How To Go Independent

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A "one firm for life" advisor goes independent -- part 4 of an ongoing series

InterviewsSean KernanComment

This is part four of an interview I did recently with an advisor currently in the transition process. He built a successful practice and decided to make the leap to independence despite being a "one firm for life" advisor early on. I've changed his name in the article to protect his identity. 

SEAN: Today, I'm talking to Michael Scott who has graciously offered to share his experience and recently made the transition to being an independent adviser. Thanks for being back.

MICHAEL: Glad to help.

SEAN: So as we talk today, we're about two and half months into your transition, correct?

MICHAEL: That is correct. It seems to get a little bit more back to normal as every day passes, thankfully.

SEAN: Time flies, but probably a lot faster for me at first because I'm not doing the crush of work that you're doing. So when we talked last (Read part three of the interview by clicking HERE) a month and a half ago you were moving client assets over at a rate of about a million per day. Looks like you’ve almost kept up with that pace. Can you give us a quick snapshot of where you are in terms of what you've moved, and what you have, and what your goals were?

MICHAEL: So far we have about $71 million transferred and settled of the $89 million that I was targeting to get over. So I'm at about an 80% clip with another $2.5 million in the works to settle here in the next week or two. It will be pretty neat because two weeks from today will basically mark three months. And as best I can tell, even if I didn't get anything else over, within three months that would put us a little over 82% of the goal of what I was aiming to get here.

So, obviously, the longer it goes, the more things kind of dry up or slow down---because most of it is already here! That being said, it's so key early on to just be on top of it, get in front of people as much as you can, and do what you can to help get the paperwork going. Then you're not having to hope and pray that three to six months later you're still building up a pipeline to try to get here. Instead, you're looking at things more in terms of “I've got the clients here that I knew I wanted, and I can starting getting back more to business as usual.”

SEAN: Can you talk a little bit about how your typical day looked a month or two ago, and what your day looks like now?

MICHAEL: Sure. Well, for a good two months, it was kind of like being a brand new broker again, a new adviser. I mean, you're meeting people at all times, every day of the week, and answering any and all questions that you can at any time. Eventually there is a slowdown from that and you get back into a more normalized routine. Now that we're about three months in, we're at that point where we're starting to ask people to come in for their reviews, and to help with their rollovers, and new money, and getting back into a normalized routine of what your business activities probably were before you make the change. I also find myself being at a point where I can meet with referrals now, which before was a little bit harder, because you're working on trying to get everybody over from your old book of business. So, it's becoming more normalized as we go forward.

SEAN: Okay, good. So you're already starting to see a little bit of the ability to do things that obviously that the existing clients are sort of in play, or critical at first. And as much as you want new clients, that's have to take your foot off the gas briefly.


SEAN: That’s a crazy idea to think about temporarily saying NO to potential new clients...but sounds like that’s not a terribly long period if you work hard up front.

MICHAEL: Absolutely. You know, again, the big key there is just making sure you prioritize where your activities are to be spent: meeting with your bigger clients and those that are more vulnerable to being convinced to stay behind. There's a pretty good mix in there of people that you've always got to really filter down in when you're determining who do I start with, who I go to next after that, so forth. We did a pretty good job on that.

SEAN: All right. Let's talk a little bit about your approach to any potential changes to a business model, and I think people have different opinions on this. And of course, one of the wonderful things about being independent is we all get to make the call with very little outside influence, especially if you select business partners, whether that's a broker dealer, RIA, or both, you get to decide how to do that now. You have a good deal of brokerage business - partially because that's the only choice we had at your previous firm (and my first firm) -- you had a brokerage business when we started, and you stuck to that.

I know there are people that you've talked to, and that I know that would advocate if you're going to do advisory stuff, that it's a good time to make the change when you're making this big shift anyways. Why don't you talk about how you evaluated that idea. and kind of how you've done it and talk about why.

