#FASuccess Ep 176: Understanding The Landscape Of Employee Vs. Independent Advisor Broker-Dealer Platforms, with Mindy Diamond

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

What You’ll Learn In This Podcast Episode

• Common Reasons Advisors Want To Switch Platforms And The Important Questions Advisors Need To Ask Themselves [00:05:16]
• How The Onus Of Compliance Influences Financial Advisors To Change Roles [00:14:53]
• How Brokerage Platforms Have Changed Over The Years [00:27:08]
• The Right Time To Switch To Another Independent Broker-Dealer Firm [00:35:04]
• The Range In Choosing A Brokerage Platform And Why Advisors Must Understand Their Own Priorities [00:46:03]
• Contrasting Benefits And Disadvantages Of Each Platform [01:13:51]
• How The Independent RIA Channel Is Replicating The Brokerage Channel [01:37:41]
• Why The Decision Of Which Platform To Choose Is Not As Simple As It Once Was [01:48:19]
• Advice Mindy Would Give To Newer Advisors And What Comes Next For Her [01:52:25]
• What Success Means To Mindy [01:57:34]

Resources Featured In This Episode:

Did you enjoy the Financial Advisor Success Podcast?

And if you have a moment, please Click Here to leave us a rating and review in iTunes!

Full Transcript:

Michael: Welcome, Mindy Diamond, to the “Financial Advisor Success” podcast.

Mindy: I’m thrilled to be here. Thank you, Michael.

Michael: I’m really looking forward to the discussion today about all the challenges that crop up when we want to change firms. I know you’ve spent the better part of 20 years in the world of, I guess what in the industry we call recruiting. What I think of as helping advisors decide when to change platforms and what platform to change to since we’ve got a better part of about 3,800 broker-dealers out there, plus a growing range of RIAs and RIA platforms that have their own recruiting and offerings associated with them.

And to me, there’s this interesting sort of debate in the industry that we’re very different in who we are. There are some advisors who are just wired to be hardcore independent entrepreneurs. They want to control absolutely everything about their lives. We have others at the other end of the extreme that just don’t want to deal with all those decisions and the weight of all that stuff. They’re just like, “I just want to see my clients, get paid for what I do, and go home and have dinner with my family.” And a wide spectrum in between those two.

But we all tend to view the world through our own lenses. And so I find advisors that have that really hardcore independence mindset sort of put on a pedestal like, everything that gives you the utmost independence is the best, and everything else is wrong. And then people that are on the employee side say, “You’re absolutely crazy to go out to the wild west of independence. You should stay in this nice large firm environment where the mothership provides all. And you all are nuts.”

And we spend a lot of time sort of shooting barbs at each other for being on the other side of the divide, wherever you are on the divide, instead of, to me, taking what I think is just the more appropriate approach of saying, “Well, what actually is best for you? What is your style of being an advisor? What kind of environment is the best fit for you and would create the most positive outcomes for you, given what’s important to you?” And then let’s figure out, are you actually in the place where you best fit or not? And if so, or if not, I guess, what change are you going to make and what would be better?

Common Reasons Advisors Want To Switch Platforms And The Important Questions Advisors Need To Ask Themselves [00:05:16]

Mindy: Well, so you hit the nail right on the head. I don’t think it’s my job ever to try and presuppose where somebody belongs or to what degree they’re entrepreneurial, to what degree they prefer support, etc.

So, first of all, the beauty of the landscape of the industry as it lays out today, and the expansion of it, the expanded waterfall of possibilities, means that any advisor is never stuck and is much more likely to find his or her version of utopia because it’s more likely to exist today than it was years ago when the landscape was… the options were binary. You either stayed at Merrill Lynch or you went independent, but there was nothing in between. Today there’s a ton in between.

But my whole job, and everybody who works with me, is to get an understanding, to ask advisors, to get a real sense of what’s most important to them, what their goals are. What are the things that are frustrating them? What are the things that they appreciate, that they’d want to replicate?

