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‘The Most Important Thing’ Breakaway Brokers Must Answer Before Taking the Leap

Get this wrong and misery, instead of liberation, could follow.

"Success favors the brave." 

Those words appear beneath Michael Souza’s name on his LinkedIn profile. And that same quote is splashed prominently across the website of his company, Koa Wealth Management, the independent RIA he founded in San Diego that manages roughly $100 million in assets. 

Becoming an independent advisor wasn’t always an obvious choice for Souza. Though he first entertained setting up his own company as a vice president at UBS in 2007, it took eleven years to make the break, by which time he was senior vice president and portfolio management director at Morgan Stanley.

“As for many people, business and personal circumstances got in the way,” he says. Souza is no stranger to a career change – he was once a professional football player for the Indianapolis Colts. A year after making the leap, Souza says the experience has been “illuminating, to say the least.” 

Breaking away can be a fraught experience for brokers, regardless if they work at a wirehouse or independent RIA. Some 44% of prospective breakaways said they were likely to move in the next 12 months, according to a July 2019 TD Ameritrade survey, with nearly half saying they are more interested in moving in 2019 than they were in 2018. 

Louis Diamond, executive vice president and senior consultant at Diamond Consultants in New York, says the current climate is a perfect storm for potential breakaways. “Wirehouse brokers feel the squeeze from their firms who have time after time marginalized the advisor force, attempted to institutionalize individual businesses, and overall taken away as much freedom and control as possible.” 

At the same time, the success of many independent advisors has shown this to be a viable alternative for those who had doubted their options. “It’s never been easier to become an RIA,” says Scott Collins, managing director of institutional consulting for TD Ameritrade Institutional, which provides brokerage and custody services to independent advisors.

Collins points to improved tech solutions but also greater awareness among investors about the competitive edge of independent RIAs. “We’ve recently seen the big firms go to great lengths to keep brokers chained to their desks, but that can’t stop the inevitable. Brokers, and their clients, all know that the independent RIA model is the superior model.”

That doesn’t make it any easier for breakaways to take the plunge. “Inertia, fear, sheer overwhelm, and sometimes complacency stops advisors from making the leap,” Diamond says. “It is always much easier to stay especially as businesses continue to grow and advisors have a very comfortable quality of living.”

Diamond says advisors can emotionally prepare by educating themselves early and often, so that the process becomes less overwhelming. “Talk to colleagues who have made the move, and think about the decision to go independent strategically,” he says. He advises potential breakaways to make an inventory of their goals, identifying the exciting areas of independence versus the areas that might bog the broker down, then consider outsourcing potentially challenging areas.

Jason Fertitta was part of a team at Morgan Stanley that managed $6 billion in client assets until April, when it became one of the largest advisor breakaways of 2019. Their new firm, Americana Partners, joined the Dynasty Financial Partners network to leverage Dynasty’s wealth management services, people, technology, and capital support. 

After just 75 days, Americana amassed $1 billion in assets under management. But Fertitta says many challenges remained. “When you’re at a big bank, mentally you feel like there’s a cavalry to call when something goes wrong,” he told RIA Intel. “That is not there at your own firm, so everyone at these firms has to work harder and be smarter and be better – but the morale is super high all round.” 

With partners like Dynasty and breakaway platforms offered by Schwab and TD Ameritrade competing to provide services for breakaways, there is no shortage of service providers, consultants, capital providers, and platforms to choose from. This can be particularly enticing for existing wirehouse advisors who look to technology and personal support to smooth their transition, according to Diamond. 

Smaller independents likely already have turnkey support in place at their broker-dealers, making these partnerships less of a draw, says Diamond. Nonetheless, brokers at these smaller firms may find it easier going solo as they own their clients, have an existing brand, office space, and know what it means to be business owners.

“I think the most important thing that any advisor really needs to determine for themselves before they venture into the RIA space is the following – am I a business owner or a financial advisor?” Souza says. Being an IAR on someone else’s RIA platform is the right move for many advisors, Souza says. They receive much of the autonomy and compensation that prompted them to enter the business without the risks and distractions that can pull advisors in many different directions outside of their primary job of serving clients.

Souza recommends all potential breakaways read The E-Myth Revisited by small business expert Michael E. Gerber. It argues that most starting small businesses lack the business skills required to succeed. “Running a practice as an employee of a wirehouse, bank or independent firm might give you the illusion that you’re a business owner, but I can assure you those individuals are not,” Souza says. “Running a business requires a separate set of skills and a willingness to always be ‘on,’ while at times being pulled in many different directions.”

Potential rewards for breakaway brokers include true equity ownership, ultimate control over the business, creation of a legacy, and “more fun, not to mention superior take home payouts,” says Diamond. “It’s a ton of work to go through the project but just about everyone on the other side says it was the best decision they ever made and [that they] wish they did it earlier.”

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