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Going Independent? 11 Questions Wirehouse Advisors Should Ask
by: John Stuart and Mag Black-Scott
Friday, July 5, 2013
Partner Insights

When wirehouse brokers consider shifting to independence, they need to weigh a lot of factors and ask a lot of questions. John Stuart and Mag Black-Scott of Beverly Hills Wealth Management provide 11 questions that should be top of mind for advisors before making the move.

1. Technology: How is the RIA Supporting the Technology Ecosystem?

RIAs thrive based on their partnership network of Service applications and tools.  RIAs that offer a full suite of Wealth Management services can have over 10 feature rich applications from Financial Planning, Insurance, Fixed Income Inventory, Employee Benefits, Office Productivity, Performance Reporting, etc.  The RIA is responsible for securing access to these applications and orchestrating these tools in a secure and easy to use environment for advisors and clients.  This is not a simple process – ask about compatibility, ease of use, single sign-on and security across all applications.  A technology migration can be the most challenging aspect of any transition.

2. Employment: Will I be a 1099 or W2 Employee?

Advanced RIAs can leverage Professional Employer Organizations to manage their payroll-roll back office, benefits, retirement plan administration, and much more.  PEO’s typically extend their services to W2 employees offering group healthcare rates and discounted 401K administration.  1099 employees will be challenged with costs associated with individual benefit rates and additional federal and state self-employment taxes which can cost the 1099 individual an extra 7% of their taxable wages.   Health care costs increased on average 10-12% for group rates and much more for the individual plan.   1099 individuals can enjoy the tax write-offs of business related expenses but once again, advanced RIAs have developed Institutional type payroll systems offering Business Development Allowances that allow W2 employees to deduct expenses from their revenues pre-tax.

3. Platform Costs: What are the Service and Platform Haircuts of My Existing Separately Managed Accounts, Unified Managed Accounts, Third Party Strategies, and Other Asset Management Services?

Most wirehouses will have a fixed haircut on SMAs of 40-50bps based on their large distribution channels.  RIAs can typically access more separate managers than a trimmed set of managers in the wirehouse but will pay a much higher haircut.  It is important to find out how you are paid on non-discretionary accounts or accounts where the advisor is not acting as the portfolio manager.

4. Payout: When, Where, and How Will I be Paid?

RIAs have tried to simplify payout structures as much as possible primarily because they lack an army of payroll resources.  Most RIAs will deduct client Fees on a quarterly basis which are then passed to the Advisor on their pay stub.  Some Innovative RIAs have designed Practice Management systems to proactively surface end-to-end revenue information.  Setting Key Performance Indicators in the varies Income Statement items such as Fees, Commissions, Insurance, and hourly consulting revenue is important to measuring the success of a practice.  RIA Revenue and Income Dashboards will be an industry trend in the next few years. 

5. Product Ecosystem: My Wirehouse Has Trust, Insurance, Annuity, and Structured Product support. What Resources Are Available to Me for Maintaining This Level of Support?

Adding partners to the RIA service eco-system requires more and more oversight and relationship management.  Smaller RIAs often leave revenue on the table because they don’t have the resources to add additional revenue related partnerships like Trust Companies and Capital Markets Trade-Away relationships.  Nimble and hardworking RIAs have defined these relationships in advance to support all of the middle office back and forth required to adequately support clients.

6. Client Service Support: I Like the Independent Space Because I Can Access the Entire Financial Services Market.  How Does the RIA Manage and Scale this Massive Addition and Products, Tools, Services, and Client Features?

How does the RIA mange client support, operations issues, compliance, and other back office type tasks?  Does the Compliance manager also support Prime Brokerage requests, payroll, reception, and new accounts?  Successful practices have defined workflows and process broken out by functional flavor.  Small businesses need surgical, utility type employees but need the right amount of resources to service the business in an accurate and timely manner.  The more responsibilities the Operations Manager has been delegated will slowly reduce the client and advisor service levels.

7. Trading Support: My Clients Have Fee and Commission Accounts with More Than Stocks, Mutual Funds, and ETFs.  What Capabilities Will I Have in More Complex Markets Like Fixed Income and Alternatives?

(1) Comment
This article assumes that the advisor is joining an RIA, not an independent broker dealer. If the advisor is joining an RIA he may also be concerned about a place to put his securities licenses in order to capture trails and be able to write variable annuity business. Many wirehouse advisors are interested in a hybrid type of situation unless they are already doing 100% fee-based business.

Other concerns that are important include the culture of the firm they are joining, the compatibility of the money management options, the opportunity for a succession scenario, and the opportunity for an equity position within the firm.

Posted by Mitch V | Monday, July 08 2013 at 2:03PM ET
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