How To Go Independent

An objective source to learn about independent business models

Does your firm say "We'll pay you whatever we feel like"?

MiscellaneousSean KernanComment

This is a transcript of HTGI podcast episode 10 (click HERE to check out that show) where I discuss the employee model and how it differs from the independent model. It has not been edited to a final draft quality, so please excuse any hard-to-follow passages. You can also listen to the show using the media player to the right or below if on mobile. 

Sean: Hello and welcome to this episode of How To Go Independent. So I’m glad you joined us. Today I’ve got a solo show for you, where I go through some articles from recent industry publications and kind of riff on the thoughts in those articles a little bit and add some commentary. If you come across any articles you'd like some thoughts on or hear my take on, please shoot them to me at I’ll be happy to potentially include that in the future episode. Or if you have any questions or comments about past episodes, let me know.

I really appreciate the feedback and so far it’s been mostly positive with some couple tweaks recommended and I’ll try to take those into consideration going forward. So without further ado, here we go!

The first article is from the February 2016 issue of On Wall Street. This is about a firm that may or may not have a bull as its logo and may or may not have the initials ML but we’ll keep its enmity intact. It’s an article “This firm xyz” Raises Bar on Broker Pay. The wirehouse has recently unveiled comp changes to its more than 14,000 advisors. Among the biggest: core grid ranges will rise $50,000 for producers below $1.5 million. And then the next sentence which is interesting to me: Core payouts remained the same. So core grid ranges will go up 50,000 but the payouts have remained the same. The way I read this, the payouts will not remain the same but the point is the percentage is not the same, just the bogies are 50,000 higher.

So, again, for a lot of advisors who are looking to grow their business, this would mean much. It might give them something to shoot for, which is great. But I think it’s interesting that, say a $5,000 producer who’s generating probably pretty reasonable profit at least in percentage terms for the firm, now has to pump his/her production by 10% just to break even. That lack of control and somewhat arbitrary change, I think a lot of people find that alarming and disconcerting and it should. Spokeswoman, in this article, is quoted as saying We are well positioned ahead of client expectations, new competitive realities and regulatory requirements, which I’m not sure that sounds like a bunch of nothing to me and doesn't really discuss the payout at all. Our strategy remains the same – to build a consistent goals-based standard of care for all clients, which again, seems like that could be done without messing with the payout all the time. And again, some of these changes might be good at times for advisors but any amount of the energy that we have to spend parsing through our compensation documents and all that moving parts, I view that as a dead way basically to society because as advisors we’re actually gonna know how we're paid or we wanna figure that out. Any business owner should.

But that time is not served, doesn't really serve our families all that well ‘cause we can't control those changes. It certainly doesn't serve our clients and so I just don't see it as a productive use of time. Then one of the point mentioned in this article about the change, Each advisor will now be required to make one client referral to another unit of “Bank of Xyz” in order to avoid a 1% grid pay cut. 

In 2015, the firm required only one referral per team. So basically just another not-so-subtle reminder that you will support the parent company, the bank that owns this investment firm, and otherwise you're gonna pay a little bit of penalty. So I thought that was very noteworthy as I didn’t even realize there was a cost of not referring business to the bank there but apparently there is. And then this last quote that ends the article from the spokeswoman is (again makes me chuckle) The compensation plan and the investments we continue to make in our platform and advisor practices are based on three principles: Giving our advisors incentives to grow while encouraging alignment with our strategy, providing resources to support advisor practices, and making it easier to do business. To me, the key phrase there is “encouraging alignment with our strategy”. So that makes it very clear. You'll get paid as long as you like our strategy. So I guess that goes to the very fabric of why those of us that are independent love being independent -- because the strategy is ours in terms of the types of investments and types of practices we run. So again, many people obviously don't have a big issue with that or there wouldn't be four or five very large wirehouse employee firms still remaining with the size of assets they control but for those of us that start to question that, I think that's a great window into how a major firms thinks. “Encouraging alignment with our strategy.”