MICHAEL: Well, for me, partly because I was new to this world and having to learn a brand new system for making this change, I've made it very simple to my clients and told them “you know, what we have is what we're going to bring over.” That way we're not having to learn a new platform. We're not having to go into this right now. That gives us time to get used to how the statements look, get used to the transactions, get used to the online capabilities for both of us - myself and my client. Also, it lets us sort-of see how things will play out for an industry that is certainly not lacking for change from the government.

We will have time to see how that's going to play out in terms of what the government says they want, and what the broker-dealer determines they want. I will say this: there is nothing in my mind that has helped to get assets over here faster than telling people that. I don't begrudge anybody who says "Look, we're making changes now. You might as well do this now." But it's just adding more layers of change to the operation that I feel like within three to six months after you leave and get settled in, you can easily go back to do. I think that's been a big point of sale for me is just to say, "Let's just get this here. Let's go with what we know, and then as we move forward from here, we'll see what we need to do if we need to do anything." I think that's really helped a lot with all of my clientele.

SEAN: Yeah, and I tend to agree. My approach was similar to what you have done. When I've moved, I tried to enforce that I'm the same, the approach is the same. It's worked fine. I certainly understand it might need more work for you or me, the advisor, maybe for the client, but really, it's just more work for the advisors with changed account types. Later, you know, clients appreciate keeping things simple.

MICHAEL: Yeah, absolutely. Also, I go back to the reality that clients recognize when you're working hard for them, and a lot of times, working hard for them is presented to them in the form of paperwork, whether it's just signing something, or seeing something. When they see that, they know that you're going to bat for them. I still feel like, in the big scheme of things, that's a message that can be, and will be delivered accordingly. And, in the current environment we're in where fee-based models are really becoming a big driver of things (and they haven't been something that I've used), it just gives the advisor and the client more time to get prepared, to do research, to understand the technology, the investment management, etc...I've never found that to be a bad thing to take your time on.

SEAN: I Agree. And on the flip-side, for someone that wants to make a change like that to their business model, it can be a good way to sort out people who may not be the type of client they would like long-term. They've made the transition, and are ok with leaving behind accounts or relationships that may not be a good fit moving forward. That can be a good thing. There are different approaches, but it doesn't surprise me. You're going to be able to maximize your retention.

MICHAEL: That's the thing. You make it clear, not that you're making light of the change, but the reality becomes the biggest change you’re going to deal with here as a client is that instead of your statements being the colors they've always been, green and yellow in our case, they're now blue and white, and everything else you own is as is. That was the beauty of choosing independence for me: I get to choose how this goes. I don't have somebody above me going, "you need to have this all invested in these platforms, producing this kind of revenue." It's literally up to the advisor. What a great, freeing feeling that I never knew before, and I was always scared of because that's what the industry really wanted to point to you as an advisor.

SEAN: Okay, let’s change gears just a little bit. You've obviously had success moving the vast portion of the business you've built for 14 years or so. What has been the response from your previous firm? Have they gone after you, or what's your experience been so far?

MICHAEL: They have not. Again, having all your I's dotted and T's crossed before you make this change, to know exactly what is acceptable, and what is not is very important You need to be able to understand where the line is, and where you don't want to go. We have been very fortunate that we have not received any correspondence other than one letter just saying it's our duty not to have any materials from the previous broker, stuff like that, which is common sense.

SEAN: Sure. You attribute that to anything in particular? Any thoughts other than doing it the right way, so to speak?

MICHAEL: Yeah, I think part of this is going to be the length of time that you've been working with clients. So, I can only speak to the fact that I have done it for almost 15 years, and there might be some recognition from the other firm that I left that making this anything ugly without them having paperwork, or a trail that clearly shows I had done something unethical or illegal wasn't really going to serve them well, or was going to serve the clients well that they are trying to keep. I could be completely wrong about that, but I don't think that I am. I think that the reality is that you're kind of cutting bait, and they’re asking how do we move forward from here?