In many, many, many cases, the answer is, yeah, you might be mildly frustrated, but it’s more than good enough. You’re doing well. You’re making good money. You’re home at 5:00 to coach your kids’ soccer game. Whatever it is, whatever your goals are, you’re meeting them well enough. You’re able to serve your clients well. And so staying put is the answer. So the first thing is to note that not everybody should move.

If someone, if there’s enough meat on the bone or enough pain, if you will, in the status quo, then a whole lot of what we talk about is to describe that pain. To what extent are the pain points limiting you or impacting your ability to get it done? Whatever it is – serve your clients, grow the business – whatever it is. What are your goals? So, where do you see yourself five years from now? Is it where you are now? And if not, what does it look like? And what do you value more, transition money, a big check upfront or better take-home economy, because they don’t usually come in the same package? What do you value more, freedom, flexibility, and control, which defines independence, or turnkey support and infrastructure?

And so we developed, actually, a series of questions, we sort of call it a self-assessment, that’s not meant for somebody to check a box and if you have one from column A, one from column B, you spit out, you should go to that firm. But it is absolutely the basis for our conversation with every advisor we’ve ever dealt with, which really, really helps us together, us and the advisor, to determine A, whether there’s enough pain to consider going elsewhere, whether B, there’s enough pulls to pull, or impetus, or enough excitement or enthusiasm about looking at another option or moving elsewhere, and determining what that other option should be.

Michael: I like that framing, kind of is there… do you have enough pain to want to go? Right? Just to make the change and go through all the, what’s still going to be a non-trivial amount of hassle to deal with this? Do you have enough enthusiasm and energy to just carry through what’s going to still be the work it takes to get to a better place? Right?

There’s sort of the whole, the grass may be greener on the other side of the mountain, but you still have to actually be ready to climb the mountain and get over it if you want to get to the valley on the other side. And then figuring out, okay, and if all that stuff makes sense and you want to leave your current valley and trek to a new one, where are you going? Then where do you want to actually land?

Mindy: Well, and that’s exactly right. And in my view, it’s not enough to be in pain. It’s not enough to be excited by something else, although the excitement should far outweigh the pain in terms of motivators or drivers. But in 99% of the moves I facilitated, and I’ve facilitated many in the last 23 years, there’s always pushes and pulls. And it’s not enough that there’s just pushes, but it’s important to understand the impact of those pushes, okay, so that you’re frustrated.

My husband leaves the top off the toothpaste. It may irritate me, but I’m not going to go to divorce court over it. So you’re irritated or frustrated or feeling limited by A, B, and C, but to what extent is it really impacting your ability to serve clients? Are you at risk of losing clients? How is your staff feeling, etc.? And then equally, if not more, there needs to be a pull towards something better, a desire to be independent, a desire to be with a non-bank-owned firm, a desire to get referrals, whatever those drivers may be.

Michael: So can you give us maybe a few more examples of just what are the kinds of, I guess, both pushes and pulls that you typically see? I guess what are the common pushes you see, but they’re actually usually not the things that people leave over? They’re, as you put it, kind of annoyances but not necessarily change triggers. And what are the kinds of pushes that you usually do see people say at the end of the day, like, “Okay, I can’t take this, and there are other places that will do this better, I’ve got to make a change?”

Mindy: That’s actually a very good question because one man’s pushes may be another man’s, “Ugh, I can live with it. No big deal.” So first of all, it’s the point that it’s very individualized. Secondly, it almost always comes to a straw that breaks the camel’s back. Meaning, in most cases, advisors sort of acknowledging, sometimes barely acknowledge or barely notice the things that may be frustrating them until something happens, whether it be a change in compensation or something happens that sort of pushes them over the edge, and the sum total. So any one of those frustrations may not have been enough to make them want to leave, but it is the sum total, and most especially the pièce de résistance, whatever it is, that pushes them out.