And the next article is also from On Wall Street magazine. This is from December 2015. I think this is a great source of material, I guess, for me, because it’s target at the wirehouse-type advisor. This is actually an interview with Edward Jones principal who’s in charge of assets and office sharing department. So this is about question-answer about the retirement plan. The headline or the title of article is making retirement rewarding. So it goes into asking this gentleman about how Edward Jones pays out their advisors when they leave the company. So Edward Jones revised this plan a couple years ago.

I think many employee firms are realizing they probably needed up their game a little bit since we, as independent advisors, can sell our practice in the open market. So the first question that he was asked is, How do you determine whether to split the assets up? So one of the comments is, Then we ask our market-analysis group to do a deep dive into that advisor’s practice and on that community. So, the fact that there's even a question if you split the assets up is interesting to me ‘cause that makes it clear that as much as you may have built the business under the platform of your firm, there's gonna be a question if those are gonna be divided up and I think any asset trying to break in the pieces, you don't own it if you don't have any say on who will take care of those clients that you've developed these long-term relationships with. Where are those clients, we want to make sure that the clients are deeply served in the market they live in. I read that as, “Hey if your clients have moved out of town we're not gonna give you any say. You might have a local colleague who think would do a good job serving them from afar like you did but we’re not gonna allow that.” That’s the way I read that. In the question-answer, as you can imagine, he’s asked How much do they get? -- I'd rather not give you exact dollars or percentages, which of course is, no we’re not gonna publicized that ‘cause then other people have access to it.

But then here’s an interesting comment, We don’t buy and sell books. So in other words, these aren't really assets of the advisors for us to give them market values, the way I read that. Certainly they don't sell books, other than to keep advisors kind of in place by hitting them assets that won't be able to move ‘cause their relationships belong to the firm. I guess that's a takeaway for anybody that's building a business that generates a lot of revenue but if you're having clients hidden to you one way or another, keep in mind that makes them a lot stickier to the firm you're working with and for. So if you ever consider leaving or going independent, you might wanna really look harder where the relationships come from. That's probably something I could do a whole episode on -- how to determine what your retention rate might be if you leave particularly to go independent. If you're having folks that have been with this firm for twenty years and you're only five of that, your retention rate is not likely be that high.

So I guess I found this article interesting overall because it’s about the transition plan and how it's supposed to help the advisor. They even mentioned in the beginning the aging of the advisor population but it’s still very much talks about the firm's objectives and goals about why they might try to create a new office. So I think that's something to keep in mind, that no matter how hard you work to build your practice, if someone else will someday be making the decisions on who these people work for or work with, I think that says something. I'm forty years old as I record this episode. I hope to be doing this a long time but when (not if) the time comes for me to leave the business, I still hope I get to have the first recommendation to my clients who I’ve done work with. Clients will always have the decision to work with whoever they want but I sure hope I have the flexibility I have now to transition those advisors, someone I’ve had selected versus gonna be at the mercy of an institution with 15,000 advisors and profit motives to me, etcetera. So, just an interesting topic of who decides who your clients work with if you decide to sell your practice. Again, I'm forty but if I wanna sum my practice and consult with other advisors full time I can do that right now and not incur any kind of discount or any penalty for my age or experience for ten years in a particular firm. So, again, another valuable thing to keep in mind.

