The investment industry has become a maze of choices that advisors must navigate in order to discover how to best build and manage a business. The various combinations of technologies, investment services, operations and regulations are fairly well defined in Canada. However, sometimes new third party solutions present themselves and offer a chance to change your business model. In these instances it becomes more difficult to determine which business model is best for you. Should you stick with the current system or explore the other alternatives? Or should you simply join another firm that offers a change of venue and a slightly higher level of satisfaction and rewards?
The affiliation questions are fairly straightforward. You should be able to easily determine where you will find the best combination of resources, economics and business philosophy and, therefore where you belong. The decision comes down to four questions in a very specific sequence and a fifth question that runs in tandem and holds more weight than all the others. The questions are:
- Are you more suited to being an employee or a business owner?
- Do you wish to outsource investment management?
- Do you see a strategic role for commission based business in your practice?
- How will you achieve scale to economically support your business?
These questions are a decision tree that should lead to a business model that allows you to achieve both your professional and personal goals. Each model represents a unique combination of risks and rewards and essentially trades varying degrees of control and independence for support and resources. At some point, you also have to ask this last and very important question:
- Where will you feel a sense of cultural belonging?
At any point in the process, this question can trump all others. If you feel that you belong in your current organization and that the people you respect are in that organization; if you currently have the freedom to manage your clients robustly; and if you can realize your aspirations within the framework of your current organization, then it may be worthwhile to continue in your current environment. The opposite is also true. If you no longer feel that you culturally belong; if the people you respect are now elsewhere; if you do not have the freedom to manage your clients prudently; and if you cannot fulfill your career goals where you are, then you should consider changing your affiliation.
There are three general contractual models in the industry based on the level of independence and the responsibilities assumed by advisors and their firms – IIROC, MFDA and independent financial planners. The choice of model depends upon the relationship between you and your dealer, the ownership of the client relationship, your strategic decision making power, your product options, and the responsibility for operational infrastructure and ultimately the control of the business.
The Ownership Question
The single most prominent reason to be independent is to own and control your practice and to be fully responsible for its success or failure. This takes a level of risk tolerance and self reliance that not all advisors possess. Advisors who are not passionate about building a practice of their own should never try to be independent. Without passion, independence is just a long list of chores.
If you are stuck comparing the value of your deferred revenue plan to the equity valuation to an independent practice, you should probably not be independent. If you cannot bear the thought of your branch manager telling you that you need to add “this fund” and “that fund” to your client accounts then you probably are well on your way to independence.
Third Party Investment Management
Whether or not you decide to affiliate with a particular third party is often based on your past experience. Advisors who have had a bad experience will have a hard time believing that another party can actually have any constructive input into their investment management process. You have to consider the issues around the decision-making process before selecting a third party affiliation. Some advisors will never trust a third party and do not want anyone else influencing their decisions. Those who feel this way may forfeit the scale, flexibility and robust solutions required to successfully build their practice.
Simply put, if you have a strategically important reason for requiring commissions in your business it makes sense to affiliate with a dealer. The key word is strategic. If the use of commissions is temporary or accidental then the decision to move to a fee based model is fairly easy. Becoming independent in almost all instances requires converting to a wholly fee based revenue stream.
The Economic Models
The economic models are surprisingly straightforward but they are also a common source of confusion and misunderstanding. The first task is to compare the differences in expenses between contractual models. Some of the expenses are very scalable and therefore their magnitude as a percent of the revenue of the practice will vary widely between the dealer and the independent model.
Essentially, in order to move from a dealer to an independent model, you will need to be able to pay for your own branding, office staff and physical infrastructure and technology. The total budget will vary depending on the size of the practice and its unique needs. Some advisors are able to function with a lower budget in a shared office where they peripheral staff and services are included in the lease. The hidden cost of independence is time. This cost is perhaps more significant than any other expense, so budgeting and seeking appropriate help is of paramount importance.
So Where Do You Belong?
It should be a relatively straightforward process for you to find the best combination of resources to achieve your professional and personal goals; however, the five decision tree questions can combine to produce many different outcomes. The factor that often gets overlooked but is one of the most important influencers is the cultural decision. The strongest social drive we have as human beings is the desire to belong. That sense of belonging can trump all the rational reasons but it can also be a powerful booster for the rational choices. What is often misunderstood is that the sense of belonging is present in all the models from independence to full time employment. It is not about the people you greet in the office in the morning but rather about the people with whom you feel you share the same values, ideals and goals. That defines where you belong much better than payouts and printouts.