Wirehouse Liberation: The Economics Of Independence For Advisors

Breaking Away Can Result In Higher Take-Home Earnings And Better Tax Treatment For Advisors, And Advantages For Clients
Ed Friedman, Director of Business Development and Growth, Summit Financial
Ed Friedman, Director of Business Development and Growth, Summit Financial

Let’s momentarily shift our focus away from the financial advice industry.

In any profession, which sensible individual would opt to retain approximately 50 cents of every dollar they generate for a company, when they could retain up to 70 cents, almost a full quarter more, for doing precisely the same job?

It’s a no-brainer – which is why it’s confounding to see financial advisors continue to flock to broker-dealers or wirehouses, where a typical compensation structure caps payouts to an industry average of approximately 45%. While that model has security and the recognition of a well-established brand, the financial advantages of independence compared to being an employee at a wirehouse are substantial, not to mention the many qualitative perks.

Quantitative No-Brainer

An independent advisor maintains control over their financial situation because their decisions can influence both the revenue and expense components of the profit and loss (P&L) statement. As mentioned earlier, this translates to potential take-home earnings as high as 70% of revenue. Another noteworthy distinction is that in the context of a “payout percentage” system within a wirehouse or brokerage, these firms capture all the benefits of an advisor’s growth, while the advisor’s payout remains fixed.

As an illustration, consider a top advisor generating $2 million in revenue, capped at a 45% payout. If this advisor doubles their production and assets under management (AUM) within three years, they would indeed earn more in absolute terms. However, it’s important to note that they would remain locked into the 45% payout rate in this scenario, with the firm capturing all of the margin expansion. In an independent model, every additional dollar of revenue generated year-over-year in a well-run business usually results in increased profitability and higher earnings for the advisor.

The ability to create significant net worth for the advisor and their family exists within the independent advisory model. When an advisor builds an independent practice, they become business owners, creating a valuable asset that could be sold at some point in the future at a notably higher multiple compared to any recruiting incentive they might receive when moving from one wirehouse to another.

The independent practice’s value generated over time, which can eventually be converted into monetary gain, enjoys favorable tax treatment as long-term capital gain.

Furthermore, the value generated over time, which can eventually be converted into monetary gain, enjoys favorable tax treatment as long-term capital gain, unlike the ordinary income received through a recruiting bonus. This is particularly significant considering the potential nine-year lock-up period when departing one wirehouse for another.

Qualitative Benefits Engender Trust

In addition to the quantitative advantages to founding an independent RIA, there are qualitative advantages that benefit both the advisor and their clients.

The qualitative advantages engender trust between both parties, particularly since independent advisors operate under a fiduciary model – meaning they are ethically and legally obligated to prioritize their clients’ best interests above all else. This is a stark contrast to advisors within larger institutions who might face conflicts of interest stemming from sales targets or the promotion of proprietary investment products.

Clients of independent advisors can generally rest assured that recommendations and investments offered are not influenced by corporate quotas or the need to push in-house products. Instead, they receive counsel that is solely tailored to their individual financial goals and circumstances – and the advisor is unconflicted.

Another pivotal advantage is the ability to choose from a vast array of investment products, giving advisors the flexibility to select the best-suited investments from the entire spectrum of available options. This flexibility helps to ensure that investment strategies are finely tuned to match each client’s unique financial objectives.

Lastly, in today’s increasingly digital world, cutting-edge technology is essential for delivering top-notch financial planning, reporting and portfolio analytics – all of which serve to enhance and elevate the client experience. Independent advisors have access to industry-leading tools that empower them to offer sophisticated insights and solutions tailored to each particular client’s financial situation.

Independence Is The Path To Advisor Liberation

In essence, the appeal of independence is rooted in the empowerment it offers to both clients and advisors. Clients benefit from the assurance of fiduciary duty, unbiased advice and tailored solutions. Advisors gain the freedom to chart their own course, control their financial destinies and ultimately create substantial wealth. It’s a paradigm shift that challenges the status quo in the financial advisory landscape, urging professionals to seize the opportunity to serve clients better and build a brighter financial future for themselves.

Clients benefit from the assurance of fiduciary duty, unbiased advice and tailored solutions.

Look at it this way – think of a typical advisor’s top clients and how they accumulated their wealth. It’s likely that a significant portion did so by owning their own business and having a real asset to sell eventually. Why wouldn’t an advisor take a page out of their clients’ books and choose to become a business owner themselves? Advisors owe it to their clients, themselves and their families to go independent.

Ed Friedman is Director of Business Development and Growth at Summit Financial, which serves independent and breakaway advisors.

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