SEAN: Yeah. I know you don't want to brag about yourself too much, but I would think your reputation internally at the firm certainly helps. I know they have a legal restriction on what they can do anyway - even if they don't really like someone - but I would think, generally speaking, someone that has a good reputation internally is less likely to have trouble from the previous broker. Again, you never know exactly how it will play out, but from my observations over the past, if they are going to make an example of someone, they would rather do it with someone they don't really like, or had done things that maybe weren't ideal.

MICHAEL: Well, I'll say this. If you're thinking about making this change, and the change is because you're running into issues with your field supervision, compliance type folks, it's a lot easier if you recognize that early where it's not becoming any kind of problem where you could get anything documented against you, or anything like that. You’ve got to see the signs to know if you're not on the same page as to what they are, or vice-versa, because if it gets to the point where this does get a little bit tighter, it's going to make your change harder. First of all, you're going to have people who aren't going to accept you, or they're going to put conditions on that, or they’ll look at your situation and say "we can't even consider this because the risk is too high,” In the heightened environment we’re in right now legally, I can see that becoming an issue for folks. You want to be ahead of the game, not behind.

SEAN: Yeah, I agree. I think you're right on with that. We see this on our end with our broker-dealer, and with the RIA as well. Just like the markets don't like uncertainty, we don't like uncertainty. So, if there's a pending issue, even if it's really not a big deal, once that can has been opened, you can't put it back.

MICHAEL: No, it's pretty hard once that's happened.

SEAN: Right. If someone is at an insurance-based firm, and can see that doing straightforward advisory business is not going to be welcome, or whatever the mismatch is there, you're right, if you can identify that trend, I think that's good advice to look forward, look for options. I don't know if this was really the case for you but I know your old firm has gone from "we don't like advisory stuff" to "that's all we want."

 MICHAEL: Yeah, right.

SEAN: And if you didn't change fast enough, so to speak, for their taste, it's probably a very, very leading edge of that kind of issue for you, but I guess, case in point, it's worked out pretty well for you so far.

MICHAEL: Well, it was because I could see the direction this was going to take from that firm’s standpoint, and partly from the industry, but mostly from the previous firm's interpretation of it. To me, any time that you're on the side of “we're going to put all of our chips on one side of the table” -- and I don't care what side that is -- you probably need to really consider what makes the most sense for your practice. There's nothing in the world that should be right if somebody's telling you that you have to make a certain amount of revenue from these certain products. There should never be anyone who's telling you that you only want to go any particular direction and convince as many people as you can. You should always strive to have the most flexibility you can, and have rationale that's easily explainable to the client, to the auditors, to compliance, to fellow advisers. If you can do all of those things, then that usually, in my opinion, is going to be better for your career and better for the client's.

SEAN: Yeah, agreed. I was just thinking, ironically, when I left the same firm 11 years earlier, part of my rationale was they didn't have these platforms, but now, they’re semi-forcing them down people's throats. It shows that same trend. I realized, "Wait a minute, if I want to do this, I can't”. Even if there was a way to do it in another way, it was not going to be looked favorably upon. That was the old trend there. That definitely worked out for me. You're going somewhere better fit for those people. As you gone along, I know we talked a little bit about some of the questions you've been getting from clients, the most common ones. Just to revisit that question, are there common misconceptions that you've seen, or things that you have to clarify the most?

MICHAEL: Yeah, I think one of the misconceptions that I probably dealt with the most was that when I said I'm going out on my own independent model (a lot of this that was delivering it), they weren't recognizing the value of the broker-dealer that I was going to be clearing through still providing them with services and research. What they saw was basically me working out of the trunk of my car, if you will.

SEAN: One guy by himself, not a large institution.

