1. What is critical for me to know about going independent?
There are several main parts to this answer:
First and foremost, you're no longer running a practice but a small business. You don't need approval to make strategic investments in your business, don't have to worry about whom your next manager will be, and never need to concern yourself with the stifling bureaucracy and politics inherent to larger firms. But, as a small business owner, there are expenses to be controlled, staff that require leadership, and marketing and brand-building considerations. These issues can be challenging, but ultimately engender pride of ownership. What will prove invaluable is setting up a network of mentorship and support across all aspects of your business from successful advisors who are open to sharing best practices and key insights towards success.
Second, choosing the right support team is critical to the success of a new firm. It is important to understand what roles need to be filled and identify which of your current team members are best equipped to handle those roles in order to effect a successful transition and add value to your new firm. Keep in mind that not everyone on your current team may be suited to handle the ups and downs of a start-up; Select those personnel who will think like shareholders, controlling expenses and delivering consistent value to your clients. At Dynasty, we decided to make everyone an equity owner in business so they act like owners because they are owners!
Third, know your legal and practical rights regarding your existing clients, and your ability to bring them over. Each major firm has particular policies regarding the issue, so be aware of what you can and can't do in terms of notifying clients and educating them (not selling them) about the benefits of working with an independent advisor. What client information you can take with you is strictly prescribed, and there are regulatory concerns regarding privacy. Make sure you seek legal counsel that has proven experience in setting up new RIAs and who understands issues around broker protocol and nuances around how you plan to run your business in terms of advisory and/or commission based business.
Finally, work with the right strategic partners. At Dynasty, we've learned that it takes a significant amount of time working closely with each advisor to determine which resources will best position the new firm for success. Through extensive research, testing and insight we've identified the essential partners that are vital to an independent start-up: An experienced, hands-on transition team, a solid custodian, assistance handling the compliance burden, a leading-edge reporting group and access to an open-architecture platform that offers institutional-quality research and investment products. Each traditional RIA custodian we work with (Schwab, Fidelity, Pershing) has local business development people. They can be great place to start to get educated helping you to build your own checklist for independence. Of course, there are numerous other considerations involved (current employment agreements, etc.), but nail these and the heavy lifting is basically done.
2. How will my compensation be affected in the independent space in contrast to my current situation?
As an independent advisor, 100% of your advisory fees hit your business' top line. On average, firms in the Dynasty network run their practice with a 65ù0% gross profit margin. Effectively, 65ù0% of gross advisory fees will translate into your new net pre-tax "payout". Said another way, your fixed costs (Real Estate, staff, etc.) and variable costs (custody, trading, legal, etc.) should run in 30% of revenue depending on your size, scale, etc. Thus roughly 70% is left to determine advisor/partners compensation. Many of our advisors take roughly 40-45% of revenue as compensation and leave 25-30% in the business as net revenue to make future investments in business.
As an RIA, you have the potential to ultimately keep more of what you earn, and build equity in YOUR business where everything you do directly correlates to enterprise value of business. (I'd like to take this opportunity to point out that Dynasty Financial Partners doesn't take an equity stake in the RIAs we work with; this is unique in the industry and has a beneficial effect on compensation and owners wealth accumulation since they own all the upside and reap all the benefits if they sell business some day.) Bear in mind, out of that payout, your "small business" will be responsible for paying all related fees and expenses, and financial issues in general become magnified. Spend a lot of time now creating a bullet-proof, detailed P&L projecting revenue based on AUM and proposed expenses that includes everything from office space to office supplies, personnel and custodial fees - not to mention taxes. This will give you a holistic, 30,000-foot view comparing your current business versus that as an independent RIA. Just as important, this exercise will show you to what degree you can find new sources of revenue and develop strategic business opportunities.