How To Go Independent

An objective source to learn about independent business models

If their payout is so much higher than at a wirehouse, why don't independent advisors seem to even know what their net payout is?

MiscellaneousSean KernanComment

When I was talking to independent advisors before I made the move, I came across a strange phenomenon: they didn't seem to know what their net payout was! 

 Do you know what your net payout is? Despite getting a higher gross payout, independent financial advisors sometimes have a hard time comparing their net payout to the employee advisor payout. 

Do you know what your net payout is? Despite getting a higher gross payout, independent financial advisors sometimes have a hard time comparing their net payout to the employee advisor payout. 

After 7 years of being independent and discussing business topics with hundreds of independent advisors, I have some thoughts on what explains this apparently illogical truth. After all, if one of the big benefits of owning your own practice is the financial one, shouldn't we all know EXACTLY what our payout is?

Probably, but that's not been my direct experience; I suggest three main reasons or categories why this is the case.

  1. They just don't care. For many, one of the major reasons to take leave of an employee situation is so they don't have to "sweat the small stuff" -- and some may feel that closely tracking a metric like net payout isn't worth the time and attention. An advisor may have done a cursory analysis before making the switch and have seen that the numbers worked dramatically in their favor, but then not worried too much about the payout details. Another part of "not caring" is because they specifically want to avoid the stress of a manager or a corporation tracking their financial results at any and all times. This would cause some to not track how many hours they work, what their net payout is, how much "time off" they take, etc. In short, they don't care because they don't have to--and they like it that way.
  2. Another reason one might not know their true payout---somewhat related to the first--is that their just not very good business people. As Michael Gerber points out in his book, The E-Myth, most of us started a business not because we're true entrepreneurs, but because we are a "technician experiencing an entrepreneurial seizure." The payout issue itself does not mean you are not a good person, but I also see the following decisions that I don't think are wise: not investing in at least part-time staff to leverage the advisors' time, not investing in software/tools to save time, not systematically using a CRM to track their client contacts, spending inordinate amounts of time to save relatively tiny amounts of money (without considering the value of our time as a professional). I believe the E-Myth was right on---many financial advisors don't act like business people, they act like employees without a boss.
  3. A third reason is that our net payout is just harder to track when you are independent. As an employee, you see the payout effect each and every paycheck---your payout is multiplied by your gross production and BOOM, that's your payout for the month/pay period....next month, same thing. Now, as a business owner, things are different. You get a much, much higher gross payout, but then you have to pay your own expenses: office, staff, licensing fees, custody and/or broker-dealer expenses, marketing, general operating costs, and plenty of miscellaneous "stuff" that comes up. Some of these expenses are fixed each month, but plenty of them are not, so that you have to look at a whole year's expenses to accurately assess the net bottom line...and often that's at tax time, when many of us are spending our focus getting our tax return done, not doing detailed business analysis. In addition, many of the expenses we deduct might not exactly be true business expenses....for example, I have some extra family members on my cell phone plan. They happen to be clients, but is that a true business expense? I know if I were to put my business up for sale, I would add back that expense to my financials---because that cell phone bill exists for me personally whether or not I own a business or not. This is a common issue for business owners in all industries when they look to sell their business. How do you treat the tax advantages (and few disadvantages) of self-employment? For example, when I discuss payout comparisons with advisors, I show them the self-employment taxes and make sure to acknowledge that there is an added cost compared to being an employee. I doubt most independent advisors think about this stuff too much, because they are not trying to convince others to consider a move.

You may have not asked any independent advisors "what is your payout?" yet...if you do, this might help explain why they might not just shoot back a single number at you. If you have any questions about this concept or how to actually do an apples-to-apples comparison, don't hesitate to ask.