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Strength in numbers?
Adam Shalvey, 08/24/2019
If you could start from scratch and build your ideal advisor office, what would it look like?
Just as importantly, what's the ideal use of your time to make sure you are best serving your clients?
These are among the many decisions newly independent advisors face when deciding to pursue the RIA classification and leave behind a wirehouse firm. The biggest question is whether RIAs want to open their new businesses as sole proprietorships or partner with existing RIAs. Both options have pros and cons, and it's important to consider your mindset and your business needs before making one move or the other.
Determine your style
Deciding between a sole proprietorship or an established firm is based in part on your style of doing business. “The first thing to assess is what type of advisor business personality you are and if you are truly comfortable with becoming an entrepreneur," suggests Shad Besikof, president and chief operating officer at TruClarity, a division of a UHNW single family office that specializes in helping wirehouse, independent broker-dealer, and private bank advisors transition to the independent space so that they can focus on managing client relationships instead of spending valuable time on the middle and back office.
Besikof says that when advisors want to assess their desire to transition to independence, he's developed a method for helping them do so and believes he can honestly tell them whether they're a fit or not. He sees advisors as falling into one of three categories:
Self-directed: Those who want to take control of all aspects of their business, including minute details and tasks that are often outside of the advisors' scope of work, such as: selecting a custodian, managing compliance, negotiating leases, building out office space, sourcing an IT help solution, dealing with employment contracts, payroll, marketing, determining the best technology stack, building/maintaining a websites, conducting fee-billing, accounting, and human resources-related issues.
Validator: This group prefers to have a sounding board who can provide a much-needed second opinion on all matters related to their business operations. They welcome recommendations, but may take action on their own. Or, they may hire consultants to outsource a portion of the process they're not comfortable doing on their own.
Delegator: Those who don't mind outsourcing all of the non-revenue generating tasks they don't have interest micromanaging. Outsourcing middle-back office responsibilities helps them operate at the top of their licenses and professional designations by focusing on the specific parts of their jobs that they enjoy, such as growing their business and helping existing clients.
For example, when it comes to office space, a self-directed advisor would be happy to find a space to lease, furnish it on their own, spend an enormous amount of time siphoning through 45 technology vendors to figure out their technology stack, meet with every custodian possible, take out their own trash (so to speak), and turn the lights off and on every day, says Besikof. The delegator would rather have a partner who can handle setting up, negotiating with and managing the day-to-day needs. The validator would fall in the middle—perhaps preferring to find their location themselves but then shifting office-manager responsibility to a partner. If you are the type of advisor who spends hours or even months meeting with every custodian, every legal/compliance firm, several Independent Broker-Dealers, 45 different technology vendors, etc., then you're a perfect self-directed advisor. If, on the other hand, you are the type of advisor who likes to know how and what to do, but prefers to leave the execution to a professional, then you're probably a validator. For the delegator, building trust quickly is key because after that they tend to rely on their expert partners for all major decisions. In addition, this allows you to keep your very important duty of loyalty to your current employer while keeping your time involved to minimum. In some ways, says Besikof, the decision to delegate may come down to some simple math and your bottom line. “Holidays and vacations aside, there are 2,080 hours in a working year. Say a firm is making $1.5 million, then each hour of a sole proprietor's time would be worth $721," he says. So, for each hour that the advisor spends on administrative duties, they will be losing valuable revenue. Take the time to do some back-of-the-envelope math about what each of your hours is worth. Can a self-directed advisor become a delegator? Sure, especially if this change is born of business necessity. “Some advisors may find they need to change their mindsets once they realize that they are spending too much time and energy on the minutiae of running a business," says Besikof.
What could you delegate?
If you've determined that you might be better off outsourcing some of the less desirable tasks to others, you have a choice: Join a firm or figure out an alternative solution for those tasks. For most advisors, the things they like to do best are building client relationships, financial planning and asset gathering. Other tasks, though they may be important to long-term success, are not what they love to do.
Those tasks may include compliance, monitoring SEC requirements, buying and managing technology, managing the client-facing website, marketing and branding, maintaining operational efficiency, overseeing human resources, and, as mentioned, managing office space. Advisors who take on a general category like “technology" may quickly find it includes many responsibilities, all of which take up time: CRM management, client reporting tools, even email calendaring systems.
If all of those roles sound like necessary evils, you may think that you're best suited to join an established firm. For some new RIAs, that makes sense. But if you dream of making your own hours and operating by your own rules—but don't love the idea of managing things like front-end technology and human resources, there are solutions. Aaron Schaben, executive vice president and managing partner at Carson, notes that RIAs can bring in help from someone like the Carson Group where, “The systems are already implemented for them, so they can focus on areas they want to focus on."
Will your clients know you have a partner? Schaben says probably not. “Advisors will choose their branding and everything—including website and messaging—everything client-facing is driven by them."
Consider three questions
If you are trying to decide whether you should establish a sole proprietorship or join an existing firm, Schaben has three questions for you to consider.
|1.||Why did you become an RIA? Clearly define why you decided to break away from bank advising in the first place. Did you want to focus on all aspects of your business, or did you want to focus more on your clients?|
|2.||Do you know all your options? As an RIA you can decide what your long-term goals are and how you'll reach them. Exploring sole proprietorships, existing firms, and partnership opportunities will help you to understand the potential profits and losses on your new balance sheet.|
|3.||Do you know your risks? Accepting existing clients into your new RIA will be dependent on the risks of your new business. There are different risks for sole proprietorships versus established firms, and your clients may be interested to know them before they follow you.|
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