For wirehouse advisors considering a leap to the independent channel, getting the process right can mean the difference between a smooth landing and a face-flop.
There are hundreds of details to address before advisors can officially hang out their shingle, and there’s a lot at stake. Getting it right is especially important given the thousands of advisors joining the RIA channel on an annual basis. More than 1,600 advisors each year launch about 700 new firms and bring with them about $180 billion in client assets, according to McKinsey, citing industry data.
“There are always going to be factors out of your control, but if you control as many things in the process as you possibly can, it lessens the likelihood of something going catastrophically wrong,” says Grier Rubeling, owner of Advisor Transition Services in Cary, N.C.
Here are six common mistakes that can hobble a transition or cause breakaways to start out on the wrong foot.
Loose lips and other red flag behavior. John Sullivan, managing director and head of network development at Dynasty Financial Partners, stresses the importance of confidentiality. While it can be tempting to share your breakaway plans with Mom and Dad, Grandma and Grandpa, close friends, and poker buddies, it’s not advisable. Keeping transition plans close to the vest is important, because even accidental slip-ups, like a congratulatory email sent to the advisor’s work email, can lead to an advisor’s firing or forced early resignation, Sullivan says.
Also be sure you are using personal email for any discussions related to the new firm. This seemingly obvious detail tends to trip up many exit plans, says Corey Kupfer, founder and managing principal of Kupfer & Associates in Rye Brook, N.Y., who represents breakaways and independent RIAs.
The auto-populate function within email can be especially problematic, he says. He offers the hypothetical example of two advisors who have been working together for 10 years and are in the process of forming their own firm. That work email is likely to be the first to populate, so double-check before you hit send, Kupfer says.
There are other red flag behaviors to avoid. For instance, many firms have their systems set up to alert them when an advisor is downloading massive amounts of data, Rubeling says. Advisors who are permitted to bring certain client information with them under the terms of an industry recruiting agreement known as the Broker Protocol should download it in small batches, if possible, she says. There are currently 2,091 firms that have signed the agreement, which governs the use of client’ data when advisors switch firms, according to Carlile Patchen & Murphy, a law firm that maintains the directory of protocol member firms.
Also try to avoid activities outside your normal patterns that could raise management’s suspicion. This includes having frequent closed-door conversations, if that’s not how you typically operate, and leaving the office for an uncharacteristic number of meetings, she says.
Not adequately incentivizing support staff. When gearing up for a move, it’s extremely important to give your critical staff members a reason to commit. Many advisors don’t want to offer equity to support staff, but this is a mistake, says Scott Wilson, senior managing director and chief operating officer of Kestra Private Wealth Services in Austin, who helps advisors transition to independence.
If your critical staff decides at the last minute that the stress of leaving is too much, it can create all sorts of headaches. It heightens the risk of being discovered prematurely, and there’s also potential loss to your new business. By offering critical workers an equity stake, or at least rewarding them appropriately for the risk, you lessen the chance they’ll bolt and leave you in a pinch, he said.
Failure to make a Plan B. Advisors sometimes need to accelerate their exit by days or weeks. This could be because their plans have been discovered or there’s concern it will happen. That’s why it’s important to have a Plan B, where possible, Wilson says. For example, if support staff members get cold feet, it will be easier if you’ve identified, in advance, industry-specific firms that can help you staff up quickly at the new firm, he says.
Also, early in the planning process, identify back-up real estate locations in case you have to make a quick exit or the new offices aren’t ready when expected. This could mean contacting workplace solutions companies like Regus or
Also, make sure you have a landing page for your new soon-to-be-launched business. You may not be able to fully complete your website in the event of an accelerated exit, but at least have the landing page and logo ready to go, Wilson says. “Being prepared with back-up plans is worth the effort,” he says.
Not having all the I’s dotted and T’s crossed. Some of the seemingly small details can easily get overlooked, causing headaches for breakaway brokers, says Matt Sonnen, founder and chief executive of PFI Advisors in Redondo Beach, Calif., whose services include helping advisors prepare for independence.
Members of the team may be unfamiliar with the new phone system, so they hang up on callers, have trouble transferring them, or can’t check voicemail. Sometimes advisors accidentally put the wrong phone number on the firm’s website. It may be off by one digit, but it can still lead to lost business. Remember, the former firm is going to go all-out to convince clients to stay. “You don’t want to do anything to give the former firm ammo,” he says.
Many advisors also underestimate the amount of information needed and time it can take to transition clients’ assets, he says. They may not know the types of documentation or the information the custodian needs to open various account types. An advisor could have 100 clients, but what if every client has seven accounts? “It’s not 100 clients; it’s 700 account numbers,” Sonnen says.
Not fully vetting business portability. Breakaways should ensure that everything a client does today can be accommodated at the new firm, or have an alternative option, says Louis Diamond, president of Diamond Consultants, an executive search and consulting firm in Morristown, N.J.
For instance, a client may have an investment in a private equity fund that is accessed through a proprietary feeder fund, or cash management products tied to the firm. Not having an accurate reckoning of which of the firm’s offerings clients are using—well ahead of leaving—puts departing advisors at a disadvantage, Diamond says. They’ll either have to scramble to be able to provide the offerings or work even harder to convince clients to transfer their business regardless, he says.
Overlooking important start-up considerations. Tax planning is often an afterthought when advisors set up shop, says Jeremiah Baba Pagano, an attorney with Jacko Law Group in San Diego. This can mean missing out on tax savings for many years, “which could hamper the growth of the business,” he says.
There are a number of options, including a single-member LLC, a multi-member LLC, an S Corp, or a C Corp. Which you choose can depend on whether you’ll be bringing on partners, your expected income, and your expansion plans, he says. Make sure to get tax advice in advance so you understand the tax implications.
Advisors often don’t realize they’ve made a mistake until it comes to year-end, says Pagano. “They are thinking about their taxes again, and they realize that they could have saved a lot of money with more thought and planning and by getting a tax professional involved on the front-end.”