Rep’s route to ‘happyness’ could be via RIA channel

In the recent film “Pursuit of Happyness,” Will Smith’s character achieves financial security (not to mention solvency) by winning a job with a brokerage firm.

In the recent film “Pursuit of Happyness,” Will Smith’s character achieves financial security (not to mention solvency) by winning a job with a brokerage firm. The message of the movie is inspiring, of course, but most brokers can attest that getting the job is just the beginning.
It can take years to build up a substantial book of clients, and it all begins as a hustle business. The first few years can be especially difficult as new business is acquired in painstaking increments through cold calls and new-client meetings.
While the brokerage firms — unsurprisingly — don’t make their employment statistics publicly available, it is generally understood that attrition at the entry level is extremely high. For the hardy few who last beyond the first three to five years, the job begins to pay increasing dividends. Happy clients begin to refer their friends and family members. Books of business are inherited from brokers leaving the firm.
Gradually, the business begins to get momentum and grow outside of the sweat equity being poured into it.
Reaching that first inflection point also marks the beginning of a change in how brokers approach their business. Instead of spending the majority of their time seeking new business, they spend more and more time deepening client relationships.
Time spent reviewing portfolios, making financial plans and bonding at sporting events or on the golf course pays off in the form of a deeper, more trusting relationship. One interesting aspect of this change is that at this point in their career, brokers often begin to move their clients to fee-based accounts. The shift to fee-based payment is a win for both parties. For the client, fee-based payment ensures a relationship based on unbiased advice, removing any lingering doubts about the suitability of high-commission products. For the broker, it converts lumpy payment streams from commission products into predictable annual fees. By the time they hit the 10-year mark, many brokers have moved at least part of their business into fee-based accounts.
As they move into the next stage of their careers — say, the 10th to 20th year — most brokers have developed high-quality small businesses. They may manage millions, if not billions, of dollars in client assets. Many have switched employers several times. The big brokerage firms offer payments in the range of one to two times the last 12 months’ production to join their firms.
For the best brokers, this creates a culture of “free agency.” While there is some value in the brand name and product access of the firm they are joining, it is clear that the value of the business lies in the relationships that the broker has built up. After all, it’s likely that their clients already have switched firms with them several times already. To clients, it just means a stack of paper to sign and a different logo on their adviser’s business card.
While accurate data are hard to come by, anecdotally, the best brokers expect to retain more than 90% of their business after this kind of move. The important question for the industry, then, to ask is, “Is this it? Is this the endgame for a successful broker — pick up a healthy check every five to nine years (the typical range of lockup periods) and then retire with a gold watch and a hearty thank you?” While this can certainly be an attractive lifestyle, successful brokers can sometimes feel that the outcome doesn’t do justice to the business they’ve built.
For an increasing number of ambitious brokers, the answer lies in going independent.
While “going independent” was once a euphemism for failing to meet production quotas, there has been a growing trend of high-production brokers’ choosing to break away and start their own firms.
Why leave the good life when you’re the star producer and are guaranteed a check every five to nine years? The most commonly cited reason is the desire to build equity value. Instead of working as an employee, a broker has the opportunity to start a firm with their name on the door. Starting a registered investment adviser firm gives brokers the opportunity to handpick and train the next generation. Over a period of years, the junior partners can take over the client relationships and eventually buy out the equity of the founding broker.
Many others are attracted to the RIA fiduciary standard. Their practices have been built on client relationships and acting in the clients’ best interests, and the RIA world captures that commitment better with its fiduciary standard than the wirehouse world does with its lower “suitability” standard. Going independent isn’t easy, and it isn’t for everyone. It’s quite a change to move from a “payout” and “production” environment where your employer is taking the majority of the fees paid by clients to owning an income statement where you make 100% of your revenue and manage all your own expenses.
Is a broker who leaves a captive environment completely on their own? Of course not. Custodians such as Schwab Institutional of San Francisco and Boston-based Fidelity Registered Investment Advisor Group have programs to help breakaway brokers get their businesses up and running. Other firms, such as Focus Financial Partners, invest in RIAs and can help newly independent advisers immediately realize some of the equity value they have created, without giving up control over running the business.
While there is always risk in striking out on your own, there are also commensurate rewards. It’s also worth noting that Chris Gardner, whose story is celebrated in “Pursuit of Happyness,” left Bear Stearns Cos. Inc. of New York to start Gardner Rich & Co. in Chicago.
Richard Gill is vice president of business development at Focus Financial Partners,
a New York-based network of independent-fiduciary wealth managers.