I can understand why five or 10 years ago, most wirehouse financial advisers would look upon a transition to a registered investment adviser as unattractive. Back then, commissions from product sales, and a more transactional focus in general, would make the change to a mostly, if not entirely, fee-based environment fairly problematic.
Now the environment is much different.
The wrap-fee business is growing all the time within wirehouses and is now a significant part of many advisers' book of business. This means that wirehouse portfolios and billings are much closer to an RIA model than ever before, allowing for an easier transition.
Prior to joining the ranks of the independent, I worked at a wirehouse. I am not ashamed to admit it.
Although somewhat blasphemous to say now that I am in the RIA world, my five years at Merrill Lynch were extremely educational and, in fact, quite enjoyable.
There are few places in the world where one can go to learn more about investment and insurance products than a wirehouse. As with all places, there were bad elements, as well, but it is a mistake to disrespect the people and opportunities within a wirehouse.
I worked with a number of smart, well-educated and genuine advisers at these firms who care a great deal about their clients and consistently look out for their best interests.
There is significant talent at the wirehouses, and many RIAs are looking for high-quality people to help fuel future growth. So why is it relatively rare for a wirehouse adviser to move to an RIA?
Is it cultural? Is it the upfront payments — really forgivable loans — or “checks” that wirehouse advisers receive to leave one firm for another or as a retention bonus to just stay at their firm?
I think the answer is yes to one or both of these questions for some advisers. But I also think the RIA path would be considered more attractive to wirehouse advisers if they were better educated about the benefits they could receive from both a service model and compensation perspective.
PROS AND CONS
It is important to examine the key issues, and pros and cons, before considering a transition to an RIA. And although we often say that decisions in life are “not about the money,” they generally are, so let's have a look.
When I was at the wirehouse, the firm's grid entitled me to about 45% of my production, which was lower than my revenue — a constant source of frustration that doesn't happen in the RIA world. That figure, after firm deductions, was really closer to 33% (what I actually took home).
The combination of a fixed salary, any revenue share, and profit distributions at RIA firms are at least equal to, if not greater than, wirehouse payouts. So for argument's sake, let's consider annual compensation to be a draw.
That brings us to the forgivable loans, also known as checks. Paid out either as an incentive to move from one firm to another or as a retention bonus to stay at the current firm, they can generally equal up to three times trailing-12-month production.
For me, when I left Merrill Lynch, my production was well over $1 million, so my loan amount would have been over $3 million — clearly a lot of money.
Although this would have been paid to me immediately, it wouldn't truly be earned until after seven or nine years, as it is forgiven over time. Not a big deal unless an adviser wanted to leave at any time during the seven or nine years, and then he or she would have to pay back any amount not previously forgiven.
Let's compare that with moving to an RIA and getting equity in that firm.
In my circumstance, when I joined Highline Wealth Management, I received some equity in the firm. Although it was not easy to quantify, we calculated that the value of my ownership interest in the firm was about equal to what my loan amount would have been if I had moved for a check.
Although the value was in equity and not cash, it appeared equal to me. And over time, I think this equity stake now has almost doubled in value.
Would my cash have doubled in value over the same time period if invested? Who knows, but that isn't what is truly important.
What is important is that the total compensation received by a wirehouse adviser in moving to an RIA is at least equal to or could be even more than what they would receive in moving to another wirehouse or just taking a retention bonus. Again, we could consider this a draw.
The RIA world is growing rapidly, and many firms including my own are looking for high-quality people to further that growth.
In the past, wirehouse advisers, by the nature of their business, didn't transition easily from one model to the other. That is very different today, and the RIA model could be extremely rewarding to the right wirehouse adviser.
But the decision by a wirehouse adviser to stay in that model or transition to an RIA model is a complex one. The factors listed above, and more, should be considered.
Even after all that, two people looking at the same circumstance could still come to opposite decisions.
For me personally, in looking at my client base, it became clear that many of my most successful folks were the owners of their respective businesses. This was the path I needed to emulate, as I felt, to be truly successful, I needed to work for myself.
At Merrill Lynch, as just another random employee, that was never going to happen.
Advisers should review their options carefully. All things being equal, if the reasons for joining or becoming an RIA are suitable, maybe it is time to take the leap.
Bill Schwartz is a principal and a financial adviser at Highline Wealth Management.