A Primer for BreakAways (Part 2) - The Transition

Originally published February 28th 2013 by Pinnacle Advisor Solutions - From the Corner Office is the leading blog for emerging independent financial advisors (AUM of $20-400MM) designed to address the common strategic and managerial issues associated with building a profitable practice. The blog is authored by the team at Pinnacle Advisory Group, an independent financial advisory firm serving more than 800 families with assets of over $1.1 billion and a four-time winner of the coveted Moss Adams Best Managed Practice award. The blog is typically published on the 15th and last day of the month.

We already established that there is life in a post-wirehouse world.  Indeed, for most, the post-wirehouse world is the beginning of the better half of their careers.  But what does that transition look like?  What is involved?  Most are unfamiliar with the transition process, so in this second chapter of the Primer for Breakaways, we are going to walk you through the transition process step-by-step.  What you will learn is that the most difficult part of the process is overcoming your inhibitions.  In a world full of outsourcing solutions, there are plenty of partners to facilitate a relatively straightforward process to establish your own independent RIA and begin the better half of your careers.

We break this transition process down into two parts: first, the breakaway decision, and, second, the actual transition process.  We further break down the breakaway decision into three steps …

Step1: Education.  In 2012, Fidelity published a survey of breakaway advisors.  That survey observed that 94% of advisors were happy with the decision to breakaway and that 90% of them wish they had made the decision to breakaway sooner.  The #1 obstacle to their decision was a lack of information about how to do it.  And that hurdle was compounded by the feeling that advisors were alone in the decision – unable to consult with bosses or peers for fear of discovery.  Moreover, the survey reported that the leading recommendation of advisors who had already broken away was to develop a plan before embarking on the transition.  Those with a plan experienced a smoother transition.  So clearly, the first step in the process is education.

But where to go for that education? The good news is that there are a growing number of sources of information.  Each of the big four custodians have dedicated a portion of their websites to education about the transition process including white papers and calculators.  Links to these resources can be found at www.BreakAwayAdvisors.com.  The trade press provides a steady stream of the latest information on breakaway trends and the players participating.  We have provided a link to some of those feeds on the website.  And there a number of highly reputable recruiting / consultant firms who specialize in educating and facilitating the transition to another firm or to independence.  Indeed, Finetooth Consulting, the kick-off speaker for the 2nd Annual BreakAway Advisors Symposium is just such a firm.  On Wednesday March 13th, he spoke specifically to this point (webinar replay): what are your choices and what do you need to consider before making the breakaway decision.

Step 2: Is it right for me? The single most important decision, and perhaps the hardest decision, in the entire process is the one that requires that you be honest with yourself.  Once you know the choices (i.e. move to another firm or start my own firm), you must ask the hard question: are any of these choices suited for me.  While it’s easy to be swept away by this very sexy breakaway trend, and, indeed, the intellectual arguments are persuasive, the fact remains that no one will live with your decision but you.  Moreover, if you are not confident in your decision, neither will your clients be.  John Hill of Pinnacle Advisory Group will address these issues as he discusses his own experience as a breakaway (webinar registration).

 Step 3: Am I wearing handcuffs?  Should you decide a move is warranted and you are comfortable that breaking away is the right decision for you, it’s down to brass tacks: are there any non-solicit or non-compete clauses in your employment contract that will make it more difficult to bring your clients with you?  So before getting carried away with your decision, it’s time to engage an attorney to review your employment contract, opine on your ability to take your clients with you and explain the steps you must to take to transition your clients without becoming entangled in an argument with your current employer.

Before getting queasy about the prospects for transitioning your clients, a little perspective is in order.  The breakaway advisors in the Fidelity survey indicated that most or all of the clients they wanted to take with them followed them to the new firm.  Indeed, whether they follow you says more about the relationship you have with them than the difficulty of navigating your employment contract.  This is also an important step insofar as you start to think about what clients you can or want to bring with you which will prove an important assumption in the economic analysis we will review in Part 3 of the Primer for BreakAways.

At this point you have selected a business model and decided to go.  So now it’s about the transition.  The good news is that the hard decisions are behind you and the right partners can make this a very smooth transition.  For our purposes today, we will walk you through the transition to independence based on our recent experience with an advisor who started his own firm by partnering with a compliance firm, a custodian, Pinnacle Advisor Solutions and FocusPoint Solutions.

Getting Started.  Once the decision is made, it’s time to start putting the pieces together.  This part of the process takes place in private while you are still employed with your firm.  In our example, this process took two months.

