The reality of starting out as a financial advisor is that it’s hard to know what type of advisory firm structure will be best in advance; often, the best strategy is just to dive in, get a job at any reasonable firm that will allow you to launch your career, and after you get some experience, decide whether it’s really the right fit for the future. Of course, the caveat to this approach is that if it turns out you do need to make a change later, that change can be scary – so frightening, in fact, that many advisors never make the subsequent changes they should, fearing the unknown and finding comfort in an (admittedly not ideal) current firm or environment.
In this guest post, financial advisor Noah Morgan shares his own transition process in making the leap, first from his original advisory firm to an independent broker-dealer, and then subsequently to an independent RIA. Accordingly, Noah gained a wide range of experience and perspective about what it’s like to make these transitions, from vetting RIA custodian platforms to navigating the Broker Protocol and compliance concerns, to selecting the entire suite of technology necessary to sustain the new advisory firm.
So if you’re an advisor who’s currently unhappy at your current firm, and considering the process of transitioning to something new, hopefully this will be helpful to you in gaining an awareness of the issues that you need to consider if you’re really going to make a switch in the future!
Noah Morgan, CFP, is a lead advisor at Acorn Wealth Advisors, and specializes in working with Millennials. With a Bachelor’s degree from Wayne State University and an MBA in Finance from the University of Michigan, he is looking to provide dynamic new approach to the way people think about savings, retirement, and blueprinting life goals. After gaining a solid foundation he left Chase and in 2014 joined with Acorn, led by CFP certificants Steven C. Bliss and Todd Tarantino. Noah volunteers with Rotary International and in his free time, he enjoys fishing around the world, CrossFit, and spending time with his wife, Danielle, and family.
Two Roads Diverged in the Woods, I chose the road less traveled and that has made all the difference.
It seems we hear a lot these days from advisors working for a Big Bank or Broker-Dealer that things at their existing firm have become more restrictive than emancipative. If you’re at a point in your business where you wonder whether or not the grass is really greener on the other side, it’s probably worth considering what a transition really involves. After transitioning a successful financial advisory business from a large bank to a large independent broker-dealer and lastly to a new RIA in a 12 month period, I really can say it has made all the difference. As someone who has experience walking down this breakaway path, the goal of this article is to help illuminate some of the questions, concerns you may have, should you be looking to make a similar business model transition as a Financial Planner.
Your First Step In Breaking Away From A Broker Dealer Is The Discovery Process
That moment when you seriously consider leaving. There is no denying the benefits of independence, however the inflection point lies in the factors that are involved to take your business to the next level, not only for yourself but for your clients.
The looming questions you want to ask in your initial meetings with prospective custodians such as Schwab Advisor Services, TD Ameritrade Institutional, or alternatives like Betterment Institutional, are mirrored around how many of your clients will come with you? Other questions you might ask include “What types of systems and technology are available for financial planning or a CRM? Will I still have access to the same money managers, products and services? How will you help me with the conversion?”
Yet while these are all important questions to consider, they are only the tip of the iceberg.
