Finding the clearest breakaway path toward independence

Experts weigh in on how and when it makes sense to go the RIA route

While the lure of independence might seem like a constant drumbeat across the brokerage industry, insiders warn to choose any kind of breakaway move carefully and never cut corners on due diligence.

“What’s most important is an honest and thoughtful assessment of your core competencies, which means knowing what you think you’re good at,” said Rick Dennen, founder and chief executive of Oak Street Funding. “Understanding what it takes to be independent and starting from scratch, versus joining a platform is something you need to do a lot of due diligence on,” he added.

Dennen was speaking Wednesday as part of panel discussion for the virtual GoRIA summit, which was geared toward brokerage representatives who are considering a move toward independent financial advisory firms.

Along those lines, the session made it clear the options are varied and the decisions are rarely as straightforward as just walking out the door with all your clients.

“You have to ask if you, your team, and your partners are entrepreneurial, because the right answer is being honest with yourself,” said Charles Paksi, director at Altium Wealth Management.

While the trend toward independence has been building for years, the growth of the registered investment advisory space has been evolving to the point where breakaways now must weigh the pros and cons of where they want to land.

There is pure independence, which means setting up a business, registering with regulators and handling everything from compliance and technology to marketing and payroll. And then there’s the other end of the spectrum of the so-called tuck-in to an existing platform and RIA.

“One of the pros of starting your own RIA is you get to determine how to organize and tailor your business, and decide on the risks you’re willing to take,” said Marilyn Miles, vice president at National Regulatory Services.

“The negative of starting your own RIA is you are responsible from a compliance standpoint for all of that,” she added. “But if you join an existing RIA you are stuck with what they have.”

Ray Adams, regional director of the Raymond James RIA custody business, said going independent is “the biggest decision you will make in your career.”

“If an adviser is looking to set up an RIA the question is whether they have the entrepreneurial DNA to be a business owner,” he said. “Do you [go independent] anchored to an independent broker-dealer, or do it as an independent RIA? With all these great vendors and third-party firms out there, there’s an opportunity to go independent and outsource things like technology stacks, operations, back office, and asset management.”

Adams said the decision to breakaway comes down to answering the following questions: Why do it at all, why do it now, and with whom do you partner?

WHAT SIZE?

There is also the issue of the right size for a breakaway adviser. Paksi said before jumping ship toward independence advisers should be thinking about where they expect to be down the road.

“The layers of complexity with compliance and technology will only increase,” he said. “If in five years you don’t plan to be at $1 billion under management, you should have a plan to tuck in.”

Adams pushed back on the $1 billion figure, suggesting success could be realized with much lower growth aspirations, but he acknowledges the power and appeal of scale.

“Many advisers are realizing they’re having a challenge to scale the business to where they want to be, but that doesn’t mean you have to have $500 million to go independent,” he said. “If you’re going to be smaller, or a lifestyle practice, or maybe it’s a second career, you have the opportunity to tuck in somewhere. And if you’re under $100 million and without the desire to scale you can register with your state, but scale is the name of the game in our industry and you will continue to see tremendous consolidation.”

Chuck Failla, principle at Sovereign Financial Group, touched on one of the nuances of deciding where to land in an age of rapid consolidation.

“On the independent broker-dealer side, they will do it all for you; all the compliance, all the technology will be in place,” he said. “Or you could tuck in at an existing RIA and it will look and feel just like the IBD experience. So, RIA is not an all or nothing decision.”

On the topic of bringing clients and their assets with you as part of the transition toward independence, Adams put it bluntly. “If an adviser can’t bring 80% or more of the business with them it’s a colossal failure,” he said.

“If an adviser then decides to make a move and cannot move a majority of the business, they have other systemic issues.”