Because I am finding more and more solid financial advice outside of myself than inside, most of my #FinancialFriday posts will now consist of the sharing of articles and blog posts focused on improving financial literacy or that are related to the financial industry. Sources will, as always, be credible and I think it would better serve my readership to receive financial advice from experts within the field.
Things to Consider When Considering Independence: An FAQ for Advisors
As the trend toward independence continues, the opportunities raise questions from those advisors who are considering making the move. At Dynasty Financial Partners, we field many queries on topics ranging from real estate to custody to staffing, and the following most frequently asked questions are meant to provide a helpful walk-through for advisors who are thinking about going independent.
1. What is critical for me to know about going independent?
There are several main parts to this answer:
First and foremost, you’re no longer running a practice but a small business. You don’t need approval to make strategic investments in your business, don’t have to worry about whom your next manager will be, and never need to concern yourself with the stifling bureaucracy and politics inherent to larger firms. But, as a small business owner, there are expenses to be controlled, staff that require leadership, and marketing and brand-building considerations. These issues can be challenging, but ultimately engender pride of ownership. What will prove invaluable is setting up a network of mentorship and support across all aspects of your business from successful advisors who are open to sharing best practices and key insights towards success.
Second, choosing the right support team is critical to the success of a new firm. It is important to understand what roles need to be filled and identify which of your current team members are best equipped to handle those roles in order to effect a successful transition and add value to your new firm. Keep in mind that not everyone on your current team may be suited to handle the ups and downs of a start-up; Select those personnel who will think like shareholders, controlling expenses and delivering consistent value to your clients. At Dynasty, we decided to make everyone an equity owner in business so they act like owners because they are owners!
Third, know your legal and practical rights regarding your existing clients, and your ability to bring them over. Each major firm has particular policies regarding the issue, so be aware of what you can and can’t do in terms of notifying clients and educating them (not selling them) about the benefits of working with an independent advisor. What client information you can take with you is strictly prescribed, and there are regulatory concerns regarding privacy. Make sure you seek legal counsel that has proven experience in setting up new RIAs and who understands issues around broker protocol and nuances around how you plan to run your business in terms of advisory and/or commission based business.
Finally, work with the right strategic partners. At Dynasty, we’ve learned that it takes a significant amount of time working closely with each advisor to determine which resources will best position the new firm for success. Through extensive research, testing and insight we’ve identified the essential partners that are vital to an independent start-up: An experienced, hands-on transition team, a solid custodian, assistance handling the compliance burden, a leading-edge reporting group and access to an open-architecture platform that offers institutional-quality research and investment products. Each traditional RIA custodian we work with (Schwab, Fidelity, Pershing) has local business development people. They can be great place to start to get educated helping you to build your own checklist for independence. Of course, there are numerous other considerations involved (current employment agreements, etc.), but nail these and the heavy lifting is basically done.
2. How will my compensation be affected in the independent space in contrast to my current situation?
As an independent advisor, 100% of your advisory fees hit your business’ top line. On average, firms in the Dynasty network run their practice with a 65ù0% gross profit margin. Effectively, 65ù0% of gross advisory fees will translate into your new net pre-tax “payout”. Said another way, your fixed costs (Real Estate, staff, etc.) and variable costs (custody, trading, legal, etc.) should run in 30% of revenue depending on your size, scale, etc. Thus roughly 70% is left to determine advisor/partners compensation. Many of our advisors take roughly 40-45% of revenue as compensation and leave 25-30% in the business as net revenue to make future investments in business.
As an RIA, you have the potential to ultimately keep more of what you earn, and build equity in YOUR business where everything you do directly correlates to enterprise value of business. (I’d like to take this opportunity to point out that Dynasty Financial Partners doesn’t take an equity stake in the RIAs we work with; this is unique in the industry and has a beneficial effect on compensation and owners wealth accumulation since they own all the upside and reap all the benefits if they sell business some day.) Bear in mind, out of that payout, your “small business” will be responsible for paying all related fees and expenses, and financial issues in general become magnified. Spend a lot of time now creating a bullet-proof, detailed P&L projecting revenue based on AUM and proposed expenses that includes everything from office space to office supplies, personnel and custodial fees – not to mention taxes. This will give you a holistic, 30,000-foot view comparing your current business versus that as an independent RIA. Just as important, this exercise will show you to what degree you can find new sources of revenue and develop strategic business opportunities.
3. Will I be able to grow my business as an independent advisor?
Like any other business, there are various ways to grow your new firm: Increasing your share of each existing client’s wallet; expanding your client base through referrals, word-of-mouth and marketing; and, once your business is established and stabilized, merging with and acquiring “tuck-in” advisor teams (that’s a topic for another article).
Client-based growth is nothing new to any advisor – securing more of a client’s assets and regularly asking for referrals should be part of running your practice. But how quickly you go from transition to success will have a direct bearing on attracting additional teams later if that’s one of your goals, so doing your diligence and planning now is critical. After all, everyone loves a winner.
Also spend a fair amount of time practicing your client delivery of your new firms value proposition before you break. At Dynasty, we help role play with advisors and work through this marketing and communication strategy. It proves very helpful in first few weeks after your launch. Our experience shows that clients like the triangular approach with advise being delivered separate from where assets are safely custodied and reported on separate from where products are accessed across multiple firms. Contrast this to the siloed approach where everything is under one roof and clients begin to clearly understand the fiduciary model.
