Personality Test

“Almost every adviser has thought about making a change during this period,” says John Bowen, CEO of San Martin, California-based CEG Worldwide LLC, a financial-services consulting and adviser-coaching company. “If they have not, they have not been paying attention to what is going on.” Despite the past two years’ upheavals, Bowen has not seen much recent movement by advisers above the $750,000 production mark. “With all the disruption, we are only seeing slightly more than the 10-year average of approximately 1.6% per year movement at this income level or higher,” he says. Retention packages undoubtedly helped.

Nobody likes change, including advisers, says Liz Farrar, a Partner at adviser recruiter Vousden Associates in Washingtonville, New York. “It is important for FAs [financial advisers] to know what the opportunities are for them out there. They should not be afraid to explore,” she says. “The ball is always in their court to decide if it is in their clients’ best interest and, if not, they should not move.”

Overall, “we certainly saw a slowdown in the past 12 months, compared to the previous 18 months,” says Darin Manis, CEO of RJ & Makay, a financial-industry recruiter and consultant in Colorado Springs, Colorado. “We are starting to see things pick up. A lot of FAs moved in 2008, but a lot of FAs did not want to move when the market was really volatile.” Manis cites several reasons for the lack of movement during market volatility, including deals structured on assets that were declining at the time. Many advisers also did not want to approach their clients about moving to another firm when their clients’ portfolios were down 30%, he says, “and many firms were in the press every week with some sort of negative news.” A large group of advisers also took retention deals to wait until the market and the environment stabilized, and “are getting the first part of their retention deals dropping­ off,” he says.

A lot of advisers have been waiting to see how mergers and joint ventures worked out, Manis says. “You have had three major mergers in the past couple of years with Merrill/BofA [Bank of America], Wachovia/Wells Fargo, and Morgan Stanley/Smith Barney,” he says, but now financial advisers have a good read on what their firms are going to be like and what their culture is going to be. “A lot of FAs are not content with their current situation, and are looking now,” he thinks. “Combine all of those undercurrents with record or near-record high transition packages, the growing appetite wirehouses have for rising-star producers, and more channel and work options for FAs than ever before, and you have a new, fertile recruiting environment,” he adds.

Evaluate your affiliation partner yearly, Bowen recommends. “It is simply good business practice to evaluate all your strategic relationships annually to make sure they help you to serve your clients very well in a cost-effective manner,” he says. In addition, while clients’ needs and the needs of an adviser’s family remain key elements in deciding to change, an adviser’s own preferences also should play a big part in a decision to change affiliations—especially if it involves a shift in business channels, such as from a wirehouse to becoming a registered investment adviser (RIA). “I do not think it is a personality thing. It is more an issue of the business structure,” he says. “Do they have the energy and motivation to be a classic entrepreneur, or do they prefer to work as an ‘intrapreneur’ within a large organization? It is more of a different mindset.”

RIAs typically have the most independence, followed by advisers affiliated with independent broker/dealers, advisers working for so-called “regional” (mid-size) companies, and wirehouse advisers. Sources talked about four of the key mindset questions advisers should ask themselves when evaluating the best option for them:

Do you want to blend into an existing culture? Nowadays, advisers going to a wirehouse walk into a very established culture, Farrar says. “On the wirehouse side, it is very much about growing their business. If you do not have a growth model, they are not interested,” she says. A wirehouse makes its expectations about an adviser growing his or her business very clear when the deal gets worked out, she says. “If an adviser is ‘resting in place’ [career-wise] or thinking about leaving the business, a wirehouse would not be a good fit,” she adds. As Manis says diplomatically, “They are always focused on getting the best out of their FAs.”

Wirehouses considering a hire look at an adviser’s leadership roles in the community, in the industry, and at their current branch, Farrar says. While no one personality profile thrives in the wirehouse culture, “generally speaking, it is someone who is an A type personality,” says Bill Willis, President and CEO of adviser recruiter Willis Consulting, Inc. in Los Angeles—a self-starter, self-reliant, confident, and resilient, he adds. Whether an adviser stays at wirehouses long term seems to have a lot to do with his yearly revenue, Manis has observed. “The upper half of production of FAs at wirehouses typically goes to another wirehouse,” he says. “Do not get me wrong: You definitely have big teams that go RIA or independent, but most go wirehouse to wirehouse.” Forty percent of reps who changed firms from October 2008 to September 2009 worked at wirehouses, and 53% of those advisers stayed within the wirehouse channel, according to Discovery Database.

Advisers setting up a business establish their own culture. “You have to have an independent, entrepreneurial type of personality [to thrive in your own business],” says Jim Williams, President of San Rafael, California-based ­Financial Telesis Inc. “You have the flexibility: You can modify your practice and build it any way you want.” Of course, that comes at the cost of a much greater administrative burden. (More on that later.) Regional firms loom somewhere in between wirehouse and independent culture. “Maybe there is less pressure on FAs that they have goals to meet, and some of the offices may have a more collegial feel” because they have fewer advisers than mega-firms, Manis says.

