I work almost exclusively with independent investment advisers. My most typical client is someone who has, for one reason or another, become disillusioned with their current employer or business partner. The three most common refrains I hear from clients and prospective clients considering independence are:
- Restrictions. They feel like they are unnecessarily restricted or burdened by legal or compliance restrictions.
- Equity. They want to be more entrepreneurial and create a business with real equity, and
- Revenue. They don’t want to continue giving up 20-60% of their revenues to their employer or business partner.
Restrictions
The legal and compliance restrictions I hear about most frequently from financial professionals include:
- Inability to Manage Outside Assets for Compensation. Every financial professional knows that a large portion of U.S. individual’s personal wealth is tied up in their employer-sponsored retirement accounts. However, most employers won’t allow them to manage these accounts or provide advice on these accounts in exchange for compensation. If 80% of a person’s wealth is in their retirement account, why would a financial professional spend so much time and energy with that client when their revenue is tied to only a small portion of their wealth? Independence provides solutions to this problem. You can consider retainer-based fees or you can charge asset-based fees for managing these held-away accounts.
- Restrictions on Internet and Social Media Prospecting. Many financial professionals are prohibited from using social media, “Google My Business”, or Yelp for developing business. Obviously, employers have valid concerns relating to record retention and supervision, because they don’t want to open up the floodgates and create a headache for their compliance departments. However, smaller, nimbler investment advisers are able to engage in these activities in compliant ways.
- Prohibition Against Outside Business Activities. Many financial professionals want to engage in outside business activities that could be investment-related. Almost unanimously, most larger firms will prevent financial professionals from engaging in these activities for fear of liability.
- Inability to Serve as Trustee or Executrix. A number of financial professionals want to accept roles as trustee or executrix for longtime clients. I am not aware of any larger firms that permit these activities. These activities can be both personally rewarding and lucrative. Independence allows you to consider performing these services.
Equity
Equity is another important reason financial professionals consider independence. Based on industry-wide studies and my own experience, independent investment advisers are valued at between 1 to 4 times their annual revenue. Larger firms stand to receive upwards of double digit valuations. If you are an employee that renders investment advice at Morgan Stanley, Merrill Lynch, Goldman Sachs, UBS, Wells Fargo, or most other investment advice firms, there is an extremely high likelihood that you are not earning meaningful equity in the company. Chances are you aren’t earning any equity or you might receive some pittance of stock in an employer stock plan. Most likely, if you are deemed successful by internal standards, you will have the luxury of earning bonuses that are intended to serve as “golden handcuffs”. So many financial professionals treat their business like it is already a distinct, legal business, but in reality, they are employees of larger organizations. I find that many financial professionals want to build true equity in their business so that they can leave a legacy, build meaningful value in their business, and have endless flexibility when it comes to succession planning.
Revenue
When I speak to prospective clients, another common reason for considering independence is the potential for increasing revenue. The thought of increasing revenues immediately to 100% is alluring. They all understand they will have increased expenses, but they also understand that they can control their expenses. Many people contemplating independence these days are comfortable with home offices and shared office space. Others are very comfortable with leasing their own space with equity markets at all time highs and commercial real estate at all time lows. Once you have a grasp on expenses, the math becomes quite easy. In terms of typical expenses, the following are the most meaningful recurring expenses: staff compensation, office lease or mortgage, insurance, software and technology, legal and compliance, and advertising. It is very possible for really lean businesses to keep these recurring expenses below $10,000 or $15,000. For more corporate and professional operations, it becomes more difficult to pin down the precise amount of expenses, but common percentages I often hear are between 10-20% of revenue. Every percentage can make a difference between resounding success, break-even, or a decrease in earnings, so it is essential to spend time plotting expenses.
Equity and Revenue Tools
If you are interested in charting out whether it makes sense from an equity or income perspective, Schwab Advisor Services has an interesting digital tool that allows you to compare revenues and equity in a world where you are independent versus your current model. While not perfect, this tool does provide a real sense of how income and equity can change in the independent space.
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I am always happy to entertain free conversations with financial professionals considering independence. Please feel free to call or email me and we can plot out your course to independence.