Stories abound about advisors leaving wirehouses and regional firms to go independent, but how about bank-based advisors. Do bank-based advisors go independent? Do they have the correct skill set or client base? If they do move to an independent firm, will they be successful? How big does their book need to be before moving independent? These are the questions many of them find themselves asking.
First, consider the differences between a wirehouse advisor and a bank-based advisor. Advisors moving from wirehouses to independent firms usually have an easy transition because they are accustomed to hunting for business and marketing themselves just like an independent advisor. In these models there are neither referrals from banking partners nor warm leads to call. These advisors have had to learn how to market themselves or starve. They must know how to go out into the big cold world and get in front of individuals with money. Then they have to convince these individuals they have the knowledge and trustworthiness to help secure a sound financial future for clients.
This is the most challenging task at a wirehouse and is the reason that the majority of advisors fail in their first three years.
The successful wirehouse advisors usually do a pretty good job building strong relationships once their prospects become clients. When you work hard to turn a prospect into a client, you usually value them more and work hard to keep them. This is also why advisors who leave a wirehouse or regional firm typically take about 75% to 80% of their clients to the new firm.
Now let's look at the typical scenario for a bank advisor. In most situations, these advisors spend most of their time closing business instead of hunting for it. They are working with existing customers of the bank. These customers may have relationships with several bankers within and outside of the branch. If they are referred to the financial advisor, it is just one more relationship they have at the bank.
Typically the process starts with the financial advisor getting a referral from a banking partner or finding the customer while canvassing the bank's database. The advisor will typically show up for the appointment and spend an hour talking about a specific investment. If they are good, the client buys the product and the advisor moves on to their next appointment. In most cases, the advisor has very little interaction with the client after that first meeting, all of which does nothing to build strong relationships.
There are exceptions, of course, but most bank based advisors do not have the time to establish strong relationships. And most of the bank advisors we hear from say they would love to spend more time getting to know their clients better and build stronger relationships, but feel it is just not possible.
Another major issue is the number of clients. Bank advisors have too many clients with a very small average account size in comparison to the wirehouses. It is not possible to build strong relationships when you have 2,000 clients. Servicing these accounts will become a nightmare.
When we coach advisors in any model, we tell them to strive for fewer clients with larger accounts. The biggest producers in the industry know that a successful advisor should reevaluate his or her book each year. They should get rid of the bottom 10% to 20%. This would allow them to spend more time with the upper 20% of their books.
At a bank, this is easier said than done because advisors are expected to service all account sizes. At wirehouses, advisors are forced to get rid of any accounts under $250,000 (or get paid very little on them.)
There is a happy medium and all advisors in all models should be free to find it.
When an average advisor leaves a bank to go independent, they will take 20% to 40% of their clients with them. Again, there are a lot of variables that come into play. Some bank-based advisors have taken 50% to 60% to an independent model.
We spend a lot of time coaching advisors on the strategies of moving a book. It is fairly easy to figure out how big an advisor's book needs to be before contemplating a move to the independent model.
First, you must know the industry average return on assets is 1%. This means that the average advisor generates about 1% in total revenue from the assets they manage.
Second, you need to know the average net payouts (revenue after expenses). An independent advisor gets about 70% to 80%, while in a bank model, the average payout is about 35%.
So, say a bank advisor has $50 million in assets under management and gross production of 1%, or $500,000. This advisor is making about 35% of that amount, or $175,000 per year.
If that same advisor changes firms and takes 35% of his assets ($17.5 million), he'll generate revenue of $175,000. And assuming an 80% payout, the upper end of our 70% to 80% range, he'll make $140,000 in income.
Consider the reasons an advisor from any model or firm may want to go independent and some of the common misconceptions.
• Payout comes out to about the same as a wirehouse after you pay expenses.
This is not true. Most independents will have a net payout between 70% and 80% depending on their control of expenses.
• I will be an island and have no direction or support. I will have to do everything on my own.
Not true. In most cases your broker-dealer is there to help you every step of the way. Your success is their success. Think of being independent kind of like a franchisee, but you have more freedom than a franchisee.
• I will spend too much time handling compliance.
The average independent advisor spends about eight hours a month on compliance. There are also solutions at most firms that will assist you with compliance or even do it for you.
In summary, independence is not for every advisor. Some advisors have more of an entrepreneurial spirit than others. Some would like to build a business while others are happy having a job. Some have done a great job building client loyalty while others have customers who don't even remember them.
Some advisors are very good at hunting for the business, and some feel they need to be spoon-fed. Any of the models can be good or bad, it just depends on the advisor's goals and their strengths and weaknesses.
Being a financial advisor is one of the best professions in the world. It is one of the only professions where you can build a loyal book of business that will follow you anywhere and pay you a fee each and every year-if you build it right.
There are advisors that understand that and the ones that don't. Which one are you?
Rick Rummage is the founder and CEO of The Rummage Group. He can be reached at firstname.lastname@example.org.