Establish an Entity.  A simple process.  Most choose an LLC structure.  Some an S Corp.  Your attorney can advise you when they review your employment contract in part 1.

RIA Application.  Your compliance consultant will interview you, complete and file your application to establish an RIA.  The time to approval depends on the state(s) in which you file.  In our example, the approval process took two months.  This was the governing timeline.  Meanwhile, the compliance consultant provides the new firm with policies and procedures and any other compliance documents to establish the firm.  AdvisorAssist will address these issues in his presentation on 03/27 (webinar registration).

Custody Application.  Meanwhile, you can also make application to the custodial firm you have chosen.  They conduct a background check and approve your new RIA.  TD Ameritrade will discuss how to choose a custodian and transition assets in his presentation on 04/03 (webinar registration).

Back Office Set-Up.  The back office must be ready to go before you ask clients to transition.  This means selecting, installing and integrating your technology solutions (Email, CRM, Portfolio Management, Rebalancing, Trading, Reporting, Document Management) plus hiring and training staff.  FocusPoint Solutions will review several cases studies about how to manage the back office in its presentation on 04/26 (webinar registration). Alternatively, you can choose a turnkey solution like FocusPoint Solutions as our advisor did.  In this case, FocusPoint is wholly responsible for owning, operating, maintaining, upgrading and integrating all the technology plus they provide the staffing to handle account set-up and administration, billing, reporting and all manner of day-to-day back office needs.  So during these two months, all the advisor needed to discuss was migrating client data so they can pre-populate any forms that you will need to provide clients during the transition phase.

Client Conversation Prep.  Perhaps the most important step after your decision to breakaway is to prepare for client conversations in the transition phase.  You need to be prepared to explain what these changes mean to the client – which in all cases means better service.  We recommend dividing your clients into three groups and prepare for each.  The first group includes those that will follow you without question; the second group includes those that may have a few questions but will follow you regardless; and the third group is that small group of clients that will ask you twenty questions.  In our example, Pinnacle Advisor Solutions worked closely with the advisor to craft the most appropriate messaging, write the announcement, provide branded collateral to support the conversations and prepare FAQs.  In our experience, advisors worry most about talking to their clients about change.  So this step is important not only for the client, but to provide the advisor with the confidence they need to communicate effectively with their clients.  What we have found in each of our transitions is that advisors underestimate their relationship with the client and overestimate the pushback they will receive.

The Transition.  When everything is ready, it’s time to announce your resignation and the formation of your new firm.  At this stage the clock starts to transition your clients.  The communication process will be governed by the restrictions of your employment contract.  If you have no non-solicitation or non-compete restrictions, you will immediately schedule conversations with your clients, deliver the message and have them sign the pre-populated paperwork.  If there are non-solicit or non-compete restrictions, your attorney will have provided you with the guidelines for communicating with clients … which may mean they will need to contact you on their own … but there are steps that can be taken so they know where to find you.  

This transition process can be as long or as short as you would like it to be.  It is typically driven by how long it takes to schedule a client meeting and hold the meeting.  Once the client signs the necessary paperwork, FocusPoint can have the assets transitioned to the new custodian and invested in the new platform very quickly.

While all of this may seem like a lot, what is important is that there are partners available today to help you through all phases of the process from getting educated, to establishing the firm to transitioning the clients.  Independence no longer means do everything yourself.

If this sounds interesting and you would like to learn more, please join us for the 2nd Annual BreakAway Advisors Symposium.  This free webinar series is designed to provide you with the information you need to make a decision and introduce you to the leading players that can help.  One of these partners will make a presentation on their respective field of expertise each Wednesday afternoon in March and April.  The webinar format should allow you to participate in private and on your own schedule – presentations will be posted at www.BreakAwayAdvisor.com.  You are also welcome to follow a continuing conversation on the breakaway market on Twitter: @BreakAwayBroker.  If you were unable to participate last year, we encourage you to join us this year.

That’s all for today.  I plan to pick up the conversation with a discussion of the economics in Part 3 of the Primer for BreakAways on 03/15.  Stay tuned!  And as always, feel free to contact me anytime.  We are always happy to help or point you in the right direction if we cannot help.

 Pinnacle Advisor Solutions is a leading provider of comprehensive business solutions for emerging advisors ($20 million to $400+ million AUM) committed to growing their firms profitably and developing the practice they always wanted. Learn more at www.pinnacleadvisorsolutions.com

See more at: A Primer for Breakaways Part 1: Trends & Rationale

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