When Bowen talks to advisers currently thinking about a move, they mainly want stability. “They also are looking for a management structure that shares their vision and philosophy,” he says. “Culture is extremely important.” At wirehouses and regionals, he adds, branch managers drive a lot of that cultural tone, and individual offices can have very different dynamics.

“There are many cultures within the overriding company culture,” Manis says. “Visit the branch and talk to the FAs at that branch, and get a sense of what life is going to be like at that office—not just in the first weeks, but in six months or a year.” With affiliation partners looking to sign advisers to multi-year contracts, he says, it becomes important to understand how an adviser gets treated further down the line.

Do you like very structured processes and procedures? “The wirehouses are best for somebody who is comfortable with, and likes, structure,” Willis says. “If you are going to fight it, you are going to be miserable.” Some advisers do not like wirehouses’ extensive compliance requirements, he says, as well as other limitations such as not being able to do their own branding. Bowen points to the upside and downside of a structured workplace: “The positive is the amount of tools and resources an adviser has; particularly compared to an RIA, they have a competitive advantage. Working in a structured environment with a firm that specializes in retirement typically will provide the adviser with the processes and tools to be successful. The negative of the structure is that you do not have as much flexibility as someone on the independent side.”

Listings for new advisers comprise a large portion of the total ads placed on Atlanta-based financial-services recruiting Web site Brokerhunter.com, and Brokerhunter.com President Steve Testerman says that the companies willing to hire new people “are typically the larger firms that can afford to train them and to absorb the expense of people who do not ‘make it’ in the business.” For newcomers starting their career at a wirehouse, he adds, “They get locked into that system and grow their business over time, maybe inherit some books of business,” he says. He does not see independent advisers with a decade or more of expe­rience shifting into those wirehouse jobs, although experienced wirehouse advisers will move to another wirehouse.

Bowen characterizes the regionals as hybrids: not quite as much structure as a wirehouse in areas like compliance issues and tools used for the various business models, but more structure than a classic independent. While they offer more freedom than a wirehouse, he says, they also may not have an equally expansive product mix or the resources of affiliated investment-banking groups and capital-markets groups.   

Willis sees less of a structural downside. “In between, there are the ‘regionals,’ even though that label is a misnomer,” he says, citing as examples Oppenheimer & Co. Inc.; Raymond James & Associates, Inc.; and RBC Wealth Management. “Typically they have all the products and services that are as good as or better than wirehouses, and a little more flexibility to do your own thing, as long as it is right and proper.” That can involve promotion and marketing efforts such as doing a radio show or running an advertisement with an adviser’s name that promotes a particular product or service, for example. A bit more freedom suits some advisers better, he adds: “Some people say, ‘I am not going to another wirehouse. I am tired of all those rules. Take me to someplace that does not have as many rules, but is not independent.’” Farrar agrees about the mentality. “The advisers I know who do well at smaller or mid-size regionals are very proud that they are not working at a larger house,” she says, “in the sense that they have a little more independence than if they are one of 12,000 advisers.”

Advisers who set up their own business take that mindset a step further. As Willis says, “Independents [RIAs] are people who say: ‘I have had it. I want to own this thing.’”

Do you want to take on the details of running a business? Going fully independent as an RIA also means getting the resources to serve clients as well as operate the business. “The most successful ones are great businesspeople and great advisers,” Willis says. “You have to run the business, as well as the business of working with clients.” The details involved in overseeing a business can seem “kind of mind-boggling,” he says. “If they work for Merrill Lynch, all the choices are made for them.”

Some advisers love the freedom to choose what ­products and services they offer, and how their company operates. A self-employed adviser also faces a choice on nitty-gritty issues from an office lease to fund-selection tools, from which support employees to hire to how to get compliance reporting done. While she has seen more advisers than ever explore the possibility of full ­inde­pendence, Farrar says, “As appealing as it is, it is a big leap that can be really daunting.” Some advisers decide to work with broker/dealers who take care of much of the adminis­trative burden of being an RIA, she says.

Financial Telesis operates as both a broker/dealer and an RIA, and independent-contractor advisers can be licensed through either or both, Williams says. “Most folks do not want to go through the licensing process themselves. The regulatory scrutiny, which is going to get worse, causes people to say, ‘I do not want to deal with that,’” he says. “Ten years ago, there were more people who were willing to say, ‘I am going to become my own RIA.’ An independent broker/dealer can take care of all the paperwork and compliance.” Advisers who work with a broker/dealer that allows them to be independent RIAs or to use the broker/dealer’s RIA “absolutely have to follow the broker/dealer’s rules and structure,” he says. That includes areas like customer-protection rules to make sure advisers’ clients have suitable investments and that their investment ­objectives are being met.