You’ve Made The Decision To Break Away, Now Here Are Some Important Things To Focus On
Essential Checklist For Breaking Away From A Broker Dealer To Start An RIA:
1. Get a securities attorney to answer transition questions as they relate to you
2. Call and interview firms who have recently made the transition from your existing Broker-Dealer
3. Identify clients that will likely transition through a Yes, Maybe, and Unlikely analysis to determine realistic conversion ratio
4. Identify a model RIA or hybrid with BD, and interview the major custodians to find a best fit from a pricing, product and values aspect
5. Set up a website, marketing campaign, and identify a niche for your new firm
6. Hire a firm to register your new RIA, set up your firm policies, client agreements and obtain E&O insurance
7. Be prepared and set realistic expectations for your workload and the support you will get from a transition team
8. Identify ongoing additional roles and responsibilities of working independently as an RIA including Billing, Accounting, Setting Up a Lease, Setting Up a Phone System
9. Technology forever and ever (demo technology solutions including CRMs, financial planning software, rebalancing software, and custodian websites)
10. Write a 90 day transition timeline and set realistic goals for yourself
The Broker Protocol And Other Issues Below the Surface To Consider During Your RIA Transition
Two to Three months from D-Day you will start the due diligence process to develop a structured approach that leaves nothing to chance. In this stage you will develop your firm’s Business Plan, find/identify your niche, and determine the value proposition that will ultimately drive your business going forward. You’ll determine your firm’s name, business entity type (LLC, S-Corp, Etc.). I recommend right from the onset of transition hiring a securities attorney to help review your current business and talk about and legal questions you may have. Make a list of any questions or reservations you have to ask your attorney to be ready for any litigation issues that may arise down the road. Knowing the ins-and-outs of your current employment situation will give you a lot of confidence you can make the transition successfully (and actually keep you out of trouble).
You may have a non-solicitation agreement or a non-compete that you should absolutely review with your attorney, to know how to handle the transition in a legal way. Know whether or not your firm is a member of The Broker Protocol by visiting www.thebrokerprotocol.com. The goal of the protocol is to further the client’s interest of privacy and freedom of choice in connection with the movement of their Financial Advisors. If you are a member of the broker protocol, you are permitted to take the name, address, phone number, email address, and account title for every client that you personally serviced at the firm, subject to certain limitations for partnerships and retirement agreements. You are not permitted to take any other documents or information concerning the accounts of your clients.
Call at least three firms who have successfully transitioned within the last 3-24 months (ideally who actually left your same broker-dealer). I cannot tell you how important it is to get the perspective of others when making this type of business decision. They will likely give insight on what potential issues you will run into. If they are from your broker-dealer in particular, they will know what assets and accounts may be problematic such as proprietary funds held in managed accounts. They may also be able to provide you with best practices to achieve a high conversion ratio. Send them a nice bottle of scotch for their time. Trust me, it will be worth yours.
Lastly and most importantly do lots of homework. You should expect to spend between 1-4 hours a day for 30-60 days to successfully master this process and have a smooth transition. This part involves learning your business inside and out all over again. You should know how many clients, how many accounts and what type of accounts you plan on working with – without even thinking twice. It’s easy to say we have roughly 350 clients and $150 million AUM, but if a third of your clients have annuities and insurance products with your Broker Dealer you are more likely to transfer only $100 Million. Remember, Custodians do not hold your Variable or Insurance Business. So in order to continue servicing these accounts, you may look to a service like Low Load Insurance Services, or becoming a dual-registered RIA by also keeping a separate Broker Dealer relationship, such as with Purshe Kaplan Sterling.
Since we made our transition in 2014, 2 of the original 4 advisors on our team have dropped their Broker Dealer registration and gone solely RIA and “Fee-Only” with their businesses. They found it was a tremendous amount of work getting registered with a broker-dealer, and then learning technology systems to stream accounts into financial planning software for business, yet it only reflected less than 5% of our overall business revenue. Looking back, we wonder whether or not this was the best decision we made setting up a broker-dealer affiliate relationship at all.
Fortunately, most custodians accept all ETFs, and 99% of Mutual Funds. If you have a one-off share class or fund that you use, be sure to check with the custodian in advance to make sure you can hold the asset. If you have Hedge Funds, Alternative REITS, BDCs, or SMAs be sure that you are aware of their transferability and how the accounts will be set up at the new custodian. Some firms require separate accounts for SMAs, where firms like TD Ameritrade may allow you to create models using SMAs. THIS IS AN IMPORTANT STEP NOT TO OVERLOOK.
Identify your clients who will be making the move with you. Use the tiered client segmentation system which you are likely to already have in place for your current clients. A client is either going to be a yes, maybe, or not a good fit for your new firm. Knowing upfront who is and who isn’t will ultimately be how you define your ideal clients in the future. Whether you serve Millennials, retirees, or both, make sure you focus on your ideal clients. This exercise will give you a realistic idea of what assets will likely transfer and help you identify opportunities down the road.
