Max Schatzow, Esq.

Financial Professionals Should Consider Their Available Employment Options and Going Independent

by Max Schatzow, Esq.

Are you a financial adviser, investment adviser, wealth manager, registered representative, or similar financial professional? There are many different names for those who render investment advice. Have you ever wondered how your clients’ situations might improve by changing your employer or business partner? Have you ever considered how your own personal financial well-being might improve if you changed your employer or business partner, joined a new firm, or started your own independent investment adviser (RIA)? This article is designed to illustrate the options that exist as you explore your current situation, and ultimately tries to convey how forming and operating your own RIA may be the best choice of all.

I. Employee of “Wirehouse”

“Wirehouse” is an antiquated term that generally refers to Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo — some of the largest companies in the country.

If you are currently employed at a wirehouse, you may want to reconsider. Here’s why:

1. Name Recognition:

Once upon a time, working for a wirehouse was the best form of advertising. These companies carried great name recognition with Americans of all age groups. However, in light of recent regulatory events, scandals, and enforcement actions, the original luster of these companies is beginning to fade. The culture at these companies is being exposed for what they truly are — for-profit companies that are most concerned with their shareholders.

I performed a Google search using the keywords “Merrill Lynch SEC enforcement” and uncovered five settled enforcement actions in 2018 and 2019 alone between the U.S. Securities and Exchange Commission and Merrill Lynch. Using the same search methodology, I uncovered one for UBS and two each for Morgan Stanley and Wells Fargo. This does not contemplate any of the trouble these companies have faced from their other regulators such as FINRA and the Consumer Financial Protection Bureau.

2. Conflicts of Interest

Wirehouses tend to have more conflicts of interest than other firms, especially financially related conflicts. They receive payments from vendors for recommending products; they sell affiliated investment funds and bank sweep products; they direct trades to exchanges where they have ownership interests; and the list goes on. All of these conflicts of interest ultimately lead to higher costs and lower returns for your clients.

3. Overhead Expenses

The wirehouse model has historically, and continues to have, some of the lowest payouts in the industry based on financial adviser revenue. One source indicated that payouts at wirehouses are only 32-42% of revenue generated. The payouts are so low because these firms have such extensive overhead costs — they have massive real estate complexes in major cities, a need to fund retirement packages for thousands of employees, highly compensated executives, and a stable of professionals with niches you might never need (annuity, banking, insurance, marketing, corporate, estate planning, IPOs, microcap, structured products, etc.).

4. Lack of Succession Options
When you are employed by a wirehouse, the dynamic is employer-employee. You likely do not have a meaningful equity stake in your employer and you do not have much flexibility in monetizing your goodwill that you have created by doing your job over the years. At best, a more junior adviser might pay you for an introduction to your clients so he/she could eventually take over managing those relationships. With an ownership in an independent investment adviser, you have many more options for potential buyers, such as other RIAs, which helps you to recognize the true value of your goodwill.

5. Client Ownership
In a practice that has become more prevalent in recent years, wirehouses are treating employees as if the wirehouse owns the client relationship, when we all know that no one can “own” a client relationship. Wirehouses include restrictive covenants in their employment agreements which prevent employees from soliciting and servicing their clients upon their departure. Both Morgan Stanley and UBS left the broker protocol in recent years, which makes it more difficult for advisers seeking to leave these firms and to take their clients to new firms. However, it is definitely not impossible and we have counseled numerous clients through this process.

6. Restrictions on Freedom of Investment Universe

While employed by a wirehouse, you will likely be restricted by investment, operations, and compliance policies. You may be forced to keep client portfolios within certain managed strategies. You might also be required to purchase affiliated mutual funds. Further, you might be prohibited from managing a client’s outside assets such as their 401(k) account. All of these things might be to your and your client’s detriment.

If you are just starting out, you might think that those posting on LinkedIn or other job sites to take part in a financial adviser training program is a great launching point into a career in the financial industry. If it is with the “wirehouse” model, you are probably wrong. According to one source, the Practice Management Division of Merrill Lynch had over a 90% failure rate for new employees. If you are serious about your future in the financial industry, you may want to explore other options.

II. Join a Hybrid Model

There are many different types of hybrid models for investment professionals. On one end of the spectrum, an advisor can join an independent RIA that has an affiliation with a friendly broker-dealer (e.g., Purshe Kaplan Sterling Investments, The Investment Center, APW Capital). On the other end of the spectrum, an adviser can join a separate operating division or company of a wirehouse such as Wells Fargo’s Finet. This provides these advisers with higher payouts and access to many products to recommend their clients on a commission basis, including variable annuities. Many of the same items addressed above can haunt advisers in hybrid models. For example, hybrid firms might be more likely to face regulatory scrutiny. Additionally, an adviser in a hybrid model might not be entirely free to determine his or her client’s investment policies and security selection. Depending on the firm, they might also not receive the maximal payouts.

However, there are benefits to these models. Making a transition to a hybrid model can present less risk and less time in addressing operational issues. For example, a person making the decision to go hybrid won’t have to consider registering an RIA and implementing a compliance program. They won’t need to locate office space and enter a lease or purchase real estate. All of these things should be considered in making a decision on what works best for you.

III. Own and Operate an Independent Investment Adviser

While I might be a bit biased, I truly don’t see why anyone would ignore this option. I represent many clients managing as little as $25 million who are profitable at operating RIAs. The economics of the decision are very compelling. The chart above explains the total revenues generated from different levels of assets and advisory fees (75, 85 and 100 basis points).

This chart only reflects the annual, recurring revenue that one could generate operating an RIA. It does not contemplate what one could earn as part of the sale of their business. RIAs are legal entities and can be sold just like any other company. They have relatively high values compared to other businesses. Their value fluctuates based on numerous factors (e.g., asset levels, age of clients, location, and expenses). The multiple that we have witnessed in this industry over the last several years is anywhere between 1.5 and 3.5. So for the business referenced on the bottom of the diagram, that owner could expect to achieve anywhere between a $1.5 million and $3.5 million payout when he or she sells the business. This is a very compelling reason alone to consider forming an RIA.

Here are some reasons why our clients decided to take the leap:

1. Independence

As a business owner, you have the freedom to dictate how to operate your business. You get to decide who to hire, what investment philosophy you want to adhere to, where your office will be located, whether to manage outside assets, and even more granular details like website and logo design.

2. Legal Standard

RIAs are held to a fiduciary standard when they render investment advice. Under current rules applicable to broker-dealers, they operate under a different legal standard. While it is technically called a “best interest” standard, it does not live up to the RIA standard.

3. Expense Control

Obviously, there are expenses involved in starting your own business — office space, technology, administrative support, legal, and compliance. However, these costs are all controllable and an RIA has lots of control over these variables.
4. Create Your Own Brand

Many clients that I work with are eager to become true entrepreneurs. They express that they have largely felt that way since they started their careers in wirehouses. One of the common refrains I hear is that they were predominantly responsible for the growth of their business. Given that fact, why not continue that trend outside the purview of your prior employer?

IV. Conclusion

If you are considering making a transition away from a wirehouse, or from one wirehouse to another, I would be happy to have an introductory discussion with you at no cost. I try to offer prospective clients an honest assessment whether going independent is the right move for them. If it is not the right option for you, I have ample experience assisting advisers with negotiating lift outs, bonus compensation, and succession plans.

Please visit or call 1-800-53-LEGAL to learn more.

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