Transitioning to a Financial Planning Model
This document is for advisors who are contemplating an independent business model for greater professional freedom, deeper client relationships and the financial rewards of owning a business. It is organized into the following sections: Why Advisors Go Independent; The Economics of Independence; Putting Together a Plan; and Choosing a Platform.
Why Advisors Go Independent
Personal Freedom – Many advisors understand that their success flows from their own skills and abilities, not the resources and reputation of their dealer. For these advisors, independence offers the freedom to control, and retain more earnings and build equity in a business that could eventually be worth millions.
A Client Centric Service – Having built a book over many years you are now in a position to focus on your best relationships and perhaps attract new clients by providing unbiased, trustworthy advice, together with a compensation structure which is in sync with customer needs.
Clients Losing Trust in Institutions – Clients are choosing independent advisors more frequently because they believe they are more objective. Clients may be happy with their advisors but mistrustful of large dealers or the industry as a whole. Independence eliminates concerns of a parent company that could potential be associated with a scandal, tainting the image of the service. Clients who were once attracted by the name of a major dealer are now recoiling because of the negative publicity.
Conflict of Interest Resolution – Although the pressure to sell proprietary products has abated at many firms, some advisors acknowledge “subtle encouragement” to offer specific products. Independent advisors aren’t under pressure to sell in-house products and have greater freedom to discuss the services and strategies which are in the best interest of their clients.
Compliance Restraints – Advisors are finding it harder to do business due to increasing regulation as a result of the financial crisis, dot com bust, scandals, frauds and firm failures. Financial planners are able to look at the big picture on behalf of their clients while outsourcing compliance responsibilities to other providers to shoulder the majority of the burden.
Independence Can Be Lucrative – Many advisors have already moved toward a fee based platform by running their own firm within the payout structure of a larger institution but they could be leaving money on the table. Advisors who transfer this same business model to an independent platform can, depending on how they manage expenses, have the opportunity to significantly increase their income.
Independent advisors are also building equity in their business. A successful independent advisory firm may exceed 25% operating profit margin after fairly compensating the owners and meeting overhead expenses. The profitability of independent firms creates a transferable cash flow stream. The industry press has reported numerous acquisitions at valuations from 1.5 to 3 times annual revenues or between 6 and 10 times earnings. An advisor with $1 million in annual fees could, by taking the business independent, create an asset worth between $1.5 and $3 million, a portion of which may be tax free in Canada.
The Industry Is Embracing the Fee Based Model – The fee based model provides a predictable revenue stream to the advisor, who continues to serve the account throughout the year and across market cycles, which in turn aligns interests with the client. When fees are based on assets under management, the advisor has an incentive to increase revenues by growing client assets. Independent advisors enjoy greater flexibility in setting client fees which helps them to become more competitive and manage their practices more effectively.
Advisors Want to Control Their Professional Future – Of all the reasons advisors choose to go independent, autonomy is perhaps the biggest lure. Independent advisors who have an entrepreneurial spirit want greater independence. The independent advisor model gives them the Theyfreedom to create their own value proposition.
The Economics of Independence
The transition to an independent platform is highly dependent upon having sufficient resources and a detailed transition plan. There are organizations that can simplify the process but the initial step must be to understand the economics of independence for your circumstances.
Independent advisors typically retain 100% of their revenue but at the same time assume the expenses of their own office. A detailed plan is required to ensure that after paying rent, utilities, insurance, software, marketing, administrative salaries and other business expenses you end up with a profitable firm. Results vary primarily by expense management and your client profile. Advisors that serve smaller household accounts tend to be less profitable than their peers. When turning independent, advisors must always remember that in addition to serving clients they are also running a business.
An advisor’s outlook on independence may also be influenced via forgivable loans from their dealer which were taken on as a signing bonus. Focusing on such loans may be shortsighted because with independence, the financial rewards come from building your own business. Clients are generally considered to belong to the dealer but under the independent model your clients are truly the foundation for building equity. When you are ready to retire, the business can be sold for a multiple of revenues or income.
Then there is the risk of moving from a firm where the payout seems consistent to an independent model where expense management becomes a significant concern. Becoming independent also involves a number of other issues beyond the fundamental economics.
