The tumultuous environment of the past few years has done little to dampen independent advisory firms' optimism. According to the 2010 RIA Benchmarking Study conducted by Charles Schwab, 84% of participating advisors plan to grow moderately or aggressively over the next five years.

One way a growing number of firms are fueling that growth is by recruiting team members from the stream of wirehouse advisors who have decided to move toward independence but prefer to join an established independent firm instead of starting one from the ground up. In fact, through the end of October 2010, approximately 35% of the advisors who have chosen independence with Schwab Advisor Services joined existing RIA firms.

The numbers are impressive. Cerulli Associates recently predicted that wirehouses' share of client assets under management will fall from 40.5% today to 33.4% by 2012. Aite Group found last spring that only 15% of wirehouse advisors do not have a plan to break away.

Moreover, the breakaway teams joining established firms are getting larger. The average "join" team had $97 million in assets under management, nearly double the previous year's $52 million. Tiburon Strategic Advisors has predicted that some $200 billion in assets will flow out of wirehouses in 2010 in the hands of breakaway advisors.



The movement of wirehouse advisors to RIAs will continue for some time. That means existing firms need to consider the pros and cons of taking in breakaway advisors. Beyond general growth, they bring many benefits:

* Diversifying revenues. The most compelling advantage is to bring in some of their loyal clients-creating additional revenue while also diversifying your firm's revenue stream across a larger number of clients. Client retention for advisors who turn to independence tends to be strong. According to a July 2010 report from the Aite Group, 50% of breakaway advisors from large wirehouses take 75% to 100% of their books of business with them.

When Hank McLarty, founder of Gratus Capital Management in Atlanta, recruited former wirehouse advisor Brian Doe in early 2009, Doe came with 85% of his clients. "Brian's assets had a meaningful impact, especially back then, when we were in the market downturn," McLarty says.

* Maximizing operational capacity. More clients and assets help advisory firms use existing operational capacity better and make fixed costs go further. This can boost profitability and allow more reinvestment in the business. That's what happened at Gratus.

"Our team already had additional capacity, so we didn't have to hire any staff when we recruited Brian," McLarty says. "We added revenue without adding a nickel of operating cost, so all of that revenue has gone directly to our bottom line. That's helped us invest in a new trading system and an advanced online planning tool."

McLarty says that since adding Doe to the firm, Gratus has brought on another advisor and plans to add more. The added efficiency and talent have helped an environment to flourish where advisors can focus on their clients and grow their businesses.

* Getting a jump on succession planning. It is never too early to think about a succession plan. But succession planning should not be limited to older firm principals already contemplating retirement. Adding experienced wirehouse advisors can help principals line up suitable successors.

By getting a succession framework in place, advisors can put their clients at ease, solidify the future direction of the firm and create a more valuable practice. In other words, succession planning can serve as both a growth strategy for now and an exit strategy for later.

* Enhancing client services with new expertise. Recruiting a breakaway advisor clearly adds assets and clients. But it also adds expertise and experience in rainmaking, client relationship management and other areas that can enhance and diversify the suite of services available to clients. A breakaway advisor's skill set can build on capabilities your firm already possesses or fill in gaps in your offering.

Gratus, for example, recently brought on a new client in part because Doe was able to help the investor with a particularly complex annuity she owned. What's more, Doe's reputation was strong among several important CPAs and attorneys who became more interested in doing business with Gratus.



While taking on a breakaway advisor or team can bring a number of benefits, the process is not without challenges. So as with any business initiative, it is important to evaluate carefully the decision to add, based on your firm's circumstances and its short- and long-term objectives. Here are a few key factors to consider:

* Objectives and business strategy. Hiring a breakaway advisor is worthwhile only if he or she improves your firm's ability to meet its strategic goals and serve clients. So your first step should be to define your business strategy and identify strengths and weaknesses.

For example, are there gaps in your desired value proposition that need to be filled? Do you need more experienced relationship managers to meet the increasingly complex needs of certain clients? Is the lack of a particular expertise or specialty preventing you from taking full advantage of the growth opportunities your clients present?

* Culture. Deciding whether to recruit a breakaway advisor can be a lot like deciding whether to get married. Make no mistake: A new advisor will be your new partner even if there's no equity stake involved. So you need to feel comfortable with that person's philosophy, attitude and overall approach.

To clarify their philosophy and culture, some firms develop presentations that spell out exactly who they are. Others generate a list of "truths" that encompass the way they have decided to run their business. One advisor I know even decided to put his firm's five truths on its business cards. Whatever the process, these are tangible ways for firms to assess themselves and any potential additions to their team.

* Operational capabilities. One big reason breakaway advisors join existing RIAs rather than start their own firms is to take advantage of established operations-everything from technology infrastructure to compliance. Part of the process of evaluating a potential advisor or advisor team should include examining the potential newcomer's operations and principles to determine whether it can fold into yours without investing substantial time, effort and money.

Some good questions: Can your firm support a new advisor's product mix, such as block or high-volume trading, or a commission-based business? How does the advisor handle client information? Does your firm have the human resources infrastructure to recruit and integrate a new advisor or team of advisors? If you identify any gaps, analyze whether the cost of adding an advisor would be covered by the value that person would bring to the firm.

In today's changing market and economic environment, independent advisors face an increasing demand from clients for hand-holding as well as complicated financial planning and investment management. But with these challenges come significant growth opportunities-opportunities the addition of breakaway advisors or advisor teams can help an RIA realize.

Finding these people and integrating them into your group can be complicated. But when done properly, the mix can bring clients and assets plus experience and expertise-enhancing your prospects for long-term success.


Jonathan Beatty is a vice president and leader of Schwab Advisor Services' sales and relationship management. He can be reached at

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