More and more financial advisors are choosing to break away from established brokerage and wirehouse firms to start their own independent practices. This growing trend, known as “breakaway advisors,” offers advisors a chance to gain greater autonomy, improve their client experience, and access advanced technology.
However, the path of a breakaway advisor also comes with considerable challenges that must be thoughtfully navigated.
In this comprehensive guide, we’ll explore what breakaway advisors are, why more advisors are choosing this route, and what to consider before breaking away for good.
What is a Breakaway Advisor?
A breakaway advisor refers to a financial advisor who decides to leave their brokerage firm or wirehouse to start their own independent practice, typically by joining or establishing a Registered Investment Advisory (RIA) firm.
RIAs are financial advisory organizations regulated by the SEC that offer customized financial planning and investment management services while acting in a fiduciary capacity. This differs from brokerage firms, which primarily sell products and operate under a suitability standard.
The number of breakaway advisors has steadily increased in recent years, with more advisors seeking independence, greater payouts growthinsta, and creative control over their practices. Industry surveys show approximately 25-40% of advisors are considering going independent in the near future.
Below are some key facts about the breakaway advisor trend:
- Independence – The #1 reason advisors break away is to gain more autonomy over their business. Advisors want to build their own brand, choose how they serve clients, and access technology that suits their needs.
- Higher payouts – Independent RIAs tend to offer 85-95% payouts compared to the typical 50% wirehouses provide. Breakaway advisors can thus increase their income potential significantly.
- Dissatisfaction – Many breakaways are driven by frustration over wirehouse culture, bureaucracy, mergers, reduced incentives, and other limiting factors.
- Positive experiences – Surveys show 75% of current breakaway advisors report being satisfied and earning more income after transitioning to independence. This fuels further momentum.
- Access to technology – Joining an established RIA provides breakaway advisors with turnkey tech solutions for CRM, portfolio management, reporting, and more without heavy upfront investment.
As the breakaway trend continues rising, it’s clear that the appeal of independence is incredibly strong for today’s advisors despite the risks and effort involved.
Why Become a Breakaway Advisor?
The question on every advisor’s mind is – should I make the leap to independence? Here we explore the top reasons to break away:
1. Freedom and Flexibility
For most advisors, the dream of calling the shots and operating their practice as they see fit is incredibly compelling after years of working under the constraints of wirehouse bureaucracies. As a breakaway, advisors regain autonomy over key decisions like:
- Branding, marketing, and messaging
- Product offerings and investment selection
- Client minimums and fee structures
- Team building and hiring
- Technology platforms and tools
- Compliance protocols and oversight
The flexibility to craft your ideal client experience and business model is a huge motivator for breakaway advisors. No longer having corporate red tape surrounding every decision allows advisors to truly personalize their practice.
2. Increased Profit Potential
As independent RIAs, breakaway advisors commonly enjoy 85-95% payouts on revenues generated, a significant jump from the average 50% wirehouses pay. Lower overhead and discretion over fee structures also help improve profit margins.
Industry surveys indicate most breakaways experience a 15-30% increase in income after their transition. With greater earning potential and equity in one’s own practice, the financial upside of breaking away is tremendous.
3. Freedom from Firm Politics
Frustrations over firm management, bureaucracy, switching platforms, reduced incentives, and other arbitrary decisions are huge drivers pushing advisors toward independence.
No longer being subject to the whims of corporate executives allows breakaway advisors to focus on client needs rather than politics. Streamlined decision-making, resources, and processes within a nimble independent RIA vastly improve daily experiences for most advisors.
4. Control Over Compliance
As fiduciaries, independent RIAs have stricter compliance requirements than broker-dealers. However, breakaway advisors switching to independence report greater satisfaction with compliance oversight, according to TD Ameritrade’s surveys.
The reason – independence provides control over determining compliance procedures that best suit an advisor’s practice. There is greater flexibility to tailor oversight to specific client needs rather than a one-size-fits-all corporate approach.
5. Access to Superior Technology
Utilizing efficient, integrated technology is critical for modern advisors to deliver an exceptional client experience. However, many wirehouse platforms are outdated, fragmented, or limited in capabilities.
By joining an existing independent RIA as a breakaway, advisors gain access to state-of-the-art tech solutions for portfolio management, reporting, client portals, CRM, business process automation, and more without high upfront costs.
The sophisticated tech ecosystem at leading RIAs vastly improves an advisor’s quality of life and ability to focus on client relationships rather than administrative work.
6. Opportunity to Build Legacy & Equity
As an employee of a wirehouse, advisors are simply selling products and have little opportunity to build real equity in their business. Breaking away creates the chance to establish one’s own brand and eventually sell or transfer the practice when the time comes.