Putting Together a Plan
Initially, you should evaluate your existing clients to:
- determine which clients are a good fit for the independent business model
- the likelihood that they will move with you
- the timing of asset transfers
- the subsequent implications for cash flow
You will also need to craft a very compelling value proposition to clearly explain why you are making the move and the benefits of continuing the relationship.
Once you have identified potential clients and their portfolios you will need to:
- Thoroughly understand the terms of any non-compete and confidentiality agreements that you have with your dealer
- Assess the implications of changing from a commission based to a fee based business, including how to handle trailer fees
- Consider the clients’ portfolios that may hold proprietary investment products of the dealer and the tax or expense implications of liquidating them
- Become familiar with the types of assets that can be easily transferred from one financial institution to another
Once your potential asset base has been determined you can start on your business plan:
- Service model – the types of services you want to provide at the start, and as you grow
- Target market – determine the ideal client profile, including age, geography, minimum account size, and investment needs
- Your strengths – a list of the your competitive differentiators and value added capabilities
- Location – the site for the new business, and whether the firm will share, lease, or own the premises
- Timeline – key steps and dates for getting started and for managing the firm on an ongoing basis
- Revenue projections – first year revenue and profit targets, including sources of revenues and projected cash flow – knowing that not all of the clients will necessarily be part of the practice on day one, and fees are typically paid quarterly in arrears
- Budget – a first year budget for major expenses
- Insurance – ensure proper coverage
With a fundamental plan sketched out, you can add more detail at the next stage which includes the assessment of other service providers.
- Strategic planning – create a business plan and think through the strategic considerations of the change
- Technology and client reporting – seek out turnkey portfolio data management and client performance reporting
- Business set-up – create a workplace that will welcome clients and motivate employees
- Marketing – design a sound marketing strategy that broadcasts the value of the services to the target audience
Choosing a Platform
As you can see there are many steps involved in becoming independent but it is possible to find support from outside firms. Unfortunately, too many advisors spend too much time inefficiently trying to do everything from asset allocation to writing investment policy statements, performance reporting, investment selection, customer service and day-to-day business operations. It’s little wonder they feel exhausted at the end of the day.
Many functions can and should be delegated. The value-added services that you should consider outsourcing include:
- Client management and compliance– CRM technology, client profiling, KYC requirements, investment policy statements and asset allocation
- Investment management – manager due diligence, research, rebalancing, overlay portfolio management and access to institutional managers
- Account administration – account opening paperwork, setting up accounts, monitoring transfers and overseeing the ongoing administration of accounts
- Performance monitoring – data aggregation, reconciliation and performance reporting
- Operations – billing, compliance tools and online account access
- Market and manager analysis – manager reviews, quantitative evaluations and performance comparisons
- Training and education support – newsletters, industry insight and product support
The platform you choose should allow you to remove the burden of cumbersome, complicated back office responsibilities and gain access to a one stop shop of investment services and professionals. It should reduce the resources you allocate to in-house asset management, where it is increasingly difficult to gain a competitive edge relative to the big, specialized players and it should maximize your capacity to provide the highest level of personal service possible to clients.
In the final planning stage, you should evaluate potential platform providers. Here are some questions you should ask when conducting this crucial assessment:
- Product value – Does the platform’s product solution create real value for my firm and my clients? Does the platform provide incentives to sell certain products? What is the platform’s breadth of manager/investment selection?
- Service value – Does the platform provide education on business building issues? Does the platform offer technical support on a range of topics that may be of interest to clients? What is the platform’s reporting capacities?
- Personnel value – Besides helping advisors with the day-to-day running of their firm, how well does the platform help advisors think strategically, grow their business and increase their income?
- Image value – How experienced is the platform’s management team and what are their areas of expertise? What are the platform’s investment philosophy and process like?
- Time costs – How rapidly can the relationship begin and how soon will it make a difference? What are the platform’s service quality and responsiveness like?
Keep in mind that the platform should provide a level of service you cannot find elsewhere. If the platform is employee owned, it can empathize with small business owners. Additionally, they should offer a state of the art platform that allows the advisor to stand out from a service perspective.