When asked by financial advisers if it's too expensive to go out on their own, set up shops and create unique brands, I tell them they will definitely incur costs but they aren't necessarily prohibitive — especially for those with an entrepreneurial mindset.
There are three initial factors advisers should cover in their startup estimates — front-end setup costs, the expense of outfitting your office to reflect your brand and the cost of moving your business.
How to estimate setup costs: The overall cost will ultimately depend on the number of staff members required to run the business.
For a financial adviser with $500,000 in gross dealer concessions and one full-time assistant, the costs to set up the office would likely come in between $15,000 and $20,000 to cover the following:
• First and last months' rent of an appropriately-sized office space
• Equipment costs (desks, computers, printers, phone systems)
• Creating a DBA for the private brand name
• Business cards, signage
How to plan your office space: Don't underestimate the importance of your office space. Part of the way clients are going to define your overall offering is by their impression of your office space. How will you create an atmosphere with the décor and a location that looks professional and inspires
trust?
A bigger office doesn't necessarily create a bigger impact. In fact, finding a turnkey space that does not require custom design and construction will cut down on startup expenses.
As a rule: allot 300 to 400 square feet per person. For a two-adviser team and a receptionist a 1,200-sq.-ft. space should provide plenty of working room — especially if it includes a conference area.
How to calculate the cost of moving your business: The cost of transitioning clients and their assets over to the new affiliation will depend on a number of factors.
• How portable are the assets? How much can reasonably be assumed to transfer over? Will assets have to be liquidated to transfer from one firm to the other? The assets expected to remain with the current affiliation should be considered an expense.
If affiliating with a new broker-dealer, what are the associated costs?
• Registration costs will include closeout fees as well as fees for re-registering with the new firm in all states.
• How much will it cost to set up the new company on the broker-dealer's technology platforms?
• Will errors-and-omissions insurance be covered by the broker-dealer? If the adviser is responsible, this coverage could amount to an annual cost of $3,000 to $5,000.
• Will termination fees be passed along to the client? Will the adviser pick them up or will the broker-dealer offer a credit as part of the transition package?
• Staying on the same clearing platform can also reduce the termination fees.
Hanging your shingle as a sole proprietor is an expensive prospect. For advisers without the desire to create a unique brand, tucking into an existing office can be a less expensive way to work as an independent adviser. Once advisers determine their preferred routes and the associated startup costs, the next step is to determine the probable initial loss in production over the course of the next three years.
With this final estimate in hand, the adviser can measure whether the earning power and professional satisfaction created by the change outweighs the cost of moving.
Tom Daley is the founder and chief executive of The Advisor Center, an online resource for advisers seeking to transition or further develop their practices and careers.
