Emerging Enterprises: Independent Paths for Advisors Managing $100mm or Less

Written by: Joshua Tomolak

In a world that seems to focus on billion-dollar firms making the leap to independence, advisors at a lower asset threshold are wondering how they too can gain greater freedom and control. Here are 4 solid options.

If your view of movement in the wealth management industry is limited to only what you read in the headlines, it may seem like only billion-dollar teams are leaving the wirehouses to build independent businesses.

But “real life” in the industry is very different.

During my tenure at a major custodian, it was reported that 70% of their $700B in custodied assets was held by firms with less than $100mm in assets—and the majority of independent broker dealers have a median advisor client that is also below that threshold.

So while in the public eye it may not seem like there’s much in the way of activity amongst $100mm AUM advisors, there is both plenty of action and opportunity.

What are the independent options for advisors with $100mm in AUM?

The continued growth of the independent space is driven by advisors who want to maximize their income potential, have access to best-in-class third-party technology, and greater flexibility on how they engage and communicate with clients.

Yet contrary to what many advisors believe, the independent playing field isn’t limited to big teams. For example, for advisors managing approximately $100mm in assets who desire greater freedom and control in how they build and grow their business, there are 4 main paths to choose from:

1. Sliding into independence “in-place”

Today, many “traditional” W2 firms offer an avenue for their advisors to transition from W-2 to independent contractor (1099) status. For example, Ameriprise Financial has their independent P2 channel, Wells Fargo leverages FiNET, and Raymond James and Stifel both have their own independent advisor platforms.

Each of these allow advisors to stay with a firm they and their clients are already comfortable with, maintain the same technology platforms, minimize the disruption of a move since there isn’t the need to repaper, and find a significantly higher payout with greater flexibility.

Yet advisors need to be aware that such a move would likely not come with a transition deal or upfront capital, and the advisors are responsible for their business costs (staffing, benefits, office expenses, etc.). Additionally, if there are challenges and frustrations within the current firm that are driving the advisor to explore independence, an intra-firm move does not always provide the “greener grass” one may be searching for and there will be give-ups as far overall flexibility and customization.

2. Affiliating with an independent broker dealer as a 1099 independent contractor

If transitioning to independence “in-place” is not an option or not desired – and if an advisor wants some scaffolding and support – advisors can choose to affiliate with a broker dealer that has a 1099 channel. IBDs provide compliance services, a turnkey technology stack, practice management consulting, and a ready-built “plug and play” platform.

While changing firms comes with the disruption of a transition, there is an opportunity to get a transition deal, plus the potential gain of improvements in technology, platform and culture. And, of course, the opportunity to become a business owner by creating your own brand is a major draw compared to W-2 models.

Financial advisors in a 1099 independent contractor relationship with a broker dealer will typically have ownership over their client data and books of business. What this means for the future is that if you do choose to launch an RIA or partner with one, the paperwork and overall transition process is significantly easier and less risky than that of an advisor in an employee model.

Although advisors affiliating with an IBD do own their practice, there are a few downsides of this model such as the loss of complete autonomy in selecting technology vendors, being multi-custodial, and compliance still being managed to the lowest common denominator (although to a lesser extent than at traditional W-2 firms).

3. Partnering with an existing RIA (Joining an established RIA)

For those who are mostly fee-based and want to be business owners – but prefer to avoid the headaches that come with running a business and instead focus on growing the practice – this can be a great avenue. Advisors can affiliate under the corporate RIA and still conduct brokerage business via a “friendly broker dealer” of a firm that provides the needed infrastructure (technology, compliance, HR, financial planning, etc.), plus competitive and transparent payouts.

Advisors in this space often report having a more “personal” or “common sense” compliance experience than they had in larger firms, due to the smaller advisor pool and boutique nature of these RIAs. Plus, with the right cultural fit and a community of like-minded advisors, some of the concern around independence feeling a bit too “alone” is eliminated. Other advantages include the ability to be multi-custodial and the capability to seamlessly launch your own RIA in the future as assets will already be custodied with an independent custodian.

If an advisor is looking for upfront capital, this might not be the best option. While the RIA universe does have firms that offer upfront money when discussing a transition, the amount of capital is usually significantly less than that of their independent broker dealer counterparts.

4. Launching an RIA firm

One of the most frequently shared water cooler rumors is, “I need at least $100mm to launch an RIA.” While there is no doubt that scale is a valuable commodity in this business, the truth is if you are motivated by complete independence and autonomy, launching an RIA does not need to be dictated by your asset level.

While it may be a challenge to open a relationship with a major custodian below this threshold, the independent ecosystem has many smaller, full-service RIA custodians that are focused on treating “emerging” advisory firms as if they manage billions of dollars. After all, the $100mm RIA today could be the billion-dollar firm of the future!

Directly launching an RIA is the largest undertaking of these options from an administrative and financial standpoint—and typically a journey for the most entrepreneurial of advisors. Yet it allows them to build a business solely as they see fit, without conflict and answering only to themselves, their clients and guiding regulatory bodies. Advisors launching their own RIAs are also starting with a 100% payout and then incur expenses like technology, outsourcing compliance and local expenses as they see fit. Although RIA operators have the ability to truly control all aspects of their firm and receive a higher net payout as a result, advisors need to think long and hard about how they most want to spend their time and if there is value in “staying out of the kitchen.”

Whether you’re zealously pursuing a change or just looking for some additional flexibility in your current broker dealer relationship, the expansion of the independent space has avenues for nearly every advisor. But keep in mind that the process of considering change begins with self-exploration. Start by identifying what you are trying to achieve and weigh that vision against the options that are available to you. Once you have identified what you are trying to solve for, the path to a solution becomes much easier.

Related: Billion Dollar Sellers: Tracking the Shift of RIAs from Buy-Side to Sell-Side