facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause

Achieving Real Independence as a Financial Advisor

News of advisors breaking away from wirehouses, banks, or broker-dealers makes regular headlines in the financial press. But if they leave to join an independent broker-dealer, are they really breaking away and achieving real freedom and independence? 

Picture a chef eager to open his own restaurant so he can create exciting menus of delicious food for his target clients. When he strikes out on his own, a franchise offers him a financial incentive to open one of their restaurants. In exchange for the upfront check from the franchise, the chef trades away his control and potential business value as the franchise defines most aspects of his business, including brand, operation, menu, quality, and more.

Leaving one broker-dealer and going to another is similar to the chef who was lured by the upfront payout from the franchise. Broker-dealers offer advisors a payout to join their firm, some multiple of their trailing 12 months upfront, which is essentially a loan that is forgiven over a pre-determined period of time, typically after seven years.

While the upfront payout can be tempting, it doesn’t come for free. Important decisions like who to custody with, which investment platform to use, which products are available, and more are decided by the wirehouse, broker-dealer, or bank. This creates inherent conflicts of interest as the advisor can’t always choose what is in his or her clients’ best interests.

More recently, the hybrid model has gained in popularity. On the surface, it seems like the best of both worlds: Advisors launch or affiliate with both an RIA and broker-dealer. However, when setting up a hybrid it is imperative to choose a “friendly” BD to maximize autonomy. When employing a “friendly” BD, the fee-based assets do not fall under the supervision of the BD or FINRA limiting the financial impact of the affiliation. The fee-based assets are governed by the rules of the SEC and are the responsibility of the compliance officer at the RIA. While hybrid advisors have more freedom than advisors affiliated with an independent BD (Kestra, LPL, Cetera), wirehouse, or bank, they are still governed partially by the rules of the “friendly” BD and are captive to their technology and available products. A hybrid RIA is perfect for advisors that have large legacy trail businesses that they don’t want to jettison when they create their own firm.   

Thinking of long-term succession planning, RIAs and hybrid RIAs who own their own client books have a larger pool of potential buyers than advisors affiliated with a captive BD, and benefit from the opportunity to create long-term capital gain as the firm grows.

The sale of a successful RIA could return a large multiple of earnings before owner compensation (EBOC). For example, in September 2019, Goldman Sachs acquired United Capital, an independent RIA, for $750 million in cash. The IRS would have taxed this as capital gains at 20% rather than as income at 49%.

Claiming True Independence

With our deep middle office experience, LibertyFi can help growth-oriented RIAs increase productivity to drive revenue and scale their businesses.

Our personalized consulting services include evaluating clients’ business processes and their supporting technologies, streamlining operations, providing middle-office support and training, and implementing the Envestnet platform. We can help you strengthen your client experience by defining and automating your workflows. RIAs who work with LibertyFi and outsource their middle office have more time to devote to clients and grow faster.

To learn how we can help you focus on serving clients by handling your middle office, contact Alli Jordan, President and COO of LibertyFi, at amjordan@libertyfi.com.