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Independence is a nebulous concept that means something different to each of us. But a prevailing misconception is that independence means “going it alone.” The famous 16th century poet John Donne reminded us that “no man is an island; entire of itself,” and his words ring true to this day.
Independence can coexist with support. The financial services industry must accept that notion for the sake of the advisory profession.
Advisors have been vehemently encouraged to break away and stand on their own, defying a source of oppression (the wirehouse). While I support the parts of that narrative that are empowering to the advisor and that highlight the need for registered investment advisor (RIA) firms to better meet clients’ needs, I resent the subtext of this story that equates being independent with doing everything alone.
Think about what it means for an advisor, on their own, to be performing every necessary function of their business. That includes investment management to human resources, recruitment, back-office administration, marketing, compliance… are you exhausted yet? None of this considers the need for advisors to service their clients via in-person meetings, portfolio management and more. This isn’t what advisors are hearing when they set their sights on going independent; they’re being fed stories about their freedom and the promise of greener pastures. RIAs frequently find themselves straddling dual roles: business owner and client-facing advisor.
Going independent entails an immense amount of work that, depending on the size of the practice, can quickly become untenable. I’d like to offer an alternate vision for advisors to consider when pursuing the independent model.
A different path
An overwhelming majority of advisors (71%) prefer the independent model but only 44% are independent, according to a new report from Cerulli Associates. This disconnect has, at least in part, emerged as the result of a breakdown in the independence narrative. While independence may sound alluring to many financial advisors, it’s essential they have a clear understanding of what they’re hoping to achieve. Is it owning their clients and data, removing hurdles and benchmarks, controlling their expenses, realizing enterprise value, deciding how to market themselves and their firm, freeing themselves from restrictive covenants, or something else entirely? Clarity is needed on this question before pursuing the independent model.
That’s why it’s essential to carve out a clear path toward independence, one that simultaneously and equally addresses the advisor’s and clients’ needs. RIA firms are often highly client-centric and that’s hugely commendable. However, they also should provide an environment that supports advisors in key functions of their business – not just putting the end client first but placing the advisor’s needs front and center. In essence, RIA firms need to create a culture that doesn’t leave advisors feeling like independence is akin to being marooned on a desert island.
For example, an RIA could offer full service and support for all the advisor’s back-office needs. Most advisors would prefer to be unencumbered by administrative tasks, instead spending their time with their clients and on work that drives measurable growth. By removing the weight of administrative responsibilities from the advisor’s shoulders, an RIA affords them the ability to thoughtfully grow their business in a way that feels fulfilling to them.
Trust the relationship, don’t set traps
Many advisors are hesitant to leave a brokerage firm because they have unwittingly entered into predatory contracts that make it difficult for them to take their book of business and start anew. Breaking away may involve losing access to critical data or leaving client assets on the table due to conditions specified in the advisor’s agreement with their broker-dealer. Essentially, some of these contracts are trapping advisors at firms where they’re not happy.
RIAs that want to instill a sense of independence among their advisors should avoid contracts with restrictive covenants and instead permit advisors to command ownership of their book of business. No one wants to feel like a prisoner in their own home – RIA firms can build trust with their advisors by eliminating outdated and predatory restrictions.
You can’t sell independence
For advisors looking to go independent, it isn’t easy. They must scope out RIAs with which they may wish to affiliate, thus forgoing the comfort of their existing business. Usually, it takes a lot of time and patience to find the right fit, especially as most firms mask themselves using similar language and tactics. The advisor’s need to run their business during all of this doesn’t just go away, making it a stressful period in their career.
Meanwhile, when engaging in conversations with prospective RIA partners, the advisor may find themselves on the receiving end of a hard sell and not the consultative intel and advice they need. Going independent is a big decision, and advisors need partners that are aligned with their business needs.
The advisor doesn’t have to become the CEO of their business to achieve independence, although that’s what some advisors want. But independence can also be achieved via a structure that allows advisors to choose how they spend their time and how they don’t, with full tactical, strategic, and emotional support from the firm that stands behind them.
Justin Starnes is the chief growth officer with Journey Strategic Wealth, a New Jersey-based registered investment advisor.
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