Three forces that will accelerate the drive toward independence

I’m not normally one to make predictions, but this one is a no-brainer.

The movement of so-called breakaway brokers toward independence is going to accelerate in the years to come.  Wirehouses are not in danger of becoming an endangered species, not yet anyway, but the number of advisors departing their hallowed halls will increase.

The reason is simple.  The environment has changed sufficiently to make the significant effort involved in leaving the Mothership worthwhile.

Freedom

The primary driver of the movement to independence has always been the desire of advisors for more freedom and autonomy.  That is still the case.

Schwab Advisor Services released its Supported Independence Study in May 2024 and it contains some interesting insights.  The survey covered advisors who had already made the leap to independence and those who were contemplating doing so.

The top reason for considering independence, cited by 98% of both groups, was the freedom to do what’s best for clients.  Other factors included:

• freedom to provide more personalized service
• freedom to control communications and marketing
• freedom to make sure clients are taken care of well into the future

All these factors were cited by at least 94% of the advisors surveyed.

These results are encouraging.  The major motivator for advisors going independent is the desire to provide better service and a better overall experience for their clients.

But this desire, alone, was not enough to increase the flow of advisors leaving the wirehouses and large brokerage firms beyond a trickle.  Only the most intrepid advisors were willing to brave the difficulties on the path to independence in the name of freedom.

Value Creation

The path to independence always brought along with it the promise of a higher payout.  But it also brought offsetting expenses and headaches that arguably made the transition a wash financially.  For the most freedom-seeking advisors the tradeoff was worth it.  For most, it was not enough to motivate them to action.

Now, however, the balance has shifted.  It’s not just the prospect of a higher payout.  There is now a real opportunity to create an enterprise that has a significant realizable value.

The industry is awash with acquirers and funding sources of all shapes and sizes.  Many of them either are, or are backed by, well-funded private equity firms. 

This has created a robust and competitive market for well-run advisory firms.  Typically, at the big brokerage firms, when you walk out the door, you leave most, if not the entire value of what you created behind.  In the independent space, you may be fortunate enough to enjoy a wealth-creating payday even before you are ready to retire.

This market continues to grow and thrive as new entrants and current players watch valuations and the number of transactions rise.  A recent report by Echelon Partners documents that RIA dealmaking rose 20% in the first quarter of 2024 compared to the same quarter in 2023.  It was the second-most active first quarter on record.  

This financial incentive is likely to drive additional movement toward independence.  Advisors who weren’t motivated enough solely by the prospect of more freedom may find that the possibility of a significant wealth-building event tips the scales.

Guidance and Support

Early converts to independence were true pioneers.  They blazed a trail that few had followed, and they did it with very little support.  Having a pioneering spirit is no longer necessary.  The path is well worn and crowded with those offering help and guidance.

An army of consultants who specialize in transitioning brokers to independence has mushroomed to meet the growing demand.  They are quite experienced and can bring clarity to almost any transition-related issue.  They are like coaches with a game plan.

There are also support offerings that address virtually any issue an advisor could encounter on the path to independence. 

• Every major custodian has a cadre of transition specialists

• TAMPs provide outsourced investment, back-office, and technology support

• Technology firms and consultants will help design and build a tech-stack

• Compliance consultants will make sure all regulatory issues are covered

• Business coaches, study groups, and marketing gurus abound

An advisor who wants to journey down the path to independence need not be alone.  In fact, selecting from among all the support options may be one of the biggest challenges.

No End in Sight

The SEC recently released its statistical analysis of RIA growth through December 31, 2023.  From 2009 to the end of 2023 the number of RIAs grew by 35% from 11,458 to 15,441.  This increase occurred despite the increasingly frenzied pace of consolidation over that period.

This suggests that despite consolidation at the top of the RIA food chain, new firms are entering the space faster than they are being swallowed up.  The tailwinds are in place to ensure the continuation of this trend for the foreseeable future.

The first wave of pioneers from the big brokerage firms were like the early settlers crossing what is now America in their covered wagons.  Their dreams of a new life without the constraints of established society were enough to propel them forward despite the hardships and uncertainties.

Now the tracks have been laid and those seeking a new life of independence can make the crossing in the luxury of a train car.  Although still challenging, their path forward has fewer obstacles and the potential to thrive at journey’s end is greater and more obvious. Expect the migration to continue.

Scott MacKillop is Strategic Advisor at GeoWealth Management, LLC.  He is an ambassador for the Institute for the Fiduciary Standard and a 48-year veteran of the financial services industry.