You’re now at the point where you have your firm name, you have a vague idea of how things will work from talking with other firms, you’ve identified your key clients, and it’s time to focus on the more important aspect of running an RIA – selecting your custodian and your technology solutions. The Big Three – TD Ameritrade Institutional, Schwab Advisor Services, and Fidelity Institutional, will all tell you they are the best solution for you. My advice is to really demo all three of these providers, and have a face-to-face meeting with them to address your concerns. Most of them will offer you a dedicated service team to make the transition. This does not mean they will do your paperwork for you, it simply means they will come to your office and ensure you are filling the forms out correctly. They do help you with a lot of the preliminary checklist to make sure you are on pace. From the outside looking in it’s always hard to tell whether or not a firm is properly prepared. Be sure to ask about the transitions that didn’t go so well to get insight and avoid potential known problems. You will have enough unknowns to deal with and the more you know the better off you will be.
My Experience With TD Ameritrade, Schwab, And Fidelity As RIA Custodians
Here is my experience with the various RIA custodians as we investigated during our own transition process. Take this as you wish.
TD Ameritrade is by far the most versatile in terms of Technology. For advisors that enjoy using SMAs and want to construct multiple Manager Models on a platform, they have the market. Schwab and Fidelity still require separate accounts to be opened up for each managed account.
Schwab is a great custodian, and this is who our firm uses as our primary custodian. We have a dedicated service team, as we have AUM greater than $100 million, and although the paperwork is cumbersome, they have a really robust trading platform that we have grown to appreciate. Schwab also recently launched its Institutional Intelligent Portfolios for 10 bps to firms under $100 million and free to firms with more than $100 million AUM, so if you are looking to add the robo-advisor to your platform to attract Millennials this may be a good fit.
Having little experience with Fidelity I cannot give a true perspective on their services. However, if your business is focused on retirement plans they are certainly a leader in this space.
We also use Betterment Institutional for our clients, as the Robo Advisor platform certainly cannot be ruled out. It was pretty easy to set up as a registered firm, didn’t cost anything to do so, and is a great solution for Gen X and Gen Y clients generally in the accumulation phase. Folio Institutional is also another good solution for these types of clients.
Select a custodian based on your comfort level. Ultimately a custodian is a shell for you to set up accounts for clients to protect them. You are not stuck, your clients are not required to use your custodian, and you can easily add/change Custodians down the road.
Finding a marketing company to design branding material, make general announcements and create letterhead can be easy if you are good at making decisions. I recommend using a company like Web Savvy, Advisor Websites, or Make it a Great Day, Inc to design a website for you. Go to GoDaddy.com and purchase a domain name for your future website. You can expect to spend between $1,000 and $12,000 for a customized website. If you have the time and tech capabilities you can do it for less, but let’s be honest are you a CFP or a Web designer? As a best practice, focus on your strengths and don’t try and add another project to your list. You will have plenty of other decisions to make. Note you should expect spending at minimum 6-10 hours of conference calls and planning to get the content down to brand your new firm if you hire a company to build your website.
Crossing the RIA Setup Compliance Bridge
Compliance is certainly not something we generally get excited about, however it’s a must that should be taken seriously and should be a priority for you as you define your new world.
The good news is you will have plenty of options in this department. Whether you join a turnkey group such as the XY Planning Network as a Fee-Only advisor, hire a compliance consulting group such as GS Compliance Consulting, or use a template consulting company such as RIA in a Box, the process is involved. Advisors can expect to pay between $2,400 – $15,000 a year for registration and compliance reporting.
Obtain business, errors and omissions, and cybersecurity insurance. While we hope to never actually use the insurance we purchase, it’s always good to have a layer of protection in your business. There is no regulatory requirement to have it and while you are acting as a Fiduciary, a simple cost-benefit analysis will generally give comfort knowing you are protected. Check with FPA or NAFPA if you need to find a good Insurance Broker to provide this type of coverage. Typically you should expect to pay about $2,000 a year for a $1 Million policy.
