According to a webcast by Schwab Advisor Services, in the last few years there has been an uptick in the number of advisers looking to join RIAs.
Other reasons advisers might consider going independent include more product offerings, marketing and infrastructure. According to Schwab, some wirehouse advisers have expressed frustration over limited control. At an RIA, the adviser is able to control all aspects of his business, said Allison Mistlebauer, director of adviser services strategy at Schwab Advisor Services.
The RIA model can yield greater opportunity for expansion. In one Schwab study, about half the firms surveyed added new principals since their founding.
Quality client service and relationships was also cited as a motivating factor. Jeff Leventhal was previously at UBS before becoming an adviser at HighTower, where his focus is wealth management and institutional money management “One wirehouse is no different from another,” he commented.
“I came to realize that the wirehouses look at our clients as just a number,” Leventhal said. “[There is] not a lot of interest in putting client interests first—they want to be more profitable.” During the financial crisis of 2008, he recalled, that tension between profitability and client servicing became much clearer to him, and moving forward, he wanted to protect his clients.
Landon M. Yoshida, an adviser with Iwamoto Kong Wealth Management Group, said the financial crisis also played a part in his decision to become independent. “Everyone can recall 2008 and what happened,” he said. “People asked out loud, ‘Is my firm going to exist on Monday?’ From that point on, I spent a lot of time reassuring my clients that their money was safe. It really got away from the practice we were building.”
The safety of financial institutions became a louder topic of discussion. Wirehouses have been the dominant presence for so long, Leventhal said, because of their perceived safety, as well as access to products and services. “The safety issue was thrown out the window as the financial crisis began to unfold,” he said, while “custodians like Schwab were not in the news because they are not attached to a bank.”
‘I am not cut out to run a business’
Joining an RIA is often a good fit for those who find running a business a hassle. “I was fortunate to have experience in both the independent broker/dealer as well as the big firm,” Yoshida said. “I realized I am not cut out to run a business. Thinking about trying to run a payroll, and staying in compliance—that’s the No. 1 thing— and [keeping up with technology]. I had to find a place where the infrastructure is already set up.”
Other benefits of joining an existing RIA are leveraging cost structures and economies of scale, according to Leventhal.
Mistlebauer pointed out that when advisers don’t have to expend time and energy on the day-to-day business, it leaves them freer to focus on their client base and running client experience, rather than the tasks of payroll and accounting.
One thing that sealed the deal with HighTower,” Leventhal said, “was that the relationships would always be mine, from day one. And from an investment standpoint, they asked me how I ran money and how we handle clients. They wanted to make sure the process would fit what they do in the marketplace. I could expand on products and services, back-office support, what kind of ongoing service they would offer my clients.”
Yoshida said his points of clarification were similar. “Of course I started with the topic of payout,” he said. “We’re all looking for that growth. I would suggest that those looking at these options ask the firms you’re meeting with, ‘What are you going to provide for me?’ Get those expectations really clear.”
Leventhal pointed to having an existing team as a reason he was comfortable he could operate on his own. Although there were aspects of the business he didn’t want to be involved with on a daily basis, he wanted to make sure he was an owner. “Many of us as advisers want to have some ownership stake in the business,” he said. He said that HighTower, which is adviser-owned, has national scale and is multi-custodial, provided reasonable solutions.
What Transition Looks Like
Advisers soon find out that transition is not instantaneous. “I learned right away the transition would not be over the weekend,” Yoshida said. He found that he had to explain to his clients and help them understand. “It wasn’t as smooth in that sense as I was hoping,” he said, although he was able to bring over all his clients with one exception.
“You have to know the language and be able to talk through the differences and help that client understand why they’ll be better off going that route with you,” he said.
Leventhal said that an important difference to retain in working through transition is that between a dual-party and a tri-party relationship. “I wish I’d understood that better,” he said. In the independent model, it’s firm, adviser and client, while at a wirehouse, it’s company and client. “When you come from the wirehouse world you are not a true fiduciary,” Leventhal pointed out, “but when you go RIA that is a huge benefit to the client. That can help make the transition much smoother.”
Yoshida agreed that an adviser does not need a wirehouse in order to deliver a great client experience, and mentioned the many resources available to help clients. “We can offer a dashboard where they can look at all their accounts in one place, whether it’s with us or a bank. There’s no way Merrill would have offered that.”
Yoshida’s firm—10 staff members and four wealth managers—is “entirely an RIA, SEC-registered. We have no broker/dealer affiliation. All the wealth managers have let their Series 7 lapse,” he said. Schwab is their sole custodian for client assets. “I like the simplicity,” Yoshida said.
According to Leventhal, HighTower has 250 employees with 65 adviser partners. They are multi-custodial, and advisers can work with more than one custodian, but he chose Schwab.
“There’s an option out there for whatever will fit a person, Mistlebauer said. “Larger national presence? Small, local-driven firm? It’s a matter of understanding what you want and how you’ll fit in from a cultural standpoint.”
When two advisers are touting the advantages of going independent, it is natural to wonder why anyone would stay at a wirehouse. Inertia is one factor, according to Leventhal. “It’s a lot of work to make a move, and some people don’t want to put the effort in.”
Yoshida echoed this, adding, “Obviously we’re a little biased.” Benefits, including health insurance, can be an important reason to stay with a wirehouse, he said. Merrill Lynch was very generous in its coverage, he said. “Ask the question, ‘What is that going to look like, if I transition?’ ” he advised. Part of his compensation structure was keeping his coverage at Bank of America Merrill Lynch through COBRA, which the firm paid a substantial portion of.
Other issues that might make the change harder to consider, Yoshida said, are advisers who believe there is a low likelihood of bringing clients on board, as well as retention packages and signed agreements. “The risk and the reward makes a lot of sense, and you do have to make that leap of faith and take a shot,” he said.