least that’s what we found so far at XY Planning Network. And if you want more tips about how to find the right firm to get this experience, you can check out some of our prior Office Hours. We talked about finding the best companies to work for, what questions to ask in the interview process.
Competency = Confidence + Credibility [12:26]
Now, the second domain that I want to touch on about what it takes to successfully launch your own firm is competency. Because if you’re going to give advice to clients, it helps to actually know what the heck you’re talking about, you know, so that the advice you give is actually correct in the first place and you don’t get sued out of oblivion or at best just hurt your clients even out of ignorance, even if you had the best intentions of serving them well.
So in practice, what does this mean? At a minimum, getting CFP certification and ideally, I think at least one post-CFP designation as well to deepen your knowledge and begin to differentiate yourself. And notably, actually getting your CFP marks requires two or three years of experience anyway, so you’ll often do this while you’re pursuing the experience stuff that we talked about in the first section. But the key point is that if you want to get paid for your advice in the future, you need the knowledge so that you know what you’re talking about. And just getting a Series 65 or your Series 7 and 66 in a brokerage firm is not enough. Yes, it’s enough to be minimum license to hold out as an advisor, that doesn’t mean it’s what you need to succeed to get someone to pay you for that advice.
Because the reason why these certifications like CFP marks are so important is it ultimately comes down to confidence and credibility. Because as it turns out, one of the key elements for your business development skills to be successful is that you have to be confident enough to actually sell the value of your advice and what you do. And if you’re not confident, if you don’t believe deep down in your heart that you know what you’re doing and what you’re talking about and that what you’re delivering is valuable, you will hesitate in front of prospective clients when they ask you those questions like, “What do you do and why should I pay you that fee?” And if you hesitate, if you show that you’re not confident in your own value, then they’re not confident in your value, and then they don’t say yes and then they don’t sign up and they don’t become your client and then your business doesn’t succeed.
So studying and getting the knowledge through programs like CFP certification are how you get your confidence. And because CFP certification is increasingly known to consumers directly as the designation for financial planning, thanks in no small part to CFP Board’s own public awareness campaign, getting CFP certification increasingly helps you because it makes you more credible in the eyes of the consumer, which is especially important if you’re going out on your own because you may not have the big-name brands on your business card as an independent, so you need to at least have some credibility with a recognized professional designation to affirm you really are a credible professional to work with that your client should pay. So if you haven’t started investing yourself in your education as a financial planning professional, start.
Financial Stability Is Crucial To Financial Advisor Success [14:59]
The third and final area that I’d highlight of what it takes to be successful that I frankly don’t think is talked about nearly enough in our advisor community it’s that you have to have your own financial house in order. Because even in the best of circumstances, it usually takes about three years for advisors starting out to get back to their old wages that they were at in the past. Even with the experience and the rest, rarely do advisors get there much faster in three years. It just takes time for clients to know, like and trust you and decide to work with you.
Now, the good news is that beyond that point, you know, the next 27 years after the first 3, the business just grows bigger and bigger. Advisors who’ve been doing this for 20 or 30 years often make several hundred thousand dollars a year of income from the cumulative impact of growing a high-quality client base. This is an incredibly rewarding and lucrative career in the long run. But it only matters if you make it to the long run, which doesn’t happen if you run out of money in the short run.
So having your own financial house in order and being financially stable is actually crucial to being successful as an advisor. For some advisors, that means building up as much as about three years’ worth of expenses, your household expenses, or at least two years’ worth, since by the time you’re getting through your second year into the third, usually there’s at least some income coming in, so it reduces your cash burden a little. For other advisors, it means trimming down your old household expenses. Downsizing your car, even downsizing your house, keeping your personal overhead low enough to be able to survive and pay your household expenses for the first two to three years while you’re building your income. And for some advisors I know they’re dual-income households and they navigate this by cutting back to live on one spouse’s income to allow a time it takes for the other spouse launching an advisory firm to grow.
Because the reality as a financial advisor is that it doesn’t actually cost that much to launch an advisory firm. It’s not like building a factory or even fitting out a restaurant. The actual startup costs are not that bad, at least compared to almost any other industry or franchise. You know, often no more than $10,000 or $20,000 at the most. So it’s not nothing, but it’s not hundreds of thousands of dollars. It’s not giant bank loans. What makes most new advisors fail is not the cost to run the advisory business in the early years, it’s the cost of their own household personal bills until they can get to the point where the business produces enough income and cash flow to pay those household bills. So don’t think of this in terms of startup costs to succeed as an advisor, it’s about having your own financial house in order and being financially stable enough to go what could be a few years with at least very little income as an investment in your long-term future.
And so to bring this back to the final discussion or the original discussion before we wrap up, Ezra said that he’s working at a large brokerage firm, wants get to the point of doing financial planning. So, Ezra, you’ve said you’re already doing business development, which is great. It means you can check that box, I think. So if you have a chance to move to a branch and do at least some financial planning there and get experience and practice doing that relationship management stuff, I’d aim for that as the next step. Get that experience and then you could decide either if you’re ready to launch your own firm or in a few more years maybe you take one more step, go out to an independent firm that’s even more planning-focused, build that planning skill set one step deeper and then decide if you want to move to independence.
In Corey’s case, who’s just starting out six months ago in the industry, Corey, I love your focus and enthusiasm and building your career towards financial planning, but recognize this isn’t a sprint, this is a marathon. It’s a really rewarding long-term marathon, but you’ve got a number of years to go on this. Which is fine, it just means, start laying your groundwork now. So get started on your CFP certification as soon as you can, there’s no reason to wait, spend another year or two in your current operations assistant role, and then see if you can shift to a more client-facing role, even if it’s just in a support capacity. Sit in the meetings, you don’t even have to talk yet, but start seeing and learning the relationship management skills and then try to keep moving up from there.
The bottom line, though, is that for those who know what it takes to go out entirely independent, especially if you’re otherwise starting from scratch with no clients, I’d aim for this: CFP certification, seven years of experience, including some operations, relationship management, and business development experience, and up to three years of personal expenses to bridge the gap as well. That gives you your best odds for success in an incredibly rewarding career in the long run and gives you time to figure out where your gaps are.
You know, I saw a question coming in, is a JD, is a law degree enough? I think you’ll find it will leave you some gaps. You’ll obviously be great on the legal stuff and maybe some of the estate planning elements, but your law degree doesn’t teach you much about retirement planning. It may teach you very little bit about insurance, it may not teach you that much about investments. So I still encourage everyone, go through the CFP certification, not because it’s, like, the great holy grail, but it’s an excellent anchor point. If you’re coming as a professional with another degree or designation, a CPA license, a law degree, you may get through some of it faster, but you still need the breadth of information so that you can give effective advice in a holistic planning context.
So I hope that’s helpful, everyone. Thanks for joining us. This is Office Hours with Michael Kitces, and have a great day.
Disclosure: Michael Kitces is a co-founder of XY Planning Network, which was mentioned in this article.