Becoming an Independent Financial Advisor

Many registered investment advisors (RIA) at one time or another has considered striking out on their own to form an independent financial advisory firm. But those attributes that make one a successful advisor at a larger organization don’t always translate into the skill sets that are needed to run an independent business. Still, with a growing number of mergers and acquisitions happening in the industry, many advisors are concluding that now is the right time to strike out on their own.

For those who are used to the security of a job at a big firm with a steady income, the move to independence can feel unpredictable and risky. It also requires a fair amount of time, planning and the ability to withstand risk.

If a big pay-day is the goal, then patience is also necessary, as many advisors end up losing clients when leaving a big firm to build their own businesses. But there are some basic steps any advisor can take that can help make the transition go smoother. 

One important step any advisor should take before leaving a firm is to evaluate their client relationships. You want to make sure your clients are more than satisfied with your work and that your relationships are strong. Clients want to feel that their advisor knows them well and is looking out for their families’ future. 

Reinforcing these relationships through frequent client contact is key. That’s why advisors planning to make a move should start shoring up their client relationships months in advance. Typically, 60% to 90% of clients will stay loyal to their advisor when moving to a different firm or opening up a new one. The stronger the relationship, the more likely it is that a satisfied client will follow their advisor wherever they go. 

In fact, many in the industry agree that a key to success when an advisor is going out on their own is to make sure that they are not starting from scratch in terms of client relationships. It’s ultimately much easier to bring existing clients with you than it is to build new relationships from scratch. 

At many firms, certain protocols have been put in place between brokers and RIAs, which stipulate that signatory firms will not instigate legal action against an advisor who takes basic client data with them when moving to another signatory institution. Also, many advisory firms allow their advisors to contact their current clients when leaving the firm in order to let them know when the advisor is leaving and where they are moving. This allows the client the option of moving their account when their advisor moves, which may also be in their best interest.

Some firms, however, have been known to ask their employees to sign a non-compete or non-solicitation agreement when they join the firm. This can get tricky for those advisors who want to venture out on their own. In this case, it is important that the advisor does not act in a way that can be construed as actively soliciting their clients to exit the firm when they do, as this would be in violation of the contract they signed.

There is, however, nothing stopping an advisor from giving clients their private email or home phone number so that the clients can choose to contact the advisors themselves if they wish to continue a relationship.

In those cases, when an advisor is permitted to take their clients' basic contact information with them when they leave a firm, they typically are not allowed to take any information with them concerning their clients’ accounts. In this case, an advisor may want to send out a mailing to his or her clients letting them know their whereabouts, in the hopes that the clients will then follow up and provide any information they wish their advisors to have. 

One caveat advisors should be aware of before forging out on their own is that the money probably won’t immediately come rolling in. In fact, it could be quite a while before an advisor is able to match their previous income. Often, during the first three to six months of a new business venture, an advisor’s revenues will likely decrease. At the same time, start-up costs will continue to add up, so just breaking even might be a good goal for the first year.

Without a fair amount of savings, an advisor looking to start a new venture may need to take out a certain amount of financing. This may be obtained through taking out a bank loan or a line of credit (although this type of financing is not as easy to come by as it once was) or by talking to a broker-dealer or custodian who may offer financing to advisors through term notes. Either way, saving up at least nine months of income in an emergency fund is a good idea for advisors looking to go independent. It can provide a much-needed cushion as the business beings to grow.

When just starting out, advisors may want to work from home rather than pouring a lot of money into office space. They can also save money by doing much of the administrative work themselves. But letting a broker-dealer run the compliance end of a new business and outsourcing back-office functions may be a good idea to also keep things running smoothly. 

If the move to independence seems too overwhelming, risky or just not financially feasible, an advisor may instead want to join an existing independent advisory firm or an independent broker-dealer that offers investment services. The benefit to this (over starting one’s own firm) is that start-up costs and overhead costs are eliminated – and so are back office and compliance costs, as well as various other administrative costs. With much of the infrastructure and support in place from the get-go, advisors can focus more time on maintaining existing client relationships and building new ones. These small independent firms may also appreciate being approached by qualified and experienced advisors, as these hires will help eliminate their need to spend time and money recruiting new talent.

Ultimately, it is up to each individual advisor to decide which path best suits them. While some may prefer working for a firm where the infrastructure and support are already in place, others may still crave the freedom of going out on their own and creating their own investment style and approach.

Many advisors are making the move toward independence and opening up their own advisory firms. To make the transition easier they should reinforce current client relationships, figure out if financing is available and necessary, and look for ways to keep costs as low as possible. For those ready to take the plunge, the benefits of independence may be worth it.