Welcome to How To Go Independent. Thanks for joining me. I look forward to sharing my insights and knowledge on how to take your investment or financial planning practice from an employee model to an independent model.
I’ve been excited to start this project and I hope it will be helpful and educational for you.
I want to give you a little background on why I decided to start this business and why I'm qualified to provide useful, and hopefully somewhat interesting information, if you’re curious about the other side of our business.
My name is Sean Kernan, and I'm based in the Dallas, Fort Worth area. My family has lived here since 1987. I’ve been a financial advisor for 13 years.
I grew up in the suburb of Coppell, right outside the Dallas/Fort Worth Airport. I went to West Point and became an Army Officer upon graduation. I stayed in that position for 5 years while trying to figure out what field I wanted to go into when my service commitment was over. I hadn’t planned to be a career officer.
I spent a lot of time listening to other people talk about what they did at various networking meetings. I had always been interested in personal finance, so I considered going back to get an MBA to go into either investment management or corporate finance.
However, I really liked the people side of the financial planning arena and that sounded the most interesting to me. The ability to build your own business within the confines of a bigger organization really appealed to me.
I began investigating my choices in Fall 2001 as I was getting out of the army in the Spring of 2002. I had an interview with one company and had been ready to take their offer because they had a franchise program where you could go off and do your own thing after a few years.
Then someone mentioned they thought A.G. Edwards or Edward Jones did that right away - or at least gave you your own office. Sure enough, I discovered each advisor has an individual office at Edward Jones. That appealed to the independent part of me that would come out later. I liked that model and it worked well.
I got my license in Spring 2002 and started the business in Fall 2002. That meant I got going near the bottom of the market. That ended up being lucky for me as my first clients did very well when the market turned up later that year, and did especially well the following year.
I spent the next few years at Edward Jones, doing fairly well and winning a couple of their trips. I also got comfortable with the sales training side of things. I was an Economics major at West Point and had to minor in the Engineering discipline, so I had more of an engineering-minded thought process when I came into the business.
Jones was great for the sales training and the business development aspects. The market was doing well, and sometimes it’s better to be lucky than good. I think I was blessed to be in the right spot at the right time as I was in my home town, doing well knocking on doors, as that was the way they did things.
It was challenging, but it worked well enough to build some relationships. One of the unintended consequences of that was getting to meet other people in our industry. I tried to go out late afternoon or early evenings when more people were home, as my town skewed younger.
I met a couple of people that would become instrumental in my career decisions later on, one of whom was an advisor and Naval Academy grad. I made sure I mentioned West Point in the door-knocking conversation, and he gave me some water, invited me in, and we chatted a little bit.
I met another independent advisor later on and noticed they were both working from home. It piqued my interest as I hadn’t known that option existed.
I went about my business and started building the core of my practice. Eventually, I got a call from a recruiter from a large, independent broker-dealer. The Naval Academy grad had given them my name.
I talked to the recruiter, but I didn't want to jump ship without having established myself. However, I started playing with the numbers and building spreadsheets. I enjoyed reading about the business and talking to other people, so I did both. I soaked up whatever I could in addition to building my client base.
I also talked to a Merrill Lynch branch manager. I met at least one advisor from there and interviewed with them near the time my salary was running out. I wanted to make sure I wasn't missing anything and that there was no reason to make a change.
I explored a bit fairly early in my career even though I was doing fine from a business standpoint. I’ve found most of us go along doing what we need to do and don't necessarily look around. That might have distracted me from building the business at times, but I did enough prospecting, working, and learning to do fine from a production standpoint.
After about 2 - 2.5 years, I continued on that path, though I saw some of my classmates leaving for a number of reasons. As you probably know, there are people in the business that fall out of a training class. Some went to a bank brokerage and some went to a wirehouse training program.
Wherever they went, I'd ask them, "Hey, how do you like it? What made you choose that place?" I've always been curious about the different channels our industry has.
At the time, Edward Jones didn't offer any advisory platforms and they were focused mostly on A-share mutual funds or other transactional business. It seemed like, over time, that was going to be a hard business for me to sustain with the way I did things. I preferred to be as consultative as possible, and it felt like it would be a never-ending treadmill looking down 20 to 30 years of having to get new clients or move stuff around.
I know a lot of people do a great job for their clients that way, but that didn't seem exciting to me. The more I learned about the industry, the more I liked the idea of getting paid to take care of people's money instead of getting more of it or moving it around.
That was one of the things that pushed me to look harder at the different options available. I considered going independent after 2.5 - 3 years in the business, around 2005. However, I realized this would be a little risky and I didn’t have a lot of recurring revenue (what I did have consisted of mutual fund trail revenue).
