Wednesday, May 29, 2024

What’s Driving Movement of Advisors at Independent Firms? -Dlight News

Over 9,000 advisors changed firms in 2023, marking a 7% increase from the year before.* While this movement is prevalent across all industry channels, it is particularly pronounced within the RIA world and represents a growing trend that’s a dichotomy of sorts.

That is, the RIA breakaway: Those advisors employed by an independent firm who leave for another firm or to start their own independent practice.

The term RIA breakaway indeed seems paradoxical, given that many RIAs were born out of the entrepreneurial spirit of their founders. These individuals often chose independence to break free from the bureaucracy of larger firms to shape their own destinies. However, it’s important to note that many of their advisor team members and subsequent hires are technically employees, not independent themselves. Likewise, many RIAs have expanded their advisor ranks by recruiting career changers or recent graduates and nurturing them with referrals or redistributed clients.

Advisors employed by an RIA can hold various titles, such as servicing advisors, junior advisors, associates, or IARs, depending on the firm. Despite these differences, they share common characteristics: They are typically non-owners (or minority owners), earning between 25 and 35% of their revenue or receiving a salary and bonus. They serve a specific client segment on behalf of their employer and adhere to their firm’s brand, investment, and client service processes.

While most advisors at RIAs report feeling well-supported, it’s important to acknowledge the challenges they face. The strategies that savvy RIA owners implement to drive efficiencies, foster growth, ensure a consistent client experience and enhance their appeal as acquisition candidates can inadvertently lead to advisor discontent. As these business owners build the value of their enterprise, advisor autonomy, individuality, and sometimes compensation can be compromised.

With RIA M&A activity reaching another near-record year, much larger RIAs and aggregator platforms are acquiring hundreds of advisors annually—a stark contrast to the boutique firms they initially joined.

As these advisors seek greater autonomy and flexibility, better compensation, ownership opportunities or even the ability to expand into different niches, they’re considering their options.

 

What’s next for RIA breakaways?

Employee advisors who have their sights set beyond their RIA firms have several paths to consider. These are the four most popular amongst our advisor-clients:

  • Joining another RIA firm that better aligns with their goals, client’s needs and cultural preferences. Some may prefer to partner with a larger, national firm that has more scale, resources, staying power, and more favorable compensation (including equity ownership opportunities). Others may prefer to join a smaller firm where they have more of a voice, customization, and upward mobility, including succession opportunities. While a move from one RIA to another is the most familiar, an advisor must ensure that the firm is different enough from their previous employer and that many of the issues they are facing aren’t at risk of being replicated. 
  • Transitioning to a wirehouse, bank, or private bank that offers infrastructure, a reputable brand and “everything under one roof” may also reward the advisor with a lucrative recruitment deal and enable them to go more upmarket by gaining access to a well-known brand and in-house banking and lending. That said, many RIA advisors routinely sell against the wirehouse model or are afraid of the cultural implications of working for a major institution.
  • Launching their own RIA can give them more control and ownership over their practice, but it also comes with extra responsibilities and risks. Some advisors may gravitate towards the entrepreneurial challenge and reward of starting their own firm, as well as the ability to set their own strategic roadmap, brand image and client service model. Others may find the operational burden too overwhelming or the initial startup costs and capital outlay too great to overcome.
  • Starting a practice at an Independent Broker Dealer or by becoming an independent contractor under an existing RIA firm. This offers many of the same benefits of starting an RIA while reducing the time and headaches of building out infrastructure and managing operational challenges. However, these types of options are more expensive than building an RIA and require the advisor to cede elements of control since they are operating on someone else’s platform and under their compliance policies. “Supported independence” models like these have gained in popularity for wirehouse breakaways and RIA breakaways alike.

An employee advisor may feel many of the pushes outlined above, and they may also be pulled toward some of the alternatives available to them. From our experience, the most successful transitions occur when an advisor has a benign employment contract (limited non-solicit or non-compete language), built their own practice rather than servicing their firm’s clients, has conviction in the strength of their relationships and associated portability, and a long-term perspective focused on growth. Likewise, a new firm or platform will also be more willing to aggressively pursue advisors who possess these characteristics.

Smart RIAs are aligning economic interests in more creative ways than ever before and continually bolstering their advisor-facing value propositions. However, as the RIA space continues to mature, consolidate, and professionalize, the cost is likely to be in advisor attrition.

* Data derived from Diamond Consultants 2023 Advisor Transition Report.

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