The issue of how to practice is a big one for financial advisors. Regardless of whether you’re starting a business from scratch or moving an existing client book from one firm to the next, the decisions you make will impact your earnings potential and the mood of your office. Is it better to work on a commission basis or collect fees? Will your business grow faster if you join a large brokerage firm or an independent broker/dealer? Should you consider starting your own Registered Investment Advisor (RIA)? A young person entering the financial planning profession will likely be overwhelmed by these choices. All of the recent financial turmoil has only added to the confusion by causing big shifts within the industry. Some of the older and more established firms are disappearing through consolidation and bankruptcy while newer and more current business models are taking over. This hasn’t gone unnoticed by the financial media. Nearly every publication which is specific to the financial planning profession has been doing feature stories on business models for financial advisors. So I figured, why not chime in?
Financial Advisor Magazine is reporting this month that recruiting growth at the largest independent broker/dealer Linsco/Private Ledger (LPL) climbed 160% during the first two months of 2009. The article also notes that the percentage of recruits coming from large wirehouse firms has grown from 30% in 2008 to 42% so far during 2009. Besides the general advantages which other firms might offer in the way of service support and compensation, wirehouse advisors are citing ‘implosion’ at their current firms and more turbulent environments in which conducting business can be very difficult.
While LPL may be smart in their recent positioning to attract new and fleeing reps, they have plenty of competition. Besides independent firms, banks and insurance companies are also hoping to scoop up some of the 2,000+ advisors who switch firms each month.* The reality however is that only the independent channel is truly picking up steam. The explanation for that likely stretches beyond successful marketing and into the actual needs of advisors being filled. Independent firms may offer an advisor much more flexibility than a bank or brokerage firm. The ability to customize one’s business model along with types and levels of support and compensation is extremely appealing to many advisors.
For advisors seeking the maximum payout, they may wish to establish their own RIA and handle statements, trading, marketing, compliance and other support issues themselves. For those willing to share a bit of the bread, picking a broker/dealer firm with the right mix of payout and back-office support may be the better way to go. As many former wirehouse brokers can attest, the transition to independent is anything but easy. Research shows that on average about 30% of an advisor’s book of business never makes it over to a new firm during transition.** Some clients take the advisor’s move as an opportunity to find somebody new at a different firm. Others may like the firm and keep their accounts there but find a new rep. This is why transition support and careful planning are crucial when an advisor decides to make a move. You don’t want to end up losing half your clients in the shuffle.
Overall, I think tracking the exodus of advisors from wirehouse firms can teach us a lot about where the business is headed. At this point the most apparent trend I’m following is the movement into independent b/d’s and RIAs. It seems logical that an advisor would want to control his or her own destiny after years of working for big box corporate firms. The result should be happier advisors who are better prepared to serve the expanding needs and demands of their clients.
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*Discovery Database Research: Financial Advisor Magazine (April, 2009)
**Cerulli Associations: Independent Broker-Dealer Magazine (April, 2009)