Are You Really “Independent” Before You Have Your Own RIA?

Thursday, May 19, 2011 09:16
Are You Really “Independent” Before You Have Your Own RIA?

Tags: independent broker-dealers | Merrill Lynch | registered investment advisors

Most advisors want more freedom. But for most, incremental evolution is better than a full-fledged revolution.

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It seems like everyone in the industry is talking about independence like it’s an all-or-nothing thing.


On one side of the coin, Sallie Krawcheck has been touting the relative independence of Merrill Lynch advisors as the reason why so few of them defect to smaller brokerage firms.


And on the other, die-hard fee-only mavericks insist that until you give up your securities license and open your own RIA, you’re still taking orders from somebody and so can hardly qualify as independent.


I addressed the Krawcheck argument last week, but in response to commentator brentb843, yes, it looks like Merrill is treating the word “independent” just like “advisor” or any other marketing term.


That’s a shame, because “independence” actually means something very real to the people who’ve built their business almost completely on their own.


Whether it’s a one-desk office or a national network, when you’re the boss, freedom isn’t just a marketing term.


That said, the jump out of the marketing-term mentality into real freedom doesn’t happen overnight.


A few advisors can leap straight out of the wirehouse into their own RIA, but it takes an enormous amount of work and planning.


They’ve got to transition their revenue streams to some kind of wrap fee-based arrangement that makes sense -- or else find an independent brokerage relationship to handle the commission business left on the table.


And they’ve got to leap the psychological and logistical hurdle of going from being a relatively petty officer in one of the most prestigious corporate ships in America to being the sole captain of a comparatively tiny boat.


Going independent goes beyond getting new letterhead. You need office space, furniture, support staff, technology.


You need a business plan and a procedure manual so the business can go on without you if you ever want to sell, or just take a vacation.


You need E&O insurance. Naturally, to get it, you need to know what E&O insurance is -- back at the wirehouse, all that was handled for you by endless support staff.


That’s a lot of work to tackle all at once, which is why a lot of the advisors I work with end up going to an IBD first to get that first bit of freedom and learn the ropes of the independent world.


It’s not exactly the same as being the complete master of your own destiny. But even with your own RIA, there are always trade-offs and compromises anyway -- you’ll have to make priorities and tough choices, depending on where the industry goes and where your clients take you.


And to answer another question, it’s not like your career stops there. If your business evolves in a fee-based direction, you might end up investigating the firm’s captive RIA or, if it doesn’t fit your needs, start your own.


Even if it doesn’t, you’re still a free agent, not an employee. Your relationship with an IBD lasts only as long as you want it to, and if you don’t like the conditions, you can leave and take your clients with you.


Whatever it’s called, that’s freedom. Follow that and ignore the people who want you to focus on “independence” as a marketing term, and odds are good you’ll have a great and rewarding career.

Comments (4)

I think no one is buying Mr. Shanks' attempt to paint 'independent' is used to define IBD reps as entrprenuers. These reps use it to paint the wirehouse as proprietary product mills and Krawcheck was right to call them out on this.

Shanks' 'captive' RIA reference makes my case.

E&O Insurance as the hurdle to not establishing your own RIA? Really? The process takes like 30 minutes and Schwab, TD, etc all have relationships to help their RIA's get it.
brentb843 , May 20, 2011
Ryan - Great points about independence. "Advisors", whether they are fiduciaries in the truest sense or not, now have a range of ways to access an independent business model. Yes, the custodians and other market participants can point advisors in the right direction for resources, but generally the advisor is solely responsible for pulling it all together. As you say, the IBD route is good option as some of these firms can lead the advisor down the road. We've experienced more advisors desiring to do their own driving, but still wanting to have the support system in place that provides open access to investment management, custodians and other resources, without the heavy maintenance that usually comes with being an independent RIA. Your point about having a plan is so crucial. We see too many advisors that are stuck because they've not considered what their practice will look like 3 to 5 years into the future and their current b/d or provider can't support them.
jcannon , May 22, 2011
Hello Brent -- thanks for reading. If it helps, I'd probably call IBD reps "contractors" instead of "entrepreneurs." It's a fine distinction but I think it gets at my real point, which is that I see freedom in the industry as a relative proposition. Some advisors can leap straight into their own RIA. Most of the people I talk to need a little help. (You'd be surprised how many I still run into who don't know the first thing about E&O.) For those who need a little help, the evolutionary approach that Jim Cannon lays out is a way to get out of the wirehouse without getting in over their heads.
finetoothryan , May 24, 2011
Ryan - don't get me wrong, I established an RIA after first being at a 'halfway house' IBD for a few years. I am addressing the notion of 'independence' which is a myth for IBD reps.

I also wholeheartedly agree that an RIA is a difficult proposition to most. In fact, when/if more enhanced RIA examinations occur, many firms will rethink their ability to maintain their own practice.
brentb843 , May 24, 2011

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