A Comprehensive Guide to Independence for Financial Advisors Seeking True Ownership

For most of my career, I didn’t even realize that independence was an option. I was a second generation wirehouse advisor turned manager who never thought about doing it any other way. In 2017, as a senior executive with one of the world’s largest wealth management firms, I finally woke up. Contemplating a compensation change at my company, we were studying industry trends when it hit me. Top advisors weren’t jumping from one wirehouse to another as much anymore – they had figured out how to go independent. At that point, I hadn’t seen that path as a viable option. I suddenly realized I was fighting yesterday’s battle. I had been so programmed to sell against the other major banks and brokerage firms that I missed the evolution of our industry.

From my dad’s era, beginning in the 60s, to my first day on the job in 1992, right up until now, the wealth management business has always been dominated by entrepreneurs – the industry simply evolved to meet their demand in the same way all industries do. True entrepreneurs don’t want a boss, yet, for decades, thousands of top producing advisors have acquiesced at being mere employees. Those days are over now, and there are multiple ways for advisors to stop pretending to be business owners and become actual business owners.

In this Guide to Independence I share at a high level what I’ve learned after two years studying the movement toward independence and another five years leading one of the biggest disruptors in the space. Here are the main options that can empower top performing wirehouse financial advisors to become their own boss and to unlock the asset they’ve worked so hard to build. The options range from the complete do-it-yourself model to the independent broker dealer captive model to supported models where you can either establish your own regulated entity or conduct your business on someone else’s platform.

However, what is most important is that you have choices – how you decide to move forward is up to you. Understanding these choices and how each one can help you achieve your goals is critical. This guide aims to help you fully consider that range of options before you.

Do-It-Yourself (DIY)

This model offers the most freedom and control but may also be all the rope you need to hang yourself. Most advisors launching DIY independent firms have needed to hire a large employee base, backed by multiple outsourced vendors, who do everything – and I mean everything: Human Resources, Billing, Technology Support, Operation, etc. They have no integrated platform to lean on, no specialist network to help them with portfolio construction, alternative investments, insurance, financial planning, etc. However, the bright side is that your payout is 100%. Granted, the reality is that the 100% is before a potentially bloated payroll, plus benefits, taxes, rent, utilities, compliance, supervision, regulatory support…and there’s no scale to drive down the costs of asset management, technology, custodians, etc.

Also, as the proud owner of your own regulated entity, you have all the liability that goes with it, which may be a lot more risk than you want.

The scope of responsibility and the costs of going it alone have long kept top producing wirehouse advisors from considering it as a viable alternative. A few years ago, a wirehouse advisor with 30+ years of experience had been conducting due diligence on Sanctuary. He called to tell me that he decided to go with the DIY model instead of joining our network and utilizing our platform. The analogy he gave me was perfect. He related his decision to building a house. He said he wanted to be the architect and the general contractor constructing every aspect of his firm. He would not only design the house but be the one to contract all of the trades, from the foundation and the framing to the plumbing and electric. He acknowledged that the house would probably end up being more expensive and maybe not as well built, but it’s what he wanted to do. (By the way, he ended up changing his mind and is thriving as a Sanctuary Partner Firm, but I still draw on his analogy.)

Captive Independent Broker Dealer (IBD)

Back in the day, the Do-It-Yourself and the Captive Independent Broker Dealer (IBD) models were the only options for advisors seeking ownership. If Do-It-Yourself is more rope than you want, the Captive model might not be enough. In this option, you typically join an IBD along with thousands of other brokers from all walks of life. While you are limited to the IBD’s platform, you do get some benefit from its scale. You also get to offload the regulatory liability, and you can score an upfront check almost as lucrative as if you were going to another wirehouse. Captive model firms are typically self-custody/self-clearing, just like a wirehouse, or they are a single custody RIA, beholden to a captive platform. They are willing to pay the big check upfront because they make money off your clients the same way as the bank or brokerage firm that you’re looking to leave. That could range from ticket charges, markups on SMAs and below market cash sweeps, to wide spreads on loans, technology upcharges, miscellaneous fees or any other number of ways.

In the Captive model, you’ll have moved from being a W2 employee of a big bank or brokerage firm to being a1099 independent contractor, so you will escape the HR policies of your current employer. Other than that, it might not feel much different than being a wirehouse employee. Marketing and platform restrictions, compliance policies, etc., will still most likely be made to the lowest common denominator the same way it is at a big bank or brokerage firm and while you own your clients, it’s still not very easy to leave the IBD, requiring external ACATS and all that. So, buyer beware…

Following the homebuilder analogy from above, the Captive model could be compared to buying a model home in a master planned community. You get what you pay for, and it may be exactly what you want, but you have little to no input into how it looks or is managed.

