Alan Harter's clients started suggesting more than two years ago that he should cut his Wall Street ties and become their independent investment adviser.
He finally took their advice and resigned from Morgan Stanley Smith Barney LLC. Last month, he opened Pactolus Private Wealth Management LLC and is working 18-hour days to deliver on his vision for the new firm, which is named for the river in Greek mythology where King Midas washed his hands, turning the riverbed to gold.
“You only can do this if you have put enough thought into it,” Mr. Harter said. “Independence and objectivity cannot just be tag lines that you use on the web page.”
Although no one can predict whether Mr. Harter, 41, will have the Midas touch for his clients, experts say that this is a great time for financial advisers to go out on their own.
The technology, the range of service models and the wealth of companies available to help independent advisers are unprecedented. Even the stock market — with two years of positive returns — is cooperating.
“For advisers with an established asset base, going independent is probably easier than ever,” said Scott B. Smith, an associate director at Cerulli Associates Inc.
Independent advisers have a full range of effective customer relationship management systems from which they can choose that can coordinate work flow and communication with clients. Investment analytics and asset allocation tools also have advanced in recent years, as well as data storage systems that meet compliance needs.
Firms such as Dynasty Financial Partners offer a tech and services platform for independent advisers who have left established brokerage firms. For even more support, advisers can join an independent broker-dealer, such as Commonwealth Financial Network or LPL Investment Holdings Inc.
Independent broker-dealers also offer their advisers compliance services, which increasingly are adding to the costs of running an advisory firm, as well as marketing and even office help. These firms are constantly coming up with new support services.
The number of financial advisory firms registered with the Securities and Exchange Commission has increased over the past decade. There are 11,643 firms, up from 7,322 firms 10 years ago, according to the Investment Adviser Association.
“I don't see the general demand curve going down any time soon,” said David Tittsworth, executive director of the association.
However, some think that the industry could see
consolidation that would slow the growth in the overall number of firms.
$10 TRILLION BUSINESS
Altogether, the financial services industry handles about $10 trillion in assets, with the majority still managed by wirehouses, banks and insurance broker-dealers, according to Cerulli data.
But that is shifting.
About a third of assets are controlled by independent broker-dealers, registered investment advisers and dually registered, or hybrid, advisers. By the end of the decade, assets controlled by independents will top the wirehouses, Cerulli's Mr. Smith said.
Of the independents, dually registered advisers are expected to grow the fastest, mostly by taking assets away from wirehouses, he said.
Similar to the way that risk is a factor in deciding the appropriateness of an investment for a client, an adviser wondering which path to take toward independence has to consider his or her own penchant for risk.
“The RIA model has the highest risk and the highest reward,” said John Furey, a consultant with Advisor Growth Strategies LLC.
Independent advisers, of course, earn the greatest payout. But they also have to pay for all their expenses and be willing to run their own businesses, including the responsibilities of finding office space, staffing, choosing and updating technology, creating a brand and marketing materials, and selecting investment capabilities, Mr. Furey said.
“You have to have the desire to own a business and the acumen to run it,” he said. “If you aren't a great entrepreneur, you might be better off finding a strategic partner or joining an RIA.”
It almost always makes sense economically for advisers to be out on their own, Mr. Furey said.
“But you have to be in tune to whether you want to do these activities or not,” he said.
The payout for advisers who join an independent broker-dealer will be less than at an RIA because a firm such as LPL “isn't running a charity,” Mr. Furey said.
Independent broker-dealers vary in the size of the commissions that they take and at least one, Capital Analysts Inc., instead charges advisers an annual fee to pay for custody, technology, licensing, compliance and other services.
Different models work for different people, consultants said.
“Successful firms are going to be the ones that allow their rainmakers to spend more time with clients and grow the asset base,” Mr. Smith said.
Advisers who go independent today are different from those who broke out on their own a decade ago, said Mark Elzweig, who heads an eponymous national executive search firm that provides recruiting services to the asset management community.
It used to be that only brokers who couldn't make it at a wirehouse went independent, Mr. Elzweig said.
Not so, today.
75% WILL SUCCEED
“Independence is now an option for people with solid practices,” Mr. Elzweig said. He estimates that at least 75% of advisers who break out on their own succeed.
Of course, there are some valid reasons why wirehouse advisers might want to stay with their firm.
For instance, representatives who stay at wirehouses are likely to inherit clients and assets from other advisers who leave, said Jonathan Henschen, a recruiter with Henschen & Associates Inc.
Additionally, if advisers have many institutional clients, they may need a big name behind them to retain control of those assets, he said. Or, if they do a good deal of new-issue or other investment-banking-related business, the wirehouse may be their best choice, Mr. Henschen said.
“Not everyone is cut out to go independent,” he said.
For Mr. Harter, the first month of running his own firm has meant meetings with clients and interested families — and also dealing with frustrating operational details.
“It's a major move when you're used to being in a place where everyone does things for you,” he said.
Mr. Harter is looking to attract ultrawealthy families — those with net assets of at least $25 million — from around the world. Pactolus is partnering with Dynasty to have access to multiple custodians and investment managers, he said.
Mr. Harter expects that Pactolus will set up 10 offices, with more than half outside the United States, providing highly customized services and a collaborative environment for clients.
“I want this to be our legacy in 30 years,” he said.
E-mail Liz Skinner at [email protected].