Those things could be anything from… that straw that broke the camel’s back could be anything from, my firm just changed compensation. And while it doesn’t impact me, because I’m a big producer and I’m going to be incented by the changes, but it absolutely impacts negatively the junior members of my team. And if I’m looking to really grow the next generation, that’s problematic for me. My firm disallows me from hiring additional support staff, or they’ve raised the bar, if you will, on the amount of support staff they’re willing to pay per millions I produce. It could be, they just changed local management, and I can’t deal with the leadership vacuum. I don’t trust him. I don’t like him or her or whatever it may be. It could be, everything’s okay, but I have a client that’s been complaining that they are having a problem getting into the computer system, that the desktop just isn’t working, and as a result, it’s putting an enormous amount of pressure on our staff. And it’s, I’m okay, I could live with it at all, but my staff, who’s really on the frontlines, is the ones bearing the brunt of it.

I moved an advisor six or eight months ago who had a very significant business, probably was generating almost $20 million in annual revenue and managing billions, who was 53, 54 years old, something like that, but knew that he wanted to likely retire in the next probably 5 to 7 years he. He had some philanthropic things he wanted to be able to do. And when he went to his firm to find out about their retire-in-place program, A, there really wasn’t one, and B, the economics for it, meaning the mechanism by which he could retire out and monetize his business, was really weak and unacceptable.

And his second motivation was that he wanted the flexibility to equitize his staff. He had, in particular, someone who was an analyst or in a support role at his firm. His firm wouldn’t allow him the freedom to title and to sort of create the position that he wanted to create for this analyst. And as a result, the analyst was threatening to leave. And so the advisor sort of felt that his significant pushes were the combination of not being able to retire the way he wanted to and with the economics that he felt were fair for the business. And his inability to compensate, create an equity position, make partner of somebody that was so important to him, that was his straw that broke the camel’s back.

We have advisors at Merrill telling us the same thing, that Merrill just put on salary bonus or cap the compensation of a lot of their support folks. And as a result, they’re losing a lot of their best support folks. So if I’m a top team or any team, and I rely on Bob, who’s the lead estate planning support specialist in my region, and Bob now leaves because he doesn’t like the compensation plan and Bob gets a better job elsewhere, that absolutely impacts my business. And so I hope that answers your question, but those are some pretty good examples.

How The Onus Of Compliance Influences Financial Advisors To Change Roles [00:14:53]

Michael: It helps. And I’m wondering about the pushes end; I feel like I still continue to hear that just compliance is, oh, is sort of the ever-present challenge. I think, to some extent, they’re just always going to be true because we’re a highly regulated environment. Just there’s stuff you can’t do. And there is an obligation of any firm and platform to engage in some level of oversight.

Do you see compliance these days as a kind of push thing that actually makes people change at this point, or is the reality it’s more in the annoyance category, but at the end of the day, recognizing that there’s going to be some level of compliance anywhere? It’s not necessarily the thing that actually makes people change anymore. It’s more of these other trigger events, which I’m finding most of which are at the end of the day about like, how am I compensated for my work? How is my team compensated for my work? How is my business being valued and built on the platform where I am and my ability to harvest that value in the future?

Mindy: Yeah, I think yes. For the best advisors, while a lot of it has to do with the limitations on their ability to do what they need to do to run or grow their business, for the best advisors, it always starts with the freedom and desire to serve clients the way they believe those clients should be served.

It’s one of the reasons I believe, as we come out of this coronavirus crisis that we’re going to see more advisors aware of the limitations on communication, on the frequency, on the ways they’re allowed to communicate with clients and the amount of time that it takes for compliance to approve even a simple written letter versus their independent compadre, who are telling us they’re communicating with clients five times a day via social media, via letters, via email, via video, via podcast, via whatever. So I think that in and of itself is going to be a motivator.

But your question was about compliance. It’s funny; I didn’t think to give it as an example of a push because it’s just the… it’s like the baseline. It’s what every single advisor who works for a big firm complains about is that compliance has become more heavy-handed. It’s a more zero-tolerance policy. It’s, “We feel vulnerable all the time.” They manage the lowest common denominator, and it is uber-bureaucratic.