MICHAEL: Right, yeah. Quite frankly, I can understand that. People start thinking, "Hey, I read about Bernie Madoff or some other situation,” and think “I’m not getting myself into something like that." The reality becomes that you just have to explain that and explain it more fully so that people are aware I'm not just floating out on a breeze here. I have an office. I do work for an independent broker-dealer that does provide these things. They will provide the same things you've been used to, both from statements, from online abilities to track your investments, and to get your tax reporting, and to get your trade confirmations. The things that they've been used to all these years in working with me are still there.

Like I said many times, it's just on different colored paper. And once they can grasp that, that usually does the trick. The other thing that has been surprising to me is how many people feel like the brand name that they've been used to, whether it's a big Wall Street firm or whatever other firm you may be working for currently, that name provides some form of extra layer of safety or security. It's a little bit frustrating in that regard because I always feel like the clients are giving the big banks of these big brokerage firms too much credit, and quite honestly, that's where I think that a lot of the Department of Labor issues are coming from is that there has been too much trust in the hands of a lot of different firms like this that haven't necessarily done what's right in terms of providing investments for a reasonable fee, or in services that have made sense. I think over time, that's one of the things that I'll be interested to see if some of that reputational stuff finally sort settles down some.

SEAN: And the stakes between who holds the funds and then the organization that you're really working with, which is you. It's what I would call the old model: you're employed by the company, they hold the money. They run TV commercials. Here, it's more we've got this back office firm as a vendor that provides the same security. It's more complicated, I guess, so I could see why people don't really get it. And it's not been until the last 15 or 20 years, there was all these technology advantages to being big. People, especially of a certain age, they're comfortable and used to a big name, I suppose, and banks are equated to safety. I would guess, that any of us that paid close attention to 2008, you kind of see that false sense of security. But old habits die hard, I guess.

MICHAEL: No doubt. That is a part of it, that it takes a while for that stuff to run its course.

SEAN: From an administrative flow standpoint, the speed at which things have moved over, you’ve done a lot of ACATs in your career, and most of the assets luckily were ACAT-eligible. Has there been anything else about the speed, or lack thereof, with any movement of assets, or anything set up on this end from distributions? There are always hiccups when you're dealing with a new staff person on this end. There can be a lot to communicate, a lot of stuff to keep on top of. Has there have been anything in particular that's jumped out at you that or insights?

MICHAEL: Yeah, I would say one of the bigger things you need to be prepared for is to recognize that the business that you do that is not held at the firm or the broker-dealer you're dealing with, you can add weeks on for timeframe - just for getting annuities, or 529s, or life insurance, and that's been frustrating.

SEAN: Certainly custodial-owned annuities can be tough - where the old firm has to sign off on them. I guess the 529s are that way where you were, they’ve just done that lately, versus the simple broker-dealer chain. I guess that's something I need to make sure we're communicating to advisers, so they can warn their clients "Okay, a quarter of your stuff will come over easy, and the rest of it is going to be a headache.”

MICHAEL: Yeah, and the headache isn't so much in terms of getting funds moved. It's in getting the right paperwork and the right person with the insurance company and the mutual fund company to process it correctly. That takes a lot of time. It takes a lot of follow-up.

SEAN: Yeah, automated is almost always better when you move accounts than some sort of manual process where you have to track down people that have no real vested interest in getting things done smoothly.

MICHAEL: Absolutely.

SEAN: One of the things that I try to talk to people about is the feeling of being overwhelmed that they think they will feel "running their business." I know pretty early on, you're not going through tax time yet, all that sort of stuff, but talk about what kind of time investment you’re spending on running the business aspect of being independent. You have to, you know, to take out your own trash and things like that.

MICHAEL: I think a lot of that is very dependent on the type of office set-up you have, and what it is that you're comfortable taking on. For me, I have a simple office in an office suite, so it's one-room, doing the simple activities of emptying out the trash, vacuuming the floor, watering the plants, doing the coffee, etc.,but how much time am I spending on that in a week sort of time? If I add it all up, it can't be an hour. But you get the idea. Is it something that I have to do? Yes. Is it something that takes a lot of time? No.

