Going from a wirehouse or bank advisor to being an independent advisor is a big step. Many of the advisors we speak to understand and appreciate the benefits, but still, the fear of the unknown can create hesitancy. Much of the unknown centers around the financial risks associated with being independent. To provide perspective, we did a short Q&A session with Ryan Delaney. Ryan Delaney, CFA® is a Co-Founder of Freedom Partners. Ryan has been in the financial services industry for over 20 years. He has spent most of his career in the alternative investments area. He has spent the last three years as the CFO for a $1.3 billion RIA firm where he played a vital role in several advisors leaving wirehouse firms for the independent space. Below Ryan provides some great perspective and advice on risk and some of the financial decisions you may face in a move.
What is the best advice you can give an advisor considering a move to independence?
“Don’t be penny wise and pound foolish. Think long-term with your decisions. Don’t sacrifice infrastructure or the tools you’ll need to provide your ideal client experience solely to maximize your net payout. It will be costly in the long run. When you go independent it’s human nature to look for the “highest payout” or minimize costs when building your firm to maximize what you keep. Look for the right combination of being cost conscious, but business rational.
If you look to join an existing RIA remember that the devil is in the details. Make sure you understand who “owns” the client, the stability of the RIA owner or ownership group, your exit clause, and that all insurances are in place. Every firm will sell you on the benefits, but equally important is what happens when things don’t go as planned.”
What are some financial items that advisors should be thinking about in a move?
“Understand the upfront costs. Make sure you understand the start-up costs associated with getting your business going. Think rent, office setup, and operating capital. Think about how long you will go without revenue during your transition from your existing firm to your new firm while staff and bills will need to be paid.
Understand the full suite of costs that it takes to run a business. Everyone we talk to thinks the costs are rent, insurance, and HR. Yes, those are the big ones, but what about professional fees (legal, accounting, compliance) and technology, which are vital to the stability of your business as well. And there is a long list of smaller expenses which may seem insignificant, but they can add up.
Understand your risks. There is risk in any move, but if you understand the risks and plan for them it won’t be a negative experience. Many advisors we speak to think getting the right insurance means you are “covered.” In some cases that may be true, but if you don’t understand the policies, exclusions, and how they work with your business, you may not be as protected as you may think.”
From a financial point of view, what are the biggest differences between being an advisor at a major firm and being an independent advisor?
“You will get a meaningful uptick in income in exchange for the responsibility of running a business. W-2 advisors understand how to run a book of business, but most have no experience running a business. While running a business can be learned, advisors often underestimate the time involved in the learning curve and the opportunity cost of that time.”
What’s the best benefit of being an independent advisor?
“Since you control the expenses in your business, you ultimately control how much money you keep versus your payout being determined by a management team or firm whose interests aren’t usually aligned with yours. We meet many advisors that only use a small portion of what their firm offers them, yet their (low) payout is based on the assumption they will use the entire platform. The beauty of independence is you build the firm around your needs and don’t overspend on items you don’t need. This control gives you complete transparency on your revenue and expenses. There are no hidden haircuts nor convoluted compensation guides that change annually. Independence also allows more flexibility regarding saving for your retirement and monetization of your business.”
Your title at Freedom Partners is “Your CFO.” What do you do for advisors that hire your firm for support?
“I run all financial aspects of their business so they can focus on being an advisor to their clients. I focus on reducing costs, which will increase the money they keep. I deliver streamlined reporting and dashboards that outline revenue, expenses and other metrics regarding their book of business. I handle everything from bill pay to client billing to running QuickBooks and working with their CPA. Our philosophy is that an advisor’s focus should be on their clients and prospective clients. Those activities provide them the greatest return on their time, not to mention more fulfillment.”
If you have any questions, please call us at 949.751.7407 or visit us at www.FreedomForAdvisors.com.