Breaking away to start your own firm can be a complicated process. But just as every journey begins with a first step, the process of breaking away can — and should — be broken down into steps.
While the task list for breaking away will vary depending on goals and circumstances, those who have done it advise giving yourself enough time to lay the groundwork properly, doing a lot of research, and seeking expert help as early as possible. Brian Hamburger, founder of MarketCounsel and Hamburger Law Firm, says he’s seen too many advisors planning a move come in with anecdotal information that may be outdated or inaccurate.
"This is going to be the most significant trade of their life and most likely the last one," Hamburger warns advisors against proceeding on hearsay from others. "This is not the time for WebMD-style diagnostics," he says.
Figure out your strategy
Before starting any execution or seeking any counsel, it’s crucial to be clear on your goals. Louis Diamond, executive vice president at Diamond Consultants, encourages advisors to think about: "What am I trying to accomplish, and how much work am I willing to put in to accomplish this?"
Starting an RIA takes a certain amount of entrepreneurial enthusiasm. Advisors who aren’t excited about the details of running a business might want to consider joining an RIA or an independent broker-dealer. While rare, "there are definitely some people out there who own their own RIA, who ultimately decide to shut it down ... because they just don’t want to deal with a lot of the work of doing it," says Diamond.
Part of clarifying goals is also realistically estimating the amount of client assets an advisor can bring with them and seeing if the economics of starting an RIA make sense. An RIA tuck-in model can cost anywhere from 10% to 20% of revenue but takes care of all the compliance, technology and more. Industry insiders commonly say advisors need at least $100 million in client assets before thinking of starting their own RIA.
Check your contracts
Bringing existing clients with you is critical to a successful new start, but the process can be full of legal obstacles. Advisors need to know what they can and can’t take with them.
"Advance planning is critical," says Scott Matasar, an attorney at Matasar Jacobs in Cleveland. "Ideally, [you] would like to talk to an advisor between three to six months before [the advisor is] planning on leaving," he says, adding that for advisors, the sooner you talk to an attorney, "the more tools [are at] at your disposal."
Matasar says he checks two key documents when helping advisors transition: the client contract with the current firm and the firm’s customer privacy notice. Between the two, advisors can get "some insight into what the firm considers to be truly confidential and proprietary and what the firm understands the advisor may take with them at resignation," he says.
For instance, sometimes the client contract may have a very broad confidentiality provision that states that all books, records and documents must remain confidential and that advisors can’t take any of that with them. But then the customer privacy notice states that in case the advisor leaves, they may take the client’s documents with them unless they’ve opted out of sharing. The situation can vary widely.
In addition to contractual risk, advisors also need to watch out for regulatory, legal and policy risk, Hamburger says. Both Finra and the SEC have restrictions that advisors need to be mindful of when starting a business. Finra, for instance, has restrictions preventing registered representatives from starting a competing entity without prior written consent from their firm.
Matasar advises that advisors work with an attorney specializing in the securities industry, not an employment lawyer. Some contracts state that advisors cannot do business with existing clients once they leave, but Matasar says this is an unenforceable provision. "Finra rules make it very clear that customers have the right to work with the advisors of their choice," he says. Because of the complicated regulatory environment, advisors need to work with an attorney who understands securities law.
Getting set up
This is what some advisors might consider the fun part: setting up an office, picking technology solutions, assessing vendors and figuring out branding. Because of legal restrictions and advisors’ obligations to their current employers, much of the groundwork should be done through a third party.
"They can’t go throwing their name all over town," says Hamburger, adding that there are plenty of "horror" stories of individuals who secured office space only to be found out by their employer a few days later.
The number of technology choices grows every day. Depending on the target client profile, growth projections and other factors, advisors can choose integrated solutions or piece together various solutions. "The good news is most of the things that you think you would have to hire for you can actually outsource to different providers," says Kyle Hiatt, chief revenue officer at Orion Advisor Tech.