Q&A: How advisors can go from wirehouse to independence
Wirehouses offer total support for financial advisors, which can make them a great place to learn and build a career. But as advisors mature, they tend to bump up against the barriers inherent in those relationships — challenges like conflicts of interest, sales quotas, shifting compensation models and client restrictions.
Now, new options are making it easier to move into independence. But how do you know 1) if the timing is right and 2) which of those options make sense for you? Wipfli principals Ron Niemaszyk and Paul Lally — both of whom are leaders in Wipfli’s wealth and asset management practice — sat down with Brian Hamburger to explore the breakaway movement and what it really takes to make the transition.
Brian Hamburger is the founder and managing member of the Hamburger Law Firm, a specialist in the investment and securities industry. Hamburger also leads a consulting practice specializing in the transition from wirehouse to independent practice.
Ron: Let’s start with how we got here — to the wirehouse breakaway.
Brian: There’s a confluence of events that happened. If you go back to the 70s, you see the deregulation of commissions in the brokerage space. That’s led to what many would argue is a race to zero in terms of commissions.
We’re also seeing an increase in financial products, and consequently consumers are looking for more advice. And those consumers are starting to realize that objective advice is really the only advice worth having. Meanwhile, many advisors are coming to the same conclusion. They’re saying, “I want autonomy to select the products and services that are best for my client.”
Paul: That’s right. If you go back, the first graduating class of CFPs got their licenses in 79, so that’s when the independent industry really started. I think for many years, advisors were very proud to carry the banner of their firm. But when their big wirehouse got tainted over the years, I think sometimes the brand became a detriment.
Brian: I like to tell this story of one of my early clients. He would flash his business card, and that wirehouse logo opened doors. But as he matured within his career, he found that he was slow to take that card out. It was his personal brand that was getting those meetings, and the card became something he had to justify. He realized that was the tipping point. He said, “When I was doing more for the firm than they were doing for me, that’s when I knew it was time to leave.”
Ron: What else is driving this trend?
Brian: Where we are is not a trend. Where we are is where we are going to be for the foreseeable future. Because the best financial advisors want to create their own destiny. They want to be responsible for outcomes for themselves, for their colleagues and for their clients.
Paul: Years ago, wirehouse firms added value by offering more products, services and support than an independent could offer. But fast forward to today, and technology has changed the dynamic. There’s this whole new landscape of support that’s available to independent advisors.
The influx of new technology has made it easier for these advisors to break away. To some extent it’s gotten cheaper to set up your own independent shop, so I think technology is also driving a lot of the moves.
Ron: You talk about setting up technology. What else do people need to be thinking about before they make the leap?
Paul: There’s this significant transition people need to make when they become an independent advisor. Sure, they ran their own business at one of the big houses, but when you step out on your own, you become a business owner.
And while these advisors are very sophisticated on the wealth management and investment side, being a business owner is new. Many of them don’t fully realize the risks and responsibilities. You're paying rent now. You're paying for your own accounting firm, your own law firm. You have to attract and retain people.
Brian: Another thing is the concept of business risk. Many advisors have been shielded from having to make those decisions. Or depending upon your perspective, some would say they've been prevented from making those decisions.
They've been told things like, “Well compliance says we need to do this,” and they act on that mandate without understanding whether it’s regulatory or risk or a legal issue.
Ron: So this isn’t really the kind of thing where you want to learn as you go?
Paul: We’ve seen in happen so many times, Brian and I both, where we’re called in years later, trying to fix the mistakes someone made when they set up their business.
We’ve seen partnerships where the partners aren’t getting along, but exiting that relationship is a problem because they didn’t set up the structure right. That’s just one example.
Ron: Can we talk a little bit about the breakaway process itself and potential stumbling blocks? What are the best practices for someone considering this?
Brian: The number one stumbling block here is not getting objective advice. A lot of people rely on anecdotal advice. “This is how my buddy did it five years ago, so I’ll do that.” Others rely on advice from people with a built-in conflict of interest. Whether it’s the recruiter at a broker dealer, the headhunter or the asset manager who’s calling — too often the only people providing advice on these transitions are people with a horse in the race.
Having a conflict of interest is not evil. It doesn’t make them a bad person. But it does taint the objectivity of their advice. The only way to get objective advice is to pay for it.
It’s like buying a new car. You know the Toyota dealer and you’ve worked with him before. He’s a good guy! But the Toyota dealer is going to show you a Toyota. You might never find out a Honda would have been a better fit.
Objective advice always leads to better decisions. There are paid advocates for a whole bunch of channels. But you’re better off when you have the discipline to invest in objectivity.
The number two issue is not having a sound plan.
We have folks who have very sensitive captive employment arrangements, and they will go to these service providers without any real protection of confidentiality. Advisors are expressive people by nature, and they tend to tell people things “discretely.” Word gets out, and you'd be surprised how many advisors find themselves terminated before they’re ready.
One of our most advantageous assets is the element of surprise. We want to own that timeline. Nearly every horror story you read about in Advisor Hub could have been avoided with the right plan.
One of the biggest challenges we face is convincing advisors that “No, you can't go to your most influential client and float that trial balloon.” You can’t talk to everybody on your team. It all comes together in the end, but you can’t be having these conversations, no matter how innocuous you think they are.
Paul: Agreed. Discretion is key. And I think the other thing is helping people understand this is a process, not an event.
We need to help people think practically about the process they need to go through and the complexity of that process. Maybe they don’t understand the difference between a custodian and a broker dealer, or what hybrid means or what a friendly broker dealer means. They don’t understand what the wealth tech stack looks like versus the operational tech stack.
A lot of times they need help getting honed in on the process. But if they can do that, and follow the plan, the reward is independence.
How Wipfli can help
Wipfli offers objective, third-party assistance in evaluating independence models, assessing your risk tolerance, choosing service partners and setting up a business for long-term value. Contact us to learn more about how we can help you achieve independence.
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