How to Launch a Wealth Management Firm

The independent wealth management industry has been a consistently growing segment of financial services over the past several years. According to Boston Consulting Group, there is about $55.7 trillion in private wealth up for grabs in the United States and Canada. This figure has many financial professionals contemplating the idea of opening their own wealth management firm. In this article, we’ll take a look at some key tips independent financial advisors should keep in mind when opening their own wealth management firm.

Aspiring wealth management entrepreneurs have to ensure they’re following the rules and etiquette when leaving their current employer. In many cases, financial services employees have contractual obligations to their employers that prevent them from working on or for a competing firm and advertising outside services to clients. Some employees may also have non-compete clauses in their contracts that forbid them from working in the financial services industry for a period of time following their departure, although these contracts can often be broken under some circumstances. (For more, see: Don't Sign That Non-Compete Without Reading This.)

Entrepreneurs should carefully consider these contractual obligations to avoid being sued and adhere to common-sense etiquette. For instance, entrepreneurs should not work on their new business during business hours, shouldn’t contact clients until they have left their employer and should approach former clients tactfully after-the-fact to avoid any problems with their former employers.

Independent financial advisors that seek to build up their own practice are inevitably taking a lot of risk in the form of upfront costs. Unlike most small businesses, advisory firms must meet a number of complex regulatory requirements that can prove quite expensive. The first major expense incurred by a new business is compliance, including the setup of an ADV (client brochure) and a state licensure. In general, these services can cost anywhere from $2,000 to $5,000 with a recurring component each year of $2,000 or more. Insurance costs, office expenses, letterheads, websites, banking costs, association costs, subscriptions and numerous other costs can easily add up to over tens of thousands of dollars. (For more, see: Start Your Own Financial Planning Firm.)

Financial advisors must also consider the opportunity cost of establishing their own independent practice, since a percentage of their existing clients are unlikely to follow them. In addition, many referrals may refuse to move over to a new practice and instead prefer to remain with a larger company. These costs can also amount to tens of thousands of dollars, but are offset by greater profitability on a per-client basis.

Most entrepreneurs have to hit the ground running as soon as they leave their former employers to make payroll and sustain their new enterprise. Often, the first step is reaching out to former clients while keeping the rules in mind. Before reaching this point, entrepreneurs should have a well-rehearsed pitch for these former clients that effectively communicates why they should move their accounts. Newly established businesses have no reputation (other than the owner’s) and a high level of risk in terms of solvency early on, which are challenges entrepreneurs must overcome when dealing with these former clients and trying to attract new clients. (For more, see: Management Tips from Top Financial Advisors.)

The best pitches highlight the entrepreneur’s skill sets and competitive edge compared to larger institutions. For example, the new firm may specialize in using computer algorithms to identify the best opportunities. A new owner may also point out that smaller wealth management firms are able to provide more personalized client support given the smaller client base, ensuring more attention is paid to their account and maximizing their returns.

Setting up a new wealth management firm can be a complex and time-consuming process that involves extensive legal, regulatory and compliance work. While financial advisors may be familiar with many of these things, establishing them often requires professional assistance. The good news is a growing number of companies have been established to help financial advisors set up their own practice. In exchange, these companies may charge a consulting fee, percentage of assets or even take an equity stake in the new firm. Tru Independence, for example, handles everything from registered investor advisor (RIA)/broker-dealer registration and credit and lending facilities to office space selection and design for aspiring entrepreneurs.

In addition to a solid legal footing, independent financial advisors should consider investing in professional help when it comes to designing a professional-looking website, business cards and other marketing materials. Professional consultants can also prove useful in avoiding the hiring of full-time employees to handle simple tasks like bookkeeping, accounting or even secretarial duties, which can help keep costs low early on without sacrificing quality. (For more, see: Keys to Going Independent for RIAs.)

Venture capitalist Marc Andreessen once said “software is eating the world,” which means technology is rapidly changing the way entire industries operate. While financial services have been slow to adopt new technology, it’s becoming an increasingly important part of the ecosystem. There are many different tools that independent advisors can use to improve their client services and optimize their profitability. (For more, see: How Technology Helps Financial Advisors.)

Technology can also be used to reduce costs in other areas of the business, such as payroll, accounting or marketing. For example, do-it-yourself services like ZenPayroll can help keep payroll costs down relative to hiring an internal accountant, while automated phone systems by companies like Grasshopper can avoid the need for a dedicated secretary. These types of services may not be advisor-specific, but can certainly help improve profitability.

Opening a wealth management firm is a complex process, but with the right help and tools in hand, it can be very rewarding for entrepreneurs. By keeping these basic rules in mind, financial advisors can increase the odds of success and avoid costly lawsuits and other difficulties associated with moving away from the corporate world and into their own practice. (For more, see: Why It's a Great Time to Launch an Advisory Firm.)