The straw that breaks the camel’s back a lot of the time comes down to, my client needed me to do something. It took my firm five days, whatever it is, to come back and either ultimately tell me no, or make me go through more hoops that put my client at a disadvantage, whether it be from a timing perspective or just an outcome perspective. And so as a result, that uber-heavy-handed or more bureaucratic compliance culture that has been a minor annoyance to me all along now just became DEFCON 5, or 1, whatever the analogy is.

Michael: And so that’s, as you were framing earlier, why often these end out being the straw-that-breaks-the-camel’s-back moments that we have. Like, okay, yeah, we all sort of joke sometimes compliance is the sales prevention department, and they limit us from doing things from time to time. But there are reasons why that’s in place.

Until I get to a particular thing that I feel is urgent to do for my clients, and I know is the right thing, and the compliance stops me because their processes and procedures aren’t good enough to figure out that I’m doing the right thing. And that becomes my, okay, now, I just can’t take it anymore.

Mindy: Yeah. Well, and it’s not just stopping you because they can’t figure out how to improve it, but they manage the lowest common denominator. So if I’m an advisor at a major firm, and I’m one of 8,000, 10,000, or 15,000 advisors, just because my record is squeaky clean, I’ve never done anything wrong, I’m a top advisor and have a track record of 40 years of doing good work for clients, I am held, as that top advisor, I’m still held to the exact same set of rules and yeses and noes and guardrails, if you will, that the advisor sitting 5 desks from me who’s at it for 5 years with 5 marks on his compliance.

And that’s one of the biggest drivers, is people understand, they respect the compliance infrastructure. You’re not talking about people that are looking to do illegal things or looking to color outside the lines. In fact, if you choose to work as an employee at a big firm, you respect the fact that you’re not the one having to manage compliance. You appreciate the fact that there is a compliance department that’s keeping it all in check, but it is when that compliance doesn’t think like entrepreneurs, doesn’t understand what you’re trying to do. It’s a culture of no. When it really begins to get in the way of doing your best work for clients, that’s when it becomes a real issue.

Michael: Yeah, I call this phenomenon LCD compliance, which is the Lowest Common Denominator compliance, right? It’s that phenomenon that I find, particularly in large firms, where compliance processes and procedures get written for the lowest common denominator, right?

Whatever the one biggest idiot in your entire organization of thousands or 10,000-plus advisors could possibly do, whatever that one person might do to get the firm and the chief compliance officer in trouble, compliance writes a process that captures even what the one biggest idiot might do and scoops up every competent advisor and every skilled and experienced advisor and all of the top producers in the same framework because they wrote the rule once for the lowest common denominator and didn’t make a distinction like, maybe the person who’s already got 5 regulatory marks on their record after the first 3 years should have a different kind of compliance scrutiny than someone who’s got a 30-year clean record of success and growth and doing the right thing for clients.

Mindy: Well said. I couldn’t have said it better myself. That’s exactly right. And whether or not you and I agree with that methodology, that it’s managing the lowest common denominator and there is one set of rules for every advisor that works for the firm regardless of circumstance, the bottom line is, that’s not going to change. That’s just how it goes.

It’s how the big firms manage. It’s how the leaders, whether it be of compliance or the firm in general, put their heads on the pillow, and you just have to know if you’re an advisor and you value turnkey support, you value everything you get from a big firm, that one of the downsides is a bureaucratic, heavy-handed compliance culture, and you just make peace with it.

Michael: Well, and I think it’s a good point that you make again, this is… well, A, this is often how it works in large firms. And it’s not meant to be a knock on large firms necessarily. As, I think you put it well, it’s part of the trade-off for… it’s also what makes a turnkey for a lot of what they do and takes the rest of the compliance burden off your shoulders that you don’t have to worry about it and deal with it aside from whatever processes and procedures they put in place.

But I do get it even from the firm’s perspective that if you are a chief compliance officer or a senior compliance manager in a large brokerage firm and your job and livelihood at the end of the day is on the line based on whether the firm gets in regulatory hot water because FINRA comes in on an audit and finds some stuff that was going on, it’s sort of the way this plays out. If you’re a compliance officer and you don’t want to get fired, you write rules that keep you from getting fired. That’s actually part of the compliance framework, right?