This next article is from investment news back in October of 2015. The article is titled Advisors seek independence, but less often as entrepreneurs. Breaking away increasingly means joining an RIA, not starting one, Cerulli reports. So this is based on a report by the big research firm in our industry Cerulli Associates. Apparently, advisors who are employee channel folks were surveyed and about 35% said they would be inclined to joining an existing independent firm as a principal or partial owner, about 30% would be inclined to start their own firm with other advisors, and about 18% would start their own firm on their own, and the same percentage (another 18%) would join an existing independent firm as an employee, the survey found. Advisors considering the RIA channel are increasingly looking to join existing firms that can revive them with not only the necessary operational infrastructure but also a sense of community, said Bing Waldert, director at Cerulli. So these numbers are very interesting partially because I'm assuming that not every single advisor surveyed who's in the employee channel has really explored all the options out there for if they wanna set up their own shop, the support they can get and what that would look like. I think these numbers would be even higher if that was the case. Just because I would guess that the typical employee advisor may be operating under some old assumptions about what independence means and what kind of help is available. I think they'd be shocked and amazed at all the different options available for a relatively low cost in terms of what to give up, in terms of income and what the cost to support their own business is.

So I think most of the reasons that an advisor that’s looking to go independent would not want to plug in with someone else is ‘cause they wanna have that feeling of ownership and control that would be usually a reason for escaping the employee setup but there's such an array of options around today that support independence and from a legal framework it may not even matter as much if you're an employee or owner, whether that’s 10-99 or how you're paid. It’s more about the control of the day to day operations. So one of the big benefits that most advisors, especially successful ones, don't have at a major firm is day to day flexibility -- no one telling you where to be and when to be most of the time. So if you extend upon that which most of these services and “subaggregators”, as Cerulli calls them, there's huge opportunity to be, I guess a term we hear a lot is “independent but not alone”, you have your own practice but you're using other people's support systems.

And you don't really give a pretty equity in your business other than the small slice of revenue that, the way you pay these support providers. But again, you have to pay someone for compliance support and payroll and other administrative things regardless, you're paying for it one way or another, either you pay for it as an employee, at a wirehouse with a really reduced payout or you pay for it by hiring it directly if you're building your own firm from the ground up or kind of in between but much closer to the ground up model is you find someone who’s already got that setup -- the key, kind of bread and butter stuff you have to have and for relatively low cost you can add on to that. You can sit on that platform and own your practice and that's to me a wonderful development in our industry because just about anybody with a viable business as an employee can have her own practice with relatively minimal cost.

At the end of this investment news article, Cerulli also asked these advisors what major concerns they had about switching to an independent model. About 54% cited losing clients, 45% said having to deal with more compliance issues, 38% cited having to take on more operational responsibilities, and 36% worried about greater technology duties, the survey found. So again, that's interesting as the losing clients is certainly something to consider. That's in my opinion fired away the issue is are you gonna retain your relationships? Because if you’re not, the rest of the stuff doesn't matter. If you are, the rest of the stuff can be addressed. As I said, I think the operational and infrastructure firms, somewhat like I’ve helped put together, a lot of this is what we do and the big broker dealers do it as well -- helping with compliance issues, operational responsibilities, technology guidance. Surely there might be more than you have in an employee firm but I don't think it’s anywhere as owners and intimidating as people probably think. As the cost of technology has come down, the choices for giving compliance and operational help, there’s a lot of choices. In fact that’s maybe one of the only downsizes -- there are so many choices, it’s hard to sort through sometimes.

And then the last note in this article says the same report founded on average 72% of clients follow advisors who have moved in the past three years to their new firms. So typically, with a bunch of qualifiers, like if you’re doing what you need to do, if your clients likely like you, I think 80% retention of assets is very reasonable, six months out. So this 72% of clients -- I'm not sure if that means households or if that really means client assets -- but somewhere about 80% I think is a good target for various reasons but it’s good to see this article quoting a number that’s fairly close to that.

Hope you enjoyed the podcast and hearing some of Sean's takes on some articles that deal with our industry. If you have others you wanna shoot to us, we’d love to see them and maybe we’ll throw those in another podcasts as well. You can shoot those to us at or you can send those directly to Sean at You can also shoot us your questions about going independent or the independent channel as a whole. We’d love to help you out with that. Also, if you guys will leave us a review on itunes, we’d definitely appreciate it. We’d love to see the feedback from our listeners. And I think that about reps it up so thanks again for hanging out with us and we’ll catch you on the next episode!