The ability to leave a legacy and sell a business is a highly appealing benefit of independence that wirehouses don’t offer. Breakaway advisors see becoming entrepreneurs as the first step in truly taking ownership of their careers.
Challenges to Consider with Breaking Away
While the benefits are enticing, transitioning to independence as a breakaway advisor also comes with considerable challenges that must be thoughtfully addressed:
- High Startup Costs: Starting a new RIA requires extensive upfront investment. Costs include licensing, legal fees, compliance setup, new technology, office space, branding, marketing, and more. For advisors going fully independent, these costs can exceed $150,000+ and require 6-12 months until revenue generation. Joining an established RIA reduces but doesn’t eliminate these frictions.
- Complex Compliance: As fiduciaries, RIAs face enhanced compliance burdens compared to broker-dealer compliance. Staying on top of regulations, implementing robust oversight procedures, preparing for SEC audits, and adhering to higher standards add to an advisor’s responsibilities.
- Transitioning Clients: Smoothly transitioning client accounts to the new RIA custodian is critical for retaining assets. There can be significant logistical, technical, legal, and relational challenges in moving clients, especially high-net-worth investors with complex assets. Poor execution exposes advisors to losing accounts in transition.
- Loss of Support: Breaking away means losing institutional resources advisors rely on for assistance – legal, compliance, operations, marketing, HR, IT, investment research, and more. Replicating all of these supports as a small business is extremely difficult. Many underestimate how demanding this aspect is.
- Leadership Requirements: As business owners, breakaway advisors must embrace enhanced leadership duties – strategic planning, managing employees, overseeing processes, budgeting, navigating partnerships and vendors, regulatory relations and more. For many, this steep learning curve is unexpected.
- Psychological Friction: The comfort and security of established firms make cutting ties psychologically difficult. Breakaways must push past uncertainty, fear of the unknown, and the stability of their current situation to take the entrepreneurial leap. Having support systems to manage this transition is critical.
While each advisor’s specific situation differs, evaluating these common challenges prudently is an essential step to determine if breaking away ultimately aligns with one’s risk appetite and abilities. For the right advisor, the benefits outweigh the costs.
Steps for a Successful Breakaway Transition
For advisors committed to independence, breaking away successfully hinges on meticulous preparation and execution. Here are best practices for navigating the transition smoothly:
- Research Your Options Extensively: Gaining clarity on what independence requires is critical – costs, compliance complexity, technology needs, Legal and tax considerations, potential partners, etc. Understand what support systems are non-negotiable for you to operate independently.
- Consult with Specialists: Engage securities lawyers, accountants, and tech consultants early to determine executing requirements. Specialist input makes navigating uncharted territory with regulators and custodians easier. They also prevent costly missteps.
- Line Up Custody and Clearing: Research custodian/clearing providers that allow you to custody assets cost-effectively while providing the trading capabilities and advisory platforms you need. Getting paperwork and accounts established well in advance is key.
- Map Out Transition Logistics: Carefully project manages key aspects of the transition – new office space, branding, marketing, technology implementation, client communications, and account transfers. Build in buffers as frictions frequently occur.
- Speak with Your Clients: Be proactive in having transition conversations with clients to clearly explain your new independent practice and the reasons for the move. Make transparency a priority and reaffirm your ongoing commitment to them. Address concerns head-on to secure their trust through changes.
- Find the Right Partners: Evaluate potential RIA firms to partner with carefully based on your vision, values, and needs. The right strategic allies are force multipliers that provide missing capabilities and supports to enable success as a breakaway.
- Hire Operations Support: Bringing aboard skilled operations staff ahead of your transition will significantly ease the burden of executing day-to-day responsibilities as you focus on transitioning clients. Don’t underestimate the need for talent.
- Transfer Accounts Efficiently: Work meticulously with your custodian and current firm to implement the account transfer process. Automate components through custodian APIs to streamline where possible. Test and verify transfers continually to avoid snags.
- Implement Compliance Infrastructure: Build out key compliance policies, procedures, oversight protocols, and documentation practices right away. Doing this ahead of your first SEC audit instills confidence and preparedness. Don’t cut corners here.
- Monitor Progress Closely: Once the transition begins, monitor progress extremely closely across all workstreams. Rapidly troubleshoot any issues and keep your transition plan updated. Be ready to pivot as needed.
With careful preparation and flawless execution, navigating the breakaway transition can be managed for minimal disruptions. But the necessary time investments shouldn’t be underestimated.
Partnering with Specialists for Success
Given the high-stakes nature and complexity of transitioning to independence, partnering with specialists is key for breakaway advisors.
Let My RIA Lawyer help guide your journey to independence smoothly and confidently. Schedule a consultation today to discuss your specific breakaway needs. Their lawyers can help you navigate the transition successfully and unlock your potential as an independent RIA.