With all of the decisions to be made, and work to be done, it’s no wonder why there are not more advisors taking this route of breaking away to an RIA. Of course, there are alternative options such as a Turnkey RIA Solution or even joining an established practice that allows advisors to avoid many of the overwhelming tasks of setting up a new business. Seriously consider calling firms, locally or even nationally, if you think you can find one with a core value alignment. A team-based approach can benefit all advisors. It was estimated by Meridian IQ that there are over 31,000 total RIA firms actively registered today and this number is growing by approximately 2000 per year. Joining an existing firm who has the experience and manpower could lead to a more successful transition as you would be able to focus simply on the transfer of clients vs. the ground laying work in setting up a business. Simply finding the right firm with the same core values and alignment is never easy for a Type-A Financial Advisor but it certainly is a solution that shouldn’t be ruled out when considering leaving your current firm. Most advisory firms are looking to grow and a phone call on your end is certainly worth your time.
Note that most RIA firms are not going to be beating down your door to have you come work with them, nor are they going to offer you upfront money to make the move. Generally you will retain the rights to your clients, and it will be a shared business expense to run the office. Economies of scale are worthwhile to leverage expertise and reduce costs. If it’s not a win for you, a win for the existing firm, and a win for your clients it’s usually not worth pursuing. That’s a lot of preplanning, now you are almost ready to move into your new office or convert your existing office into your new firm. We were lucky we own the building we are in so we just put up a new sign on the conversion date.
Rent can vary by office type but typically you can usually find non-metropolitan commercial office space for $10-$15 per square foot. In metro areas like Chicago you can find pretty decent space for $25-$50 per square foot. Your call where you want to get started. We are lucky to be in a non-metro area where space is affordable. For a 6 unit office, conference room, and reception area we have about 3600 square feet, which would retail at about $14 per square foot. This means our office would lease for about $14 x $3,600 = $50,400 per year. The benefit in this is we can easily accommodate 6 advisors and additional support staff. Look for an office that gives you the ability to grow.
Technology Solutions As An Independent Financial Advisor
Lastly, before you walk out the door on your existing firm, you will need to make some important decisions on what technology solutions your firm will use. Technology and systems are all pretty easy to use once you have had time to really learn the systems. It does take time and the systems are constantly “improving” with updates. We were originally set up with a bundled plan through Schwab Integrated Office. Most custodians or Networking Alliance Groups Such as XY Planning Network have turnkey Technology Bundled Solutions for you to access. These solutions will generally be your best bang for your buck and are a safe place to get started if you want one less thing to do. Stick to their process, don’t rush them, it’s not their first rodeo. Bundling tech will allow you to focus on transitioning your clients. If your goal is to always improve things for clients they will understand that you are testing new solutions to help meet their needs. We use Multiple Financial Planning tools and we are able to provide more solutions in doing so.
I read Alan Moore’s ”Guide to Establishing a Next Generation Financial Planning Firm” and this is a great piece on selecting some best Tech practices. Using his article as a template, here are some of the tools we are currently using and have recently demoed:
Financial Planning Software
Risk Profiling Software
RiskAlyze– $129/Month – Currently we use
Performance Reporting and Billing
Client Report Delivery & File Sharing
DropBox – Free
Data Gathering and Aggregators
PreciseFP – $59.95/month – Demo’ed did not sign up
BlueLeaf – $395/month – Demo’ed did not sign up
EMoney Advisor – Included in Financial Planning
Envestnet – Pricing Determined by AUM and services needed – We were not a good fit for Envestnet with $200 million AUM. They are great for larger firms over $1 billion in AUM. Middle market and smaller firms may not get the best services from my experience.