SEAN: And that's something I want to hit up when we get through your first year. We can talk about that more after-tax time and that sort of thing. How are you tracking your expenses? Do you ou have some fancy accounting software, or full-time CPA on-hand or CFO? What's your process?

MICHAEL: My process is as simple as a simple spreadsheet with an envelope of the receipts that I'm keeping to provide to the person who will do the accounting for the tax return but, no, it's really that simple. Again, in the big scheme of all this, this isn't terribly difficult. Especially if you have a set-up where a certain credit card or bank is what you use for your business expenses and you've got records of that. I also have a separate file that holds business expenses and personal expenses for tax time and that's, to me, as easy as I can make that. I don't try to spend a whole lot of time getting wrapped up in where I can find a new bit of software to make my tax time easier, etc. I know this works, and this is the way I go with it.

SEAN: Excellent. I think the first go-around, it's a little bit new and different, and then you can decide to do it differently later. One story that I found useful, just to give people a warning, was regarding the feeling about how taxes are collected. Why don't you touch on that story and your conversation with Catherine about how the new cashflow works versus the old one?

MICHAEL: Yes. Well, obviously, one of the biggest things you have to get used to is that the income that you generate here looks incredibly high compared to what you've been used to. Of course, at the other places before, they're taking their cuts, and then they're taking out the taxes, and they're taking out the insurance and other benefits, and you're going from there. Here on our side of the aisle, it's the exact opposite. We are getting this big chunk of money, but then we're required to pay the taxes and do whatever else we need to in order to cover our benefit expenses.That takes a little bit of time to get used to. For me, I have a spouse who likes things to be very simple when it comes to these types of situations, as do I. But it's just a matter of me setting up with the IRS, and then I'm sending in my bi-monthly or quarterly payments. It's not hard. It's still simple, but for our spouses, a lot of times who aren't used to that world, it's a good shock.

SEAN: Sure, and that's where, I guess, setting expectations so the advisor at least, is aware that it’s a lot more beneficial financially, but you have to not be lured in by the high top-line payout number because that's not the whole story. I guess one of the "downsides" is there are more moving parts than when it's all taken care of, but as I have argued for a long time, I think we pay a lot to have that convenience on the other side. But, yes, it's definitely different. I often say these days that if every employee out there at every company, not just in our business, had to write a check at the end of the year for their taxes, versus having them taken out a little bit of time, people would be a lot more less fired up about raising everyone's taxes, or certain people's taxes because you feel it when you write the check.

MICHAEL: Yeah, no question. The reality becomes that you've got to figure out a way to understand what your taxes are going to be from your effective rate, not just from your guessing. And quite honestly, it's not difficult. It sounds like it would be to some people, but it's just not. You can prepare yourself pretty obviously by knowing your tax bracket and your effective rates on the previous years and go on from there.

SEAN: Exactly, and you can always estimate a little high and then you'll get to dial that in with the nuances of being self-employed after one or two go-arounds.

MICHAEL: That's exactly right.

SEAN: I don't want to dwell too much on my end because everyone knows I can. If someone was in the same shoes that you were three months ago, or six months ago -- either your old firm or just anywhere really -- they've built a successful business, they're comfortable from a financial standpoint, they're still trying to grow but they're in a different cycle of their business, what are the kinds of things that will make you say, "Yeah, you shouldn't even explore this," and what are the telltale signs that you might want to continue to educate yourself?

MICHAEL: Well, if somebody were to come to me in a situation where they are frustrated, or a situation where they just want to learn more, the first thing I would look at is to talk to them about what they foresee for their own practice and what makes the most sense for their future. "Does your future involve learning about independence? Does your future involve a goal of involving your children or spouse or whoever might be in your practice?”

