Financial advisors continue to be attracted to either creating their own RIA or joining an existing one. In this blog, Jay Hummel, Partner and Co-founder at Wealth Advisor Growth Network, a strategic LibertyFi partner, shares significant industry trends, the motivations for breaking away, and factors that should be considered before leaving your current firm.
New Entrants Grow RIA Channel
The registered investment advisor (RIA) market continues to grow even as the number of broker-dealers (BD) falls. In their 2019 Evolution Revolution report1 on the state of the investment advisor profession, the Investment Adviser Association and National Regulatory Services state that 13,000 RIAs manage almost $84 trillion for more than 43 million clients. The report found that since 2018:
The number of federally registered advisors grew 3.3 percent.
Aggregate regulatory assets under management (RAUM) grew 1.4 percent.
Meanwhile, the number of BDs fell 2.8 percent.2
Between 2012 and 2019, the number of RIAs grew 24 percent, while the number of BDs fell 16 percent. Most of the growth in the RIA marketplace is not from organic or new client growth. The channel is growing because of the new entrants into the market, mostly advisors breaking away from their current captive or BD models.
While there are a lot of reasons why advisors breakaway, there are two fundamental ones that advisors should consider:
Creating enterprise value.
Delivering better client experiences.
Own Something – Create Enterprise Value
Advisors working inside a wirehouse or independent broker-dealer (IBD) may be well compensated, but their employer owns their practice. The value of an independent, well-run business, even in today’s volatile markets, is significant. There are many factors that go into a firm’s valuation, but to give a simple example, a firm doing two million dollars in earnings could trade in the range of eight million to 12 million dollars.
Meet Evolving Client Needs – A Better Experience
In large organizations, everything from technology to compliance, must be built around the lowest common denominator or the average. This restricts a good advisor’s ability to meet the needs of their clients. By running their own practices and adopting innovative fintech, widening their service menus, and accessing best in the industry strategic partners, breakaway advisors can create an experience that attracts prospects and retains clients. Breakaway advisors leaving captive models can also generally lower the cost to the clients with transparency and open architecture investment platforms.
Why Breaking Away is Easier
In totality, it should be easier to break today than it was 10 years ago:
Technology has gotten faster, better, and cheaper. An independent firm can now take on the largest brands in the industry, a concept that was unheard of two decades ago. There are service providers, like LibertyFi, that can now operate the technology on a firm’s behalf and allow that firm to overcome technology complexity.
Vendors: Best-in-class vendors provide services across the entire spectrum, including compliance, investment management support, financial reporting, etc.
Custody costs have disappeared, for now, and the proliferation of options has made the overall cost of breaking cheaper.
Capital: Recent market volatility has dried up some capital sources, but overall capital access is no longer a constraint to breaking away.
Why Breaking Away is Harder
There are a lot more options out there today than there were 10 years ago, from vendors to business models. If the advisor works with the right strategic partner to assist in the process, it will go well. Most advisors that try and figure everything out on their own ultimately find it to be more challenging than it should be. Potential partners might include existing firms, a friend who has done this before, or a consultant. Advisors thinking about breaking away need to make a lot of decisions. Perfectionism as it relates to every decision can get in the way of progress.
If you are thinking about breaking away, don’t believe the myths that are in our industry:
It’s too hard: It’s not too hard to break, and it isn’t too difficult to run your own firm. There are too many partners out there to help, and the benefits far outweigh the downside.
I can’t replace what I have: With the right partners, almost any platform can be replicated from technology to service menu and investment options (i.e. alternatives).
In a future blog post, we will review the steps needed to simplify the breakaway process. If you are considering breaking away or building your own firm, LibertyFi and Wealth Advisor Growth Network can help.
For help assessing your fintech needs or managing the Envestnet platform, contact Alli Jordan at LibertyFi: https://libertyfi.com/contact
For a free consultation about creating your breakaway RIA, contact Jay Hummel at Wealth Advisor Growth Network: firstname.lastname@example.org