4. How long will it take to transition my business?
Every business transition is unique, but at Dynasty we have found on average it takes three-to-six months of planning before the official break. To make sure your transition goes smoothly, we recommend laying out a roadmap that goes from now through the actual transition date, and identifies all key decisions and the order in which they need to be made. This will eliminate surprises and ensure adequate time is given to every consideration – from setting up a copy machine to launching your website – so you are thoroughly prepared when the doors open.
Once a new firm is officially launched, it has taken us an average of 90 – 120 days before 90% of pre-break assets under management are transferred to the new custodian. This is above industry averages and is with a full time dedicated transition team in place. If you are doing it on your own, the industry average is about 85% inside of 12 months. Results vary depending on client relationships, firm stickiness of products used and of course amount of thoughtful preparation put into the transition.
The process includes a lengthy list of tasks, from forming an LLC to planning for employee benefits, key-man insurance, mapping critical investment vehicles and establishing a client communication plan.
There’s a lot to do, but the result will be as seamless of a transition as possible that ensures clients will be comfortable transferring their accounts to your new firm under the direction of the same, trusted advisor.
5. How important is naming, branding, promoting and marketing my firm?
Getting the word out is key to establishing added legitimacy in the minds of existing clients, for prospecting additional clients and letting the industry in general know you’re out there. By all means create marketing and client communications strategies and calendars, and , find a marketing and public relations provider to work with. Especially before transition and immediately after, having expert guidance in the naming and logo design of your new firm will prove money well spent. Dynasty provides its own marketing and public relations services and they are used heavily by our advisors.
The goal is to make your firm “real” to your clients and prospects on day one, so we also recommend promoting your launch through carefully directed press relations and releases. You or your PR firm need to coordinate media contacts, set up exclusive interviews with national and local reporters and disseminate media kits. This is a cost-effective way of getting immediate publicity, and an opportunity to establish yourself or your firm as “subject matter experts” available to answer future media requests and generate exposure.
It is important to get in front of clients with an institutional-quality brand and explain why independent advice is in their best interest. To that end, customized marketing collateral and a website will give you the real estate to tell your story, provide your credentials and differentiate yourself in the marketplace. At minimum, a “client welcome kit” and a “why” brochure will help clients understand your rationale for independence, what it ultimately means for them and how to become a client of the new firm.
And put new technology to work: social media hubs like Facebook and LinkedIn are essentially free portals to a wide world of potential clients and network contacts – these can be cultivated now before your transition, and you should have a presence already. Free or low-cost email providers like Constant Contact and Mail Chimp let you stay in touch with clients via short blasts or newsletters, and Twitter lets you share opinions or updates in microbursts. Services like ZoomInfo let you tap highly targeted databases to generate leads and integrate with your own CRM program. Just be sure to coordinate with your legal team to ensure how you communicate your message is consistent with legal and compliance procedures of your new firm.
Naturally, there is no better marketing than your own high-quality service and reputation. Make your clients – and your staff – your advocates and evangelists by ensuring they always have positive experiences (send birthday cards – really). Do what you do best, and the word will spread.
6. What technology is available to me in the independent space that is not available at a bank?
According to the J.D. Power and Associates 2012 U.S. Financial Advisor Satisfaction Study, providing the right mix of technology and support to advisors, thus optimizing the time they spend with clients, has the single biggest impact on advisor satisfaction. Best practices include technology and software solutions that are aligned and integrated with workflow processes, and address and resolve compliance issues quickly and efficiently.
Banks and brokerages carry legacy computer systems that are massive in scale, designed to service large networks of advisors. Because these systems are designed to accommodate the least common denominator, they have limited or no ability to enhance or customize specific packages for sophisticated needs or tailor systems to benefit the most successful advisor teams.
By comparison, independent firms are built for agility and adopt and integrate new technologies quickly and effectively – that’s why technology offerings are such an enticing part of move to independence. At Dynasty, we’ve surveyed the complete spectrum of software and technology available in the wealth management space and suggest you look for the following when considering the move to independence:
· An integrated system with a dynamic, open-architecture platform · A platform that offers integrated reporting, trading, market research, analysis, implementation and nearly unlimited access to products and services · A platform that can be quickly upgraded when new technologies become available · The ability to access all of a client’s data from any place at any time and consolidate client assets into a single picture – even when those assets are held at a variety of different custodians
Unlike captive environments, independent advisors are free to use any provider that best fits their needs. A major benefit is how competitive technology providers have become in order to maintain their standing, in both pricing and features. Technology developments let independent advisors focus on providing high-quality advice and service to many more clients than they could in the past, delivering very customized solutions in a scalable and efficient way.
7. What do I need to know about custody of my clients’ assets?
Choosing the right custodian is a vital step, so take the time to explore the marketplace – research online, ask industry peers and contact firms directly – you can also tap the resources of your existing custodian. Ask lots and lots of questions; after all, this is a key relationship that you and your clients will maintain for a long time.
What will make it easier to choose is knowing what are the most important capabilities to transition, grow and support your business. Sift through those firms to find one that understands your goals, and offers the services, tools and guidance – and culture – that complement your needs. Look for a firm that has a transparent business model and a flexible platform, and a you-first attitude.
A high-quality firm will be strategic and responsive, and help ensure your paperwork is complete and organized to smooth your way through the transition process. Make sure that the custodian you select is set up to deal with all the operational aspects of transferring client accounts, and makes holding and reporting on client assets simple and safe.
Ultimately, find a firm that can provide direction and support for transitioning clients easily; we can’t stress enough how important it is to make it simply for your clients to transfer accounts.
Are you considering the move to independence? Curious or just have general questions? Let me know at firstname.lastname@example.org and I’ll address those in future articles.