In the last decade or so, industry attention has been focused on breakaway wirehouse advisors. And for good reason: The independent channel has been on the receiving end of the fastest-growing form of advisor affiliation, according to our
Indeed, Cerulli Associates projects that by 2025, more than a quarter of the industry's assets will be managed by advisors in RIA channels.
Advisors from the big brokerage firms are having immense success joining the independent ranks at a time when the infrastructure and capital solutions to support these de novo businesses have never been more robust. But while we see continued tailwinds supporting such breakaway activity, emerging trends indicate that the next wave will originate from within the RIA channel itself.
That's because the ever-growing stable of employee advisors at RIAs — also known as non-owner advisors, servicing advisors and senior advisors — now shares many similarities with their counterparts at wirehouse firms: they build and service books of business for an employer, fly that firm's flag and leverage the platforms and technology that the firm makes available to them.
However, as RIAs professionalize their firms, standardize processes to drive efficiencies, and consolidate at a breakneck pace, many RIA employees now find they have far less day-to-day control than they once had. And while RIA owners certainly benefit from immense freedom, control, and economic riches, these same liberties are most often reserved for them and are not shared equally with their employee advisors. And this is where friction begins to exist.
The result is drastically stepped-up movement among employee advisors, with the anticipation of more to come. It's a phenomenon that can only be appreciated with a clear understanding of the drivers motivating these advisors' desire for change.
While an RIA owner may net 60% to 75% of their firm's revenue before receiving compensation, employee advisors are paid salary and bonus, or at a payout most often less than 35% of revenue. In many cases, the logic tracks because advisors are hired to service an existing book of business rather than building a book from scratch. And, of course, the RIA owner took the initial risk in starting the business and has overhead to pay.
Still, many advisors, especially those who can bring in their own clients and have built up a meaningful practice with minimal assistance from the RIA, may feel undervalued relative to their financial contributions to the firm.
And while logic would seem to dictate that RIA advisors have far greater day-to-day control over investments and client service than their wirehouse peers, many RIA advisors have far less control. That's because well-run RIAs' efforts to scale their service model and enhance growth most often include the centralization of investment management and standardized processes.
As a result, employee advisors who want to service clients in a different way, or who come to believe that their RIA no longer provides a best-in-class service model, are likely to consider a scenario that removes such limitations. Advisors looking to expand their offerings to clients, for example, may opt to change jerseys for RIAs scaling to include new services and lines of business, including tax preparation, family office services, estate planning, business management and differentiated alternative investment platforms.
Too, most advisors tend to be growth-oriented and focused on how they can continue to scale their practices and serve more households. Taking stock of how a current firm enables growth can sometimes leave advisors wondering how much value they receive relative to the costs.
There's also the succession dilemma to consider. It's no secret that many practices are run by senior practitioners who do not have a well-thought-out succession plan in place. Although the carrot of taking over a business is a compelling proposition for an employee advisor, many get frustrated with the lack of progress on their rise in the management ranks or in the sharing of equity.
What's next for employee advisors?
With industry M&A momentum continuing, RIA advisors — especially those who don't have meaningful equity stakes — have other opportunities if their firm is being sold or they expect it to be sold in the future, and far less incentive to stick around and go through the tough work and unpredictability of an integration process.
In a labor market with more legitimate channels available than ever, grass that seems to be greener often is. An RIA advisor may join a competing firm with a stronger advisor-facing value proposition, one that may include more favorable ongoing compensation, a platform for growth, additional freedom and flexibility and more day-to-day support.
For those RIA advisors — and there are still many — focused on creating their own business, affiliating with a platform provider offering supported versions of independence may be appealing.
In our experience, advisors who check the following boxes will enjoy more compelling exit opportunities and can demand more aggressive compensation packages.
· Those with self-sourced and serviced clients as opposed to those with less-portable "firm relationships"
· Those with limited non-solicitation, non-compete or other post-employment restrictions or whether the firm is a member of the Protocol for Broker Recruiting
· Those with a hunger to grow and bring in new business
· Those who are highly confident in their level of portability
In short, the line between working for an independent firm and a wirehouse is starting to blur for many advisors. Limitations on freedom and control, along with lackluster economics, are just a few of the drivers that started the big brokerage breakaway movement — and which are now propelling a new generation of RIA breakaways.
