Some people in our industry will say that it is the best of times, while others will say it is actually the worst of times.
Independent financial advisors are experiencing their highest revenue in history, while those in wirehouses are feeling squeezed by continuously changing payout grids.
Compensation is a key area for wirehouse advisors to examine when considering the move to independence. Although money is but one factor in this decision, often evaluated alongside the ability to provide superior service to clients and the freedom to run their businesses as they have always envisioned, it is an important one, as there are crucial differences between the compensation models of a wirehouse and a registered investment advisor.
For traditional wirehouse advisors, compensation is often extremely difficult to describe to clients.
The bulk of this is generally paid as a fixed percentage, or payout, of their production, and is typically in the low 40% range for top advisors. An advisor's production, however, isn't an accurate reflection of the true revenue the practice generates but rather what is left over after the firm takes an initial cut (see illustration below).
Source: Focus Financial Partners
When evaluating the share of revenue that a typical wirehouse advisor retains, top advisors are increasingly questioning whether the services and support provided by the wirehouses come at a fair value.
Furthermore, when evaluating the compensation model, advisors often overlook the additional out-of-pocket expenses that wirehouses impose on advisors running elite client-centric practices, such as a larger staff, specialized marketing collateral or client events.
In the independent space, advisors are in control of their destiny, free to tailor their businesses to best meet the needs of their clients and team members. This model is much easier to describe to clients because it can be broken down into a simple formula: revenue – expenses = income.
In addition, an independent business benefits from operating leverage, which isn't possible at a wirehouse. Operating leverage is a simple yet powerful business concept where every dollar of additional revenue is more profitable than the last, because operating expenses don't grow at the same rate as revenue.
In a wirehouse environment, an advisor's payout percentage rarely changes once they cap out, and this results in zero operating leverage.
As illustrated above, in an independent business margins are significantly enhanced, operating leverage is realized and advisors are better able to truly serve the needs of their clients.
If this seems like a compelling reason to join or become an RIA, maybe it is time to pick up the phone and dig a little deeper. It is much easier than many think.
Justin Ferri is a managing director with Focus Financial Partners in New York, where he assists elite advisors build, run and grow independent wealth management firms.
This story is part of a 30-day series on going independent.