I came across an article, possibly in Registered Rep magazine, by a recruiter writing about the different deals that advisors get. The article mentioned Morgan Stanley and its Rising Star program. This is where they would give a fairly new advisor a significant transition package of 2 - 5 years in the business; someone who's already established themselves or at least made it look like they would survive.
Their rationale was, "Let's try to pay someone who's already demonstrated some success, even if it's only for a few years. Let's pay them handsomely to move over instead of training people. Training is a bit of a crapshoot, and the success rate historically isn’t very high. Why not spend money on people that appear to have some potential?"
I reached out to the recruiter who said I would be a good candidate. I met with a Morgan Stanley area sales manager, and to my surprise, he was a West Point grad. I thought that would have been set up, but sure enough, that was his role.
After a few months of deliberating, I made the move to Morgan Stanley in July 2005. I wanted to have more tools, to work with a bigger brand name to the average civilian out there, and to have advisory platform options as well as a nice transition package.
At that time, the package was 100% of my trailing 12 revenue which was $189,000 right at the end of my third year in production. That cushion allowed me to start focusing on recurring revenue. I didn’t have to worry about how much money I was making in any given month as much.
My wife, Erica, was a school teacher, and that was a phenomenal help. She had steady income which meant we didn’t have to worry about paying the bills. We also didn't have any kids at the time, which gave me the ability to focus mostly on building the business.
Moving to Morgan Stanley was fairly successful. It brought over 80 to 85% of my asset base after 9 to 12 months. In fact, I hit an asset base bonus, so that was great. Of course, that came with some strings attached: a five-year commitment forgivable loan, as those deals were structured.
It was nice, but I knew it wasn’t an end-all-be-all. I used it to slowly but surely gravitate towards recurring revenue versus purely transactional.
I had learned more about independence during the time I was looking at other firms (or at least looking at Morgan Stanley), and decided it was a little too early in my career to move. I could always do it later. The cash was hard to beat; it reduced the risk.
I've evolved into more of an entrepreneurial type over time, but I do have a certain aversion to risk when it comes to career decisions. I don't like to be wrong, and I don't like to have to go backwards.
I was fairly cautious, and having the upfront money took a lot of risk off the table. Even if it blew up in my face, I would have time to figure out what my next move would be.
I spent the next couple of years moving the book over, getting settled, learning the systems, and doing more advisory business. I continued to learn about the industry, but I was focused on the transition of getting people over and working on the business.
I kept in touch with the independent recruiter, and about two years in, I got a call and had lunch with them to re-engage the conversation. I had a 5 year deal, but I tend to think fairly long-term. Time flies and I wanted to stay in touch in case I was ready to move at the end of the 5 years.
That was 2007, so we're getting near the market peak. As 2008 unwound, I focused on the craziness that ensued. I wanted to make sure I did the best job for my clients.
During all that, I continued to investigate and learn. From time to time, I'd call an advisor off an independent firm's website and just ask them questions. Most were fairly open and willing to share, and I appreciated that.
It’s another reason I want to do this. I think there are a lot of misconceptions surrounding going independent. Many are perhaps a little nervous to reach out because as far as I'm aware, there's no central resource for this information, especially for someone that's in the middle of practicing in the independent financial advisor space.
There's plenty of information in the RA-only or financial planning industry, but it’s for those who have never worked in the employee side, in a wirehouse, or for a big name, large firm.
I’m just as qualified as anyone with the interests I have in going independent, so that's why I'm here. I continued to learn and over time I probably talked to, e-mailed, or met with about 15 different advisors from large independent firms.
They all had their different approaches and I peppered them with questions like:
- How did you decide on your office space?
- How did you pick your staff?
- Do you need staff?
- Do you pay them W-2?
- Do you pay them 1099?
- How much do you pay them?
- What do you have them do?
- How good is the technology?
- What kind of platforms do you use?
Some of that you could find out from reading brochures, but I wanted to hear it from people who were actually doing it and didn't have an incentive to sell me on how great it was.
As I got closer to making the decision, I started to ask more detailed questions like:
- How do you choose how you affiliate with a certain firm?
- Why did you choose that?
- What does your payout look like if you do different options?
- What are the implications?
I really enjoyed that time and got fired up about the process of moving. I accelerated my plans in Fall 2008. I was about a year out, and it occurred to me I could probably leave after the fourth year if I was willing to pay back one year of the note. I at least considered that option.
Then in early 2009 (4.5 years into my time at Morgan Stanley), Morgan Stanley basically bought/merged with Smith Barney. I knew Smith Barney's office was far nicer than ours - it was bigger. We were going to be moving.
(One of the biggest things I've enjoyed since going independent - it’s been 6 years now - is the choice I have in when and where to move. I also didn't want to move twice)
I then connected with the Naval Academy grad I had met back in 2002. He had hired an assistant since we last spoke, and she was licensed. I asked if she had any capacity and she got back to me saying we should talk.