When people with compliance are endowed with both that authority and that responsibility and that accountability, that’s what encourages them to write rules to catch people that are doing things wrong. But it happens to tend to create an LCD compliance kind of environment, which I think has become an edge that I hear at least some of the independent firms now using as part of their differentiators is, ironically is saying, “We’re not huge. We’re not so huge that you’re just one of the numbers that are subject to the same compliance processes and procedures as everyone else. We’re a little smaller. We can be a little more intimate. We can get to know you and adapt our compliance processes and procedures to you.”

Because you can actually do that at a midsize firm in the way that just usually isn’t really feasible in a megafirm. There are just too many people to have that kind of adaptability.

Mindy: So that’s actually the biggest irony about the industry today, is when I started in the business 23 years ago, it was all about big brand, big firm, all there was. As I said, the options were somewhat binary.

And honestly, the people in those days that were going independent were either someone who was worried about being terminated, had one foot on a banana peel and needed to leave, to go independent was the only option, or somebody who was sort of close to retirement and didn’t want to work that hard, but still kind of worked out of their home and had a lot of freedom.

And yes, of course, they were the uber-entrepreneurs, the mavericks in the industry. But that was much more the exception than the rule. But a big part of what’s driving this breakaway movement is this notion, particularly amongst the top advisors who service ultra-high-net-worth clients, where when you’re serving an ultra-high-net-worth client, the number one rule of thumb is all about customization and freedom and ability to deliver service, and the notion of being put in a box, whether it be from a compliance perspective, or even in terms of the amount of investment flexibility you have is absolute anathema, not only to these ultra-high-net-worth clients but to the advisors that serve them.

And so we’ve gone from a place in the industry where the name of the firm, Merrill Lynch, Morgan Stanley, UBS, Wells Fargo, whatever it was, was the imprimatur that everybody wanted, to I think the financial crisis really changed that perception. That brand name became a liability for a period of time. And now, not necessarily a liability unless you happen to be with Wells Fargo right now or months ago, and your firm was being dragged through the mud. But it’s not that the names of the firms are necessarily a liability. It’s just more that the… it’s become more mainstream. It’s become more common knowledge that an advisor knows I’m not stuck. That if I get to a point where this compliance management to LCD, which I agree with completely, or the bureaucracy, or whatever it is that’s frustrating or limiting me, I know I have options. That’s an enormous breath of fresh air. It’s a breath of fresh air for every advisor to know they’re not stuck.

And it should be an enormous breath of fresh air for the investor public, for clients to know that their advisor, if he or she chooses to stay with their firm, it’s because they believe it’s the right place, the best place to serve them, but that if they don’t, and they choose to go elsewhere, it’s because it’s they’re choosing, hopefully, if they’re doing it for the right reasons, they’re choosing a firm that will allow them to service those clients in a much better way.

How Brokerage Platforms Have Changed Over The Years [00:27:08]

Michael: I do think it’s just a fascinating shift of what’s happened over the past 20 years, to go from this world where the megafirms really did have nearly all the advantages – with size, economies of scale, the ability to build better technology because they had those resources, national marketing brands – all of these advantages that one after another seems to have been eroded in the current environment and not gone.

I think sometimes the independent channels overstate the decline of the wirehouse. We measure the number of breakaways in the dozens every year, and there is something on the order of 50,000 advisors in just the big 4 wirehouses. So we’re talking about a trend where the debate is whether 0.3% of wirehouse brokers will leave or 0.5% of wirehouse brokers will leave, i.e., 99.5% have still been staying put, even though when you leave $1 billion at a time, it does add up to a lot of money.

But just all these advantages the firms have. They used to dominate on brand. Well, now independents are building brand, and for some firms, that brand became a liability. They competed on economies of scale. They still have some advantages there. But less so as more outsourcing platforms build up for independent advisors so you can get the same kind of marginal cost advantages. Technology used to be an advantage for large firms. Now actually, a lot of the large firms buy technology from the independent providers because independent tools like MoneyGuidePro and eMoney have more financial planning software users than any wirehouse has advisors. So the independent software companies actually get a larger advisor base to amortize their costs.

