What I learned in going independent

By Kenneth R. Heck November 16, 2008 Post a Comment

Last year, my father, brother and I decided to start our own investment advisory company. Had we known then what we know now, we would have made only one major change: We would have done it years earlier.

My father, Robert, has been in the investment business for 50 years and my brother, David, for 16; I'm an 18-year veteran. We worked for Smith Barney, where together we built a business managing and advising $1 billion in assets for a few hundred families, charitable organizations and corporations in 29 states.

Over the years, we received many lucrative offers — including upfront bonuses — from other wirehouses. But we never made a change because the basic structure for our clients would have remained about the same. Instead, because we felt it was in the best interest of our clients, we decided to start our own company as registered investment advisers. In one way, the move was a natural extension of what our father taught David and me from the beginning: always treat clients the way we would like to be treated, and put their interests first.

For advisers who feel the way we do, independence may make sense. For us, the transition happened quickly. We met with several custodians in January and February 2007 to determine which would be the best fit for our business. By early spring, we decided on Fidelity Investments of Boston (in large part because they are family owned, as we are), and on May 18, a Friday afternoon, we resigned and began Heck Capital Advisors LLC — joined by our entire support team, who are a key part of the overall client experience.

Throughout that weekend and the next few weeks, we contacted our clients. We were delighted that more than 90% of them decided to join us, and we spent the next several months handling customer paperwork and setting up ac-counts. It took about six months for assets at our new firm to reach pre-departure levels.

Behind the scenes, the three of us were busiest between the time we decided to go independent and our May 18 start. We tackled several business management issues: finding a business location, securing medical coverage and other insurance, and deciding on technology and other office equipment and supplies. Your custodian should be able to provide you with contacts for some of these resources.

In addressing these issues, we faced some challenges. First was finding the appropriate legal counsel to help in the transition and setting policies. A good legal adviser will guide you in addressing issues with your previous employer, such as non-compete clauses and how and when you can contact your clients, as well as provide guidance about business structure and setting up compliance standards. He or she also can help with employee contracts, handbooks and procedures. We looked for counsel that was non-conflicted with broker-dealers.

Insurance was another focus. We spent a lot of time speaking with insurance representatives and agents to understand our medical insurance options. We reviewed several proposals based on cost, deductibles and network coverage and also looked into dental, vision and short-term and long-term disability plans, as well as accidental death and dismemberment and life insurance. Depending on your firm, you also may want to look into key-man, directors and officers, and errors and omissions insurance, in addition to general liability insurance for your office and warranty coverage on your equipment.

Since we plan to build our own building and eventually expand to another city, we decided to lease space for the first few years. As a result, we purchased functional furniture to allow us to concentrate our spending on technology, employee pay, benefits and marketing. We spent more money on our conference room than we did on our individual offices. For office equipment including copier/printers, shredders and phone systems, it may pay to lease until you can determine your work flow. We initially leased some items but have since purchased others. Also, we're based in a small town in north-central Wisconsin; you may be able find appropriate office space and order and install equipment more quickly in a larger city.

Although we were primarily a fee-based group at the wirehouse, we still had commission revenue from accounts holding annuities, bonds and equities. As an RIA with no broker-dealer affiliation, we can no longer receive commissions on these accounts. Still, the switch to independence gave us the ability to bring in additional revenue and assets over and above what we had at the wirehouse, largely because of the flexibility in our managed investment offerings and our objective consulting services. We are not limited to certain fund companies or share classes and we have no revenue sharing agreements. In addition, we can communicate with our clients via newsletters, brochures and investment fact sheets with greater efficiency than before.

Our clients value our independence. Several have said they wish we would have started our own company sooner. Others told us that they were relieved we were independent because of what they perceived as conflicts of interest within broker-dealers. And many clients never gave a second thought to following us since they always considered their relationship to be with our group, not the broker-dealer.

FREE TO CHOOSE

As RIAs, we are able to work with multiple institutions, record keepers and custodians. Because we are free to choose the best providers, we are able to attract more institutions, trusts and high-net-worth families to our consulting business. For both our portfolio management and consulting businesses, having a good custodian has been invaluable. As recently as a year or two ago, few clients may have thought about the financial stability of their firm. Today, obviously, many clients do.

Fidelity helped us understand and address many issues associated with making the transition to an RIA, assisted us in setting up our technology and trade systems and provided help with a branding and marketing strategy.

We're happier working as our own independent company, and I believe our clients are, too. We offer them a broader range of investment options at a lower fee schedule than we did in the past, with greater objectivity and transparency. They have thanked us by bringing over additional assets and referring new clients.

There's no denying the hard work involved in going independent. The first few months required many seven-day work weeks for my father and brother and me, as well as all of our employees, as we developed policies, learned new systems and brought over client assets. We now wear many hats — portfolio manager, consultant, client relationship manager/planner, human resource manager, owner, marketer, etc. — although, to be honest, we were already working long hours and performing many of the same functions at our broker-dealer.

But in the 18 months since we've left the wirehouse environment, we've never looked back.

Kenneth R. Heck is chief financial officer and senior director of portfolio management for Heck Capital Advisors in Rhinelander, Wis. He can be reached at kheck@heckcapital.com.