Taylor Kovar knew he wanted to offer more to his financial advisory clients.
While working at a major broker-dealer, Kovar says he was told multiple times his only job was to gather assets and not concern himself with clients’ investment strategy.
“I knew there had to be a better way of doing business. It was a pure sales job with little-to-no concern for the actual client experience, outside of making sure they are sold on every product available so it makes it harder for them to move their accounts,” he says.
Kovar left that job and founded his firm, Kovar Wealth Management, an independent registered investment advisory firm in Lufkin, Texas.
He joined a growing number of wirehouse advisors decamping to RIA firms.
Paths to Independence
Though there are many business-structure permutations within the advisory world, broker-dealers, also called wirehouses, use some type of commission-based structure, while a fee-only RIA does not. The landscape is complex because many advisors are dual registered, with some of their business being commission-based and some being fee-based. Nonetheless, the move toward greater independence is gaining steam.
A July survey from TD Ameritrade Institutional Break Away to Independence Spring 2020 Survey found that 40% of brokers reported being “more likely” now than six months ago to break away and go independent.
While a third of respondents indicated that the pandemic and accompanying market turbulence may delay their plans, interest in starting or joining an RIA firm remains strong. According to the TD Ameritrade survey, advisors at broker-dealers favor the following paths:
— Acquire or merge with another business: 39%
— Start my own business: 25%
— Join an existing firm as an employee: 19%
— Partner with a company that provides technology and other support: 17%
Desire to Serve Clients
Lawrence Solomon left an RIA employer in 2019 to join another RIA, Mercer Advisors, at its Vienna, Virginia office.
High on his list of reasons for leaving: the lack of a succession plan and continuity strategy for serving clients.
“I was getting older, the principals were already old and we did not have any younger advisors or strategy for how we were going to transition the firm and continue to serve these amazing clients when our working careers inevitably ended,” he says.
“I have tremendous enthusiasm and vast repository of knowledge and experience as an advisor, and my greatest fear was that the day I retired or if something happened to me, all that intellectual capital and expertise that I had created and developed would leave with me,” he says. “I had no one to transfer it to.”
Offering the highest level of service is a common reason for advisors to move from one firm to another.
Zach Buterbaugh recently joined Mangolds Investment Advisors in Lancaster, Pennsylvania. He previously worked as an insurance underwriter, later becoming an insurance agent with Primerica. While there, he had the option to sell commission-based investments.
“Once I passed my Series 65 exam, I did become appointed with their advisor platform, but their annual fee for clients was close to 2%, which was a big reason to go out on my own,” he says. Registered investment advisors typically charge less.
“My motivation to make the move was mostly for my clients,” he says. “I strongly value the relationships with them and wanted to provide investment services and save them on fees. My idea was: If I charge less in fees, more money stays in the client’s account, which makes them happier and the relationship stronger.”
He credits Greenwich Compliance Advisor Services Corporation with helping him navigate the regulatory process of becoming a registered investment advisor.
Advisors going independent are often encumbered by noncompete or nonsolicit clauses that prevent them from working with current clients for some period of time.
Buterbaugh had limitations on which clients he could solicit from his previous firm. For the ones he could continue working with, he sent a letter explaining that he was transitioning to Mangolds Investment Advisors and that clients had the choice to move with him.
“I mentioned if they did not want to transition with me, that I was still confident in the recommendations and plans I’ve implemented for them in the past,” he says. “I left them the regional vice president’s name and number for them to still have a contact at the prior firm.”
Kovar also had a noncompete restriction when he left the broker-dealer. If he violated that one-year agreement, he faced a lawsuit as well as owing $35,000 to reimburse the firm for training.
“I waited (for) exactly one year to start my RIA firm. I did all of the prework and legal requirements during the 12-month noncompete,” he says.
Once his firm was up and running, he contacted former clients and explained the benefits of moving their accounts. “I was able to retain the vast majority of my clients because they trusted me over the large broker-dealer,” he says.
Starting Your Own RIA
Wes Shannon founded SJK Financial Planning in Hurst, Texas, after his broker-dealer interfered with his client relationships. Not only did Shannon find that he could better serve clients, but he also appreciated the more streamlined cost structure of his own RIA.
“When I made the change to my own firm, I could focus purely on taking care of my customers and controlling my expenses,” he says. “I personally made much more money on way fewer clients and now enjoy a wonderful lifestyle, with more time for my family and greater income.”
Shannon based his business plan on 70% of his clients following him to his new firm.
“To my surprise, 100% of the clients I asked came with me,” he says. “For most of my clients, I was able to offer them a reduction of fees, and they were very pleased with the better technology I was able to offer. My broker-dealer was reluctant to embrace new technology, like electronic signatures and virtual meetings because of their compliance concerns. Compliance is much easier now as an independent RIA than as a registered rep with a broker-dealer.”
Shannon took his time developing the structure of his new firm, spending a year preparing and writing a formal business plan before leaving the broker-dealer.
“It went unbelievably well and smooth,” he says. “Victory loves preparation. My regret is that I didn’t leave five years earlier.”
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