And it’s just fascinating to me how the landscape has shifted that I’m still in the camp that there will continue to be a place in a value proposition for what wirehouses and large firms in general do. There’s still a subset of folks that would prefer an employee model for all the turnkey pieces that you talked about, and still value having those company brands on their business card and at the top of their letterhead. But to me at the least, the decision about which to go to is way more nuanced than it was before when the big firms basically had all the resources, and you went independent because you just kind of were a crazy-minded entrepreneurial person who wanted to live in the wild west, where we were 20 years ago.

Mindy: Well, a couple of things. One is that you’re absolutely right that by the numbers, the number of breakaways that actually… the number of wirehouse advisors that actually break away from the big firms and go independent every year is a rounding error. So it’s part of why the big firms, they’re paying attention. I think they give the impression that we don’t care. He was a loser. Planned attrition, we wanted to lose him anyway, so good riddance. But they’re paying attention.

It’s not that they’re not paying attention to the losses. But to them, they’re not… advisors say, “All it would take is if they offered me 10 cents. I’d be happy to stay if they give me a retention package of very little. It would take so little to get me to stay put.” They act as if they don’t care. And A, it’s not their model to pay retention packages unless a firm is sold or there’s some reason to do so. So that’s number one. But number two, because in sum total, if a firm has 15,000 advisors and they lose 10 teams in the course of a year to independence, again, that’s a rounding error.

Michael: Yeah. Whereas putting a retainer bonus and structure that all the advisors have to be eligible for, like a very small retention bonus that you give to all 15,000 actually cost them way more than just losing the subset of breakaways that they lose.

Mindy: Correct. But the part that I’m not sure they take into account enough is the impact of, so let’s assume a firm lost 10 teams or 10 advisors to independence. But if you look at those numbers, if you look at who’s going, the caliber and quality of the advisors who’re going are just mind-blowing.

Michael: It’s not a random sampling that they’re losing. It’s top talent. It’s top leaders. It’s the ones who are going to drive the growth. It’s also the ones who help drive the culture of success.

Mindy: Well, that’s exactly… and, so the impact of a firm losing $1 billion or multibillion-dollar team to independence is, the biggest impact is not just the shockwaves it sends to the local office. A guy in Miami moves and everybody in the Miami office, “Oh, my God, I can’t believe Bob just left.” But it’s the shockwaves it sends to the industry.

When AdvisorHub publishes it and the whole industry reads that yet another $1 billion or $5 billion team broke away. And then those teams have the freedom to communicate how well they’re doing. That they’ve broke away to the other side, and they now are blown away by the growth, by the unencumbered nature of what they’re able to do by how free and much they’re loving their job again, and their ability to communicate, and the kind of feedback they got from their clients about, “Oh, my God, I’m an entrepreneur now, you’re an entrepreneur, and we’re all entrepreneurs, and I can relate,” and all of that is just so incredibly positive that I think the big firms fail to really acknowledge that they’re judging the loss of a top team by the numbers. But what they’re not judging is the impact on culture and on everybody else.

And I think that one of the biggest drivers for this breakaway movement, the biggest momentum is the proof of concept, is that an advisor becomes emboldened because he may have been intrigued by independence three years ago, but he said to himself, he or she said to themselves, “Interesting, but not for me.” Look, I remember a couple of years ago a big advisor saying, “Yeah, the advisors… ” He was a Merrill Lynch advisor, “The advisors that are leaving are good. I’m not disputing that they’re good, but I could make a case that every one of them was, there was a reason. He was motivated by money. She was motivated because she was about to be fired, whatever it may be.” His comment to me was until they start losing PBIG advisors, there’s nothing to pay attention to. And then like three months later, in New York City, you saw what became Core Private Wealth, which was the Merrill PBIG team in New York with $4 billion in assets walking out the door and going independent. So there’s no denying. That’s really the bottom line. There’s no denying it.

And while you and I look at it, or