Supported Independence

Do-It-Yourself and Captive represent options at opposite ends of the spectrum. In between are supported independent structures with a variety of different attributes you need to understand to include Multi-Custodian, Hybrid, Own ADV and Shared ADV models. Let’s take a look at them one by one.

Multi-Custodian describes a platform where the advisor is not restricted to one custodian for the safekeeping of client assets. Since you are not beholden to any one financial institution, you can act in your clients’ best interests and do business wherever you see fit. This is a welcome change for wirehouse advisors where the custodian also happens to be their employer. From my previous life, I can relate to the sometimes uncomfortable position of having to defend the strength and stability of my employer or combat the company’s social or political views. In a multi-custodian environment if the client is unhappy with the financial institution holding their assets, you can simply transfer their assets to a different bank or custodian without disrupting your relationship as their trusted advisor. Some multi-custodian platforms, such as Sanctuary’s, have gone as far as investing in technology that enables advisors to bill for advice on assets held at financial institutions around the globe, even if there is no formal custodial relationship. To take it a step further, with a tech-advanced, multi-custodial platform, it is feasible for your client to maintain an account at your prior firm and still compensate you as their advisor. In addition, many advisors are surprised to learn that it is even possible to manage a client’s participant 401k account. Advisors seeking to maximize the benefits of independence usually insist on the freedom to be multi-custodian.

Hybrid means that the offering includes an integrated broker dealer, which can be important even if you have embraced the movement toward a fee-based business. Some clients might prefer to buy bonds on a mark-up basis rather than paying a fee; variable annuities and life insurance policies require a broker dealer, and often alternative investments and structured products fit better on a broker dealer chassis. A hybrid platform gives you the flexibility to do business as you see fit – and charge clients in a way that’s mutually agreeable.

ADV is short for Uniform Application for Investment Advisor Registration. If you are in a Shared ADV independent model, you own your own business with your own P&L – an asset that you can sell on the open market, but you conduct your advisory business through someone else’s registered investment advisor (RIA). That means that it’s the RIA who has the regulatory responsibility for the entity, including the obligation of being aware of, translating and appropriately implementing all of the SEC’s rules. From a regulatory standpoint, in a Shared ADV structure, you are an Investment Advisor Representative (IAR) and still have to comply with the SEC’s rules, but you don’t have the liability or obligation of interpreting those rules and developing written supervisory procedures around them. It is similar to the arrangement that exists in the wirehouses.

Shared ADV & Corporate RIA

Now that we’ve reviewed the jargon, let’s examine the pros and cons of a supported independence platform with a Shared ADV structure. While offloading regulatory liability is a huge positive, compliance can be a pro or a con. It all depends on the lowest common denominator. Look for a partner with an advisor profile very similar to your own. Sharing an ADV with likeminded, professional advisors of your caliber is the best way to mitigate the risk in another scenario where you might find yourself in a compliance culture that’s built for advisors well beneath your standards. Another quote from one of our partner firms stands out. He said, “I get it, you can treat everyone like an adult because you only have adults.” Finding the right community can make for a great environment, too – one where you can learn from other advisors and drive one another to be better than you might have been otherwise.

In a shared model, you are also better positioned to benefit from scale. Whether it’s for custody, technology or asset management, advisors sharing the same ADV benefit from being able to negotiate costs and terms together. They can also share resources like a co-op. For example, each of you does not need your own compliance officer; you can share one. Same with Billing, HR, and Operations. If you have enough successful teams in your network, you may even be able to attract a top Wall Street strategist, AI specialists, and other key talent, who would serve to enhance your client offerings. The power of this type of model can be the other partner firms in the network themselves and the inspiration they provide. You can learn from them, collaborate with them and compete with them. They can push you to be your best, and together you can push the platform provider to be even better. A Shared ADV platform that is both multi-custodian and a hybrid offers the broadest array of well-vetted products, strategies and solutions.

I equate this model to the custom home builder who specializes in homes just like the one you’re dreaming of building and who has an existing roster of tried-and-true framers, electricians and plumbers. You, as their client, hire them and trust them to choose the right trades, manage them and hold them accountable. When you’re considering this model, it’s always a good idea to ask for references. Speak to several of their network firms with a similar background who have established a business comparable to the one you want to own.