In addition to an affiliation partner who eases that workload, Williams says that many self-employed advisers want tools to help them run and grow their business, like a fund scoring system and participant communication materials. “A lot of broker/dealers have pieces of that,” he says, “but advisers are saying, ‘Where can I go to get one-stop shopping?’” Advisers need tools that help them work with plan trustees to make sure the trustees meet their fiduciary responsibilities, he says. “In my mind, not many broker/dealers both understand the retirement-plan business and can provide those tools,” he says. “That is why it is really hard for retirement-plan advisers.”

Advisers who go the wirehouse route already have a one-stop place for resources. “There are real advantages to that in the sense that some of the large houses have ­excellent training and support programs for advisers,” Farrar says.

“You have a system where everything is done for you” in terms of tools and support, Manis says. “It is like the Ritz, so to speak. You get resources, the support, and the platform. These are things that are hard for an independent or RIA to match but, if you are entrepreneurial enough to take chances on managing your own office and P&L, it is probably not going to be the best long-term match for you.”

Moreover, a wirehouse adviser may be prohibited from serving as a fiduciary, or locked into a product platform that he or she considers less than ideal.

How much of a payout/expenses trade-off are you comfortable making? Wirehouse advisers get a lower payout in return for all that support, but Willis says they do not get a guaranteed salary. For an independent adviser, payout hovers around 90%, Williams says, versus about 50% for a mega-firm adviser. “Everybody does the analysis and, at some point, they are leaving too much money on the table,” he says. “They say, ‘My gross is $300,000, but I am getting $150,000.’”

Willis explains why that works for some advisers. “What they get in exchange for the lower payout is that all their expenses, within reason, are paid,” he says, such as office rent and support staff. Wirehouse advisers also get the benefits of their firms’ branding and promotional efforts, he says.

However, overall, wirehouses still can offer strong producers an alluring financial package to join. “At this point, the larger houses are pretty much the only ones with a significant transition deal,” Farrar says.  “The deals are more and more back-loaded; you have to hit certain bogies in terms of asset growth or production.” Manis offers an example of a 300% package: A $1 million producer might get $1.2 million upfront, and then another $1.8 million in two years as the adviser brings assets over and hits certain predetermined targets, he says.

In return for that kind of package, Manis says, many wirehouses now sign advisers to seven- to nine-year deals. “Regionals will do maybe in the five- to seven-year time frame,” he says, “but they are not giving  the same level of a deal.” Still, he says that mid-size firms have successfully attracted some advisers since 2008’s market crash. “A lot of channels have become more viable for FAs, as regionals and independents become more competitive in their offerings and aggressive in their recruiting, and take advantage of the Wall Street meltdown,” he says. “What I love about the industry right now for FAs is that there are so many great, viable options.”

Fully independent advisers take a bigger chance on income but, in theory, have more upside potential. “Among higher producers, there is always the concept of going more independent, and being better compensated for what they do,” Farrar says. The expense of running a business “is still going to add up to a lot less than what they are giving up with their current firm” as an employee getting a lesser payout, she says. “It is just the stress and the responsibility.”

“If you are an RIA, the question is: What are your expenses?” Willis says. “In some cases, the expenses take the net payout below wirehouses.” Advisers thinking about going RIA often do not understand how much they would pay for things like employee benefits, he says, or the cost of renting office space that is comparable to their current or former employers’ digs. “They do not want something that looks like they got kicked out [of their large employer],” he says.

Few top wirehouse advisers are going totally independent at this point, Bowen has observed. “When they looked at creating the infrastructure from scratch, and the investment required, it did not make sense, irrespective of the retention deals offered [by wirehouses].” When top advisers also considered the retention deals, he says, the choice became a no-brainer for most.

“The payout is 100%, but it is further out,” Willis says of RIAs. “You need to bring with you as a new RIA an existing book of loyal clients. You probably have to already be successful, and you probably should be in fee-based relationships exclusively, or close to it.” Now, advisers need $100 million in assets to have a sustainable business, he says. In that case, he adds, “you have a business that can generate $1 million in revenue a year so, when we have a down market for a year or two, the business can survive. If you have $100 million [in assets], you can run a first-class operation in terms of support staff and the facility, and still have a good net payout.” If an adviser generates $500,000 in revenue a year but is based in a high-cost area, he says, “You may end up spending $300,000 to $500,000 to make it happen.”

“At the end of the day, you want a payout that is at least 50%,” Willis says. “You can do it with a lot less than $1 million, as long as you do not spend anything. My experience is that people end up spending a lot more than they thought they would.”

To net more money after expenses—office, overhead, any employees—an adviser would need at least $100,000 in annual revenues, Testerman says. He offers a simplified example. An adviser doing  $100,000 at a wirehouse would probably yield $30,000 to $35,000 in earnings a year, he says. That compares to perhaps $70,000 to $75,000 at an independent shop, after ticket charges and other items payable to the broker/dealer. “The net increase is $40,000. If your expenses are less than $40,000, you have profited from the move,” he says. “It will depend on the level of expense.”