I started figuring out how I would use her skills. Long story short, about 6 months after the bottom of the market in Fall 2009 (September 3rd to be exact), I made the change and joined an independent firm. I joined with a colleague - we went together.
She was older than me and we figured I would be a good candidate to be a successor for her business. Ever since we made the move, it's been phenomenal. I'm not the largest producer, but I'm fairly comfortable with where I am in terms of my business. I get to work with the clients I want to work with. I get to pick where I work, how I work, when I work, and what kind of platforms I use.
There’s still plenty of oversight in our industry, as there should be, and that's hasn’t decreased recently. Having control of who I hire and when I hire them, what I wear, what they wear, how much I pay them, the culture we create, all these things that just are so incredibly exciting to me, I want to share that with others.
Some people might not value going independent the way I do. In many cases, the possibility doesn’t occur to people because it's so different than the employee world. In a large company, it's hard to let people do different things when you have to keep track of 12,000 or 15,000 different ways of doing business.
With the independent model, the broker-dealer, the firm has mostly offloaded the expense (and some of the liability, but mostly the expense) to us as an advisor. If we want to get a big fancy office, that's up to us. We incur the obligation and pay the overhead, not the firm. The same thing goes for computers or phones, or how much you spend to make your logo or your marketing budget.
Each of those things we get to decide ourselves. I think that's really awesome. I don't necessarily do anything fancy, but I also don't have to pay for things I don't need. I don't pay for national ad campaigns, for chamber of commerce memberships, or stadium naming rights that may or may not be a good investment.
We truly are business owners who have that kind of control, and I find that really liberating. The money is a nice advantage of being independent, but the main benefit to me is the freedom and flexibility we have. That stuck out to me as I was investigating over the 7 years I was in the business. It's really, really neat.
That's the background on how I got to be an independent advisor. I’ll now talk about my journey from there to the present. As I researched independents with the firm I'm with now (I'll talk in a minute about why I don't mention the name), I learned about the various ways to affiliate and how you should choose which branch or Office of Supervisory Jurisdiction (OSJ) to affiliate with.
That became its own project in terms of learning who did what and why. It was usually about payout, not losing control, and getting that true feeling of independence. Over the first few years, I discovered there was a way to collaborate and aggregate advisors affiliated with the same firm to share resources. The parent firm, whoever the branch/OSJ manager was, could get a bonus for creating some scale. I started to do that.
I joined in Fall 2009 and got my clients moved over. I also had a couple people I knew - one that came with me and two others that moved the next year. By the end of 2010, I was responsible for 3 people as the OSJ manager.
I did a lot of networking and continued to push and spend time on this business idea. In 2011, it took off. We started with 3 people in the network, and over the next 15 months, by the end of March 2012, we were up to 20 advisors.
While I had hit on something good, I simply enjoyed pulling my peers together. I dedicated a lot of time and energy to it. During that time, Edward Jones had a number of people going independent, and many were people I knew or referrals from people I knew, so that made it go a little faster. But a lot of the research, and investigation, and connecting I had done had paid off, and it was nice to see it become a success.
We created a small community, and that's one thing I think people worry about. I felt that with a bit of initiative, it could be replicated, and we've done a decent job of that.
Thankfully I had a great assistant, Theresa, who helped me and a lot of other people move. The only issue was we needed more support to keep up with the compliance work that growing would involve.
I started looking around and ended up merging the original network with a smaller network of about 10 folks. They had two partners that were working together, and we all put our heads together in the Spring and early Summer of 2012 to expand. Over the following two years, we grew from 30 to 50 advisors.
We've now reached the point where we’re trying to ensure we grow wisely. We've added staff so we can continue to focus on our own practices - each of us has our own practice we don't want to give up because we enjoy being advisors. That network is sort of by advisors, for advisors, but we hired professional staff members to help run and continue to grow it.
We can focus on business development and oversight for that. I'm very proud, but also blessed and lucky to have what I would consider two separate businesses I didn't have 6 years ago. I have my practice, and I'm also a third partner in a nice sized network of advisors, and we think we do a good job for folks.
With this project, I want to reach more people than just the folks affiliated with our firm or in our local area. I realized I could reach more people if I focused only on going independent and not so much on a particular firm (ours, or our parent broker-dealer, or the region). I'm hoping this will reach more people.
Whether you’re listening to or reading this from far parts in the country or from Texas, I'm happy to answer questions or give you my two cents because I think the independent model is worth examining pretty closely.
Also, given the nature of compliance, it would be easier if we were to make this into more of a commercial for ourselves, but that would be nearly impossible. It’s better to be unbranded. My passion is as much about going independent as it is any particular firm or certainly our particular network.
If you have questions about independence that aren’t answered here, please shoot them to me or post them. I’m sure there are other people with the same inquiries.