Own ADV & Own RIA

If you elect to start and own your own RIA, you have to operate under your own ADV. (Note: the industry uses these two terms, RIA and ADV, interchangeably.) Now that we know what an ADV is, you have to figure out how important it is to you that you own it personally. As noted above, in the Shared ADV model, you own your wealth management firm, but you conduct your business through a corporate RIA with a shared ADV instead of starting your own.

We discussed the advantages of that above, but there are some potential drawbacks. For example, you might want to offer a certain technology or a particular type of fund that a corporate RIA declines to provide. Using the home builder analogy, it would be as if you want a certain foundation company to pour your slab, but your home builder declines to work with them because of their pricing or reputation – or because the builder already has relationships with three other foundation companies they trust.

When it’s your ADV, you get to choose who you and your clients work with. It may come at a higher price and without the due diligence or support found in a shared ADV model, but it’s your decision, period. Sounds great from a control perspective, but it can be a daunting and overwhelming amount of responsibility.

You can hire a company to provide support and expertise around technology, investments, billing, HR, etc., but they are careful to insulate themselves from your compliance and regulatory risk. While many do offer compliance consulting, most stop short of allowing you to name them as the Chief Compliance Officer (CCO). Tru Independence is a notable exception. Tru will take on your compliance burden and allow you to formally list them as CCO on your ADV.

Aggregator

One of the key advantages of independence is the potential to sell your new firm at a much higher multiple compared to the typical “retire-in-place” program offered by a wirehouse. This multiple, which determines the enterprise value, increases with top-line revenue and assets – meaning the larger the business, the higher the multiple. This creates a market for smaller businesses to be bought at lower multiples, aggregated and then sold together at a much higher multiple. It’s been my observation that once you’re independent, there is no shortage of buyers. (I have also seen that there is a negative correlation between the multiple and control. The more control you want to maintain, the lower multiple someone will be willing to pay you for your business.)

Let’s look deeper at teaming with an aggregator as another viable option for going independent. The aggregator will want to buy at least a portion of your business soon after you have unlocked your book from the wirehouse. Like most business owners, your new wealth management firm will likely be your single largest asset. If you think your business valuation is going to be flat to lower in coming years, it may be attractive to sell some or all of it as part of going independent. (If you think your business will be worth more later, you may not want to consider selling yet.)

Aggregators are usually platform providers as well. Selling them a portion of your business means tying yourself to their platform. Even some of the minority buyers have control provisions that can influence or even dictate how you manage the business and invest your clients’ portfolios. However, selling a minority portion of your business can create needed liquidity to responsibly leverage capital for making additional acquisitions. Additionally, it allows you to bring in a partner who can help your business create efficiencies or grow faster. Selling a minority investment also diversifies your assets while maintaining the same or higher cash flow levels compared to your time at a wirehouse, adding significant liquid assets to your personal portfolio.

Selling a portion of your business is an enormous decision. If you sell it all at once, you may not care too much about who buys it, but your clients will. If you sell only a portion of your business, you essentially take on a new partner for the life of the business, which could feel like acquiring a boss. For most, this kind of decision is too challenging to make during the transition out of a wirehouse. Maintaining control, having an open mind and keeping your options open for a couple of years will help you make a prudent decision. Diligence and experience will guide you in determining the right fit.

Conclusion

Working as an employee of a wealth management firm is like renting a home. It might make sense during some stage of your career, but if you’ve been successful, there are now a number of ways you can establish ownership. Do your homework and figure out which is best for you. Deciding factors are usually more about structure, culture, control, support and risk, and less about cost. However, it is important that you make sure you peel back the onion and understand the total cost to you and your clients. All of these models price a little differently. In my experience, there’s no free lunch. It ends up costing about the same no matter how you do it.

So, choose a partner who you trust to be transparent with you. The option you choose should be the one that allows you to serve your clients the best and grow your business the most.

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About the Author: Vince Fertitta

Vince Fertitta’s career spans 32 years in U.S. wealth management, international wealth management and private banking. He joined Sanctuary Wealth as President in 2019 after serving on Merrill Lynch’s senior leadership team and executive committee. At Merrill Lynch, Vince ascended into the role of one of six divisional executives responsible for leading Merrill Lynch’s Wealth Management business. He also served as a Bank of America Market President in Texas, selected by the CEO to bring together various statewide lines of business to deliver the bank’s strategy to clients and the local community. Vince built his early reputation as a successful financial advisor first at Shearson Lehman, then at Merrill Lynch, earning the designations of Certified Financial Planner™ (CFP®), Chartered Retirement Plan Counselor (CRPC®) and Certified Investment Management Analyst (CIMA®).