Client Relationship Management (CRM)
Wealthbox– $29/month- Great solutions for start-used – Used briefly
SalesForce – $125/month – Large learning curve – Schwab bundle – Used in past
XLR8 Salesforce – $75/Month per user – Plus upfront training cost ($5,000) – Currently we use
Redtail – $65/Month per user – Used in the past do not currently use
Junxure – $41/Month- Demo’ed but do not use
Netdocs – $200/Month up to 5 users – Currently we use
E-mail and Calendar
Online Meeting Scheduling
Electronic Document Prep and Signing Tools
MailChimp – $11/month – Currently we use
Accounting & Payroll
QuickBooks Online – $39.95/month – Excellent (save 30% by paying upfront) – Currently we use
Estimated Technology Annual Cost: $12,000-$40,000 annually for office staff of 1-6.
The 90-Day RIA Transition Challenge: Converting 75-100% of your existing clients
Week 1, Day 1, you will be greeted by the conversion team for your RIA. You may have hoped that they will be doing your paperwork for you, but they will not be. You are your own firm and they are an affiliate. They will help ensure you fill out paperwork correctly, and they will probably have by now ordered your client packets that will have new account paperwork, your firm’s client agreements, and firm disclosures. You will be drinking out of a fire house for the next 3 months until you have transferred most of your accounts.
You will be busy moving accounts, setting up clients online to get access to their new accounts, and overwhelmed by the amount of paperwork you will fill out. It will all settle down and then you can begin to integrate your firm’s technology. Don’t rush the implementation of the technology solutions you selected at first, until you move the majority of your accounts over. It’s a mass data export and then when you add new clients it’s a one off to enter new clients into your CRM. Take your time, you’ll have lots of time to focus on your business once you make it through the account conversion.
Note: Our firm transferred 90% of our business, approximately $200 million AUM, nearly 1200 accounts for just over 500 households, in 3 months. We have 5 advisors and 3 support staff. Firms that are setting up new phone systems, office leases, and entirely new business certainly need to make sure they put the prep work into the transition, even more so than we did.
Looking Back At The Transition From Breakaway Broker To RIA
There are several steps that you must seriously consider and several unknowns that lurk overhead that prevent many great advisors from making the change. The partners here at my firm debated the process for over 5 years before making the leap of faith, and they constantly say they wish they would have done this sooner.
I started my career in the financial services industry straight out of college at a Big Bank. I drank the blue Kool-Aid for the first 4 or 5 years before I really started to understand that as an advisor we need to spend more time with our clients. It was a great place to learn about the business and really build a solid book of financial planning fee-based clients. However, I was running 20-30 appointments a week after embracing the production model, and was often told that I could do more. I was simply burnt out working with 400 households. I reached a point where I felt that based on time constraints I couldn’t provide the level of service that I felt clients deserved and I began my search for Independence.
I talked to as many firms as I possibly could in 2 years, literally never turned down an interview. I interviewed the wires, the other banks, and the independents. As things usually work out in non-traditional ways, I met my current business partner through a local service group in town. Volunteering with him regularly to give back in our community we got to know each other first on a personal level, and over time we started talking about the business. We talked a lot about our firms and debated on whether the grass was really greener. After a year or two went by he said to me his door was always open to work with him.
Notably, this meant the first step of my transition still wasn’t directly to an independent RIA, but to partner with this advisor at an independent broker-dealer first. I made the move in June of 2013 to Ameriprise. Within a few months I had a great business going and my transition was almost complete. It was a tremendous amount of work but I was extremely happy with my client conversion from my prior firm, and slowly I began onboarding new clients. It was actually only afterwards that I learned my business partner was considering leaving Ameriprise and starting an RIA within 6 months… which is what we subsequently did, as detailed in this article!
Like most 30 year olds would do I embraced the change. My experience was timely as we launched Acorn Wealth Advisors in 2014. Looking back I can honestly say I am grateful I made this transition as a Fiduciary for my clients, the path less traveled will make all the difference.