For some advisers, money not motivating factor to go independent

Advisers choosing models with the most support forgo up to 25% of profits

Jan 27, 2016 @ 2:09 pm

By Liz Skinner

+ Zoom

Wirehouse advisers looking for independence have choices of the type of firms they create or join – independent broker-dealers, existing registered investment advisers or their own RIA. But the option that eliminates the most business worries will require them to surrender up to 25% more of the profits.

Increasingly, advisers are considering quasi-independent businesses where they join a wealth management firm as a part owner or principal of the firm, according to a Cerulli Associates report from last year. These firms allow advisers to run their businesses independently, but provide enhanced operational, compliance and administrative support.

While figures vary, typically the net profit for advisers joining such firms is about 40% to 50%, said Mindy Diamond, president and CEO of Diamond Consultants, an industry recruiting firm.

Advisers who choose to work as a registered representative of an independent broker-dealer will take home about 60% to 65% in the end, she said. At top-performing solo RIA firms, advisers take away 67% of revenue, while all other solo advisers are taking away about 50% of revenue, according to the 2015 InvestmentNews Adviser Compensation and Staffing Study.

But the decision of what model to pursue rarely hinges on payout.

“If you really have entrepreneurial DNA, you likely won't find the quasi-independent models to be independent enough,” Ms. Diamond said.

(More: Advisers seek independence but less often as entrepreneurs)

At the same time, today more advisers are interested in the quasi-independent models “because they have more freedom and flexibility, but they don't have to deal with the minutia” of running a business, she said.

Advisers Lauren Cosulich and Daniela Pedley spent about two years talking with multiple custodians about how it would work for them to leave Barclays and set up their own business. They estimated profits would be in the 60% to 65% range, Ms. Cosulich said. But instead, the pair joined Summit Trail in August.

“We don't have the interest or the skill set to be CEOs of a business, and we didn't want to have to worry about everything from payroll to technology to ordering paper clips,” Ms. Cosulich said. “We wanted to focus on client relationships.”

The benefits of Summit Trail's professional management and investment platform were more important than any difference in profits for them, she said.

“It was never purely a numbers game,” Ms. Cosulich said.

Summit Trail leverages the Dynasty Financial Partners platform, on which gross income of the RIA typically ranges from 65% to 73%, according to Dynasty spokeswoman Sally Cates. Summit Trail then provides additional business resources for the adviser. She declined to offer the exact payout rate Summit Trail gives its advisers.

At Steward Partners, which uses the Raymond James' platform and support services, advisers earn a flat payout of 50%, plus they receive equity in the company, said Jim Gold, president and founding partner of that firm. That equity is based not just on the adviser's book, but on the performance of the entire firm, he pointed out.

For the majority of advisers who want to go independent, the question is not so much about payout as whether they want the complete business infrastructure so they can focus on clients, Mr. Gold said.

“The question is whether they want to run a business or run their book,” he said.

Ms. Diamond agrees, saying the financial difference between these solutions, all of which offer more independence than at wirehouses, is not significant enough to be the most important factor for advisers breaking away.

The decision comes down to just how independent the adviser wants to be.

“Advisers have to ask themselves whether they are jazzed about finding their own office space and hiring staff and dealing with technology decisions and the like, or do they want it all done for them?” she said.

Other options available to advisers seeking more independence include firms like Focus Financial Partners, where firms join Focus and give up a share of their future revenue in exchange for cash and a stake in Focus; and HighTower Advisors, a hybrid broker-dealer and investment adviser.

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