If it is, then this is a good time to start learning about how this would all work, and how the transition of bringing somebody on to your practice would work compared to if you were working for a wirehouse or a brokerage firm. If it's frustration that is causing this, that's where we're going to probably look a little bit deeper. We're going to talk about the source of your frustration. Is the source of your frustration income, or is it the stress of somebody potentially trying to tell you that you're going to be fired, or that you could have the rug pulled out from underneath you as a veteran, and all of a sudden you go from a big producer at a firm to a nothing and you have something slapped on you? Those are things that you want to be ahead of the game on, and how we want to interpret what the next steps would be in talking to you. I would say this: almost anytime I talk with somebody about looking into this, one of the first things that I want to hear from them upfront were the cons. Instead of hearing the pros, I wanted to hear the cons. I would say, "You know, the cons are you're going to have a lot of work ahead of you, and you better get organized, and the cons are that you're going to be responsible for a lot of different areas that you haven't have to be responsible for.” Then get into the pros of, "Yeah, so for those responsibilities and for those hours you're going to spend getting organized and getting prepared, you're going to have an incredible amount of freedom.

You're going to have an incredible amount of opportunity to turn your income into something that is meaningful for your life versus what it was before." And quite honestly, if you put pen to paper, that's the beauty of numbers, right? Facts are facts. And if you can understand how to count, they typically show up pretty quick, and percentages talk. And in our world where we're in, if somebody has a hard time seeing that, then it's usually not because of the numbers. It's usually because of something else, which is an emotion of fear or anger.

SEAN: Yeah, that's a good point. If they’re not ready to really consider it, that's fine because you can make assumptions about retention rates. You'll never know until you do it, for your case. Speaking of the freedom part, I kind of got a chuckle (after the fact) when I asked you a few weeks ago if you had any interest in going to a national conference our back office had a couple of weeks ago. You were early on. I knew it wouldn't be a good time for you even if you wanted to go, but your dismissive tone in your response just made me chuckle. You said, "No, I have no interest in that, certainly not right now.

MICHAEL: Yes, some of us, we want to try to get away for a little bit from that sort of stuff and it takes a little bit of time but…

SEAN: It just made me chuckle because I've been here seven years now. This is my fourth year, I've gone, so I get a kick out of it, but I love it. It's fun. But it's also certainly different stage in the transition, seven years. I like to get around a bunch of people and I like coming back home, too, and being back in my own little world.

MICHAEL: Right. You've been used to being in a world of  doing this all by yourself day to day, and if you want to hear from somebody, you have to pick up the phone and call them or go see them. My previous brokerage firm wasn't too terribly different from that. But for a lot of us, these other places, you just get bombarded with the morning meeting, the monthly meeting, the quarterly meeting, the leadership team councils, the regional meetings. I told this to somebody the other day: “Here's another beautiful thing about working as an independent. You don't have to go to any more leadership team meetings, or figure out how to get somebody hired, or work on who we're going to try to get to “meeting standard.” None of that stuff. Talk about wasting your time from your practice, that would be colossally number one, for sure.

SEAN: I've stumbled into that, but you're compensated for it. It's pretty straightforward, and you always have a choice whether or not to do that sort of thing. That's one thing to mentor people that you respect and are hopeful will do well, but the typical corporate environment is not conducive to that kind of relationship. It's very much about what have you done for me this month, new-new adviser. And as an experienced adviser, you and I know, if you got it inside you, you're going to do it. If you don't, you probably won't.

MICHAEL: Yes, exactly. It becomes pretty clear as we move forward. Again, I think just in simple terms that that's the frustrating area of working with your typical wirehouse or brokerage firm. They're taking their pound of flesh for a reason. They own you. You're their employee.

SEAN: This was good to get an overview of two and a half, three months of successful transition. Is there anything else that we haven't touched on that you could think that would be critical for someone to?

MICHAEL: Not at the top of mind but if it does and it's something we need to be address, we'll do another podcast here.

SEAN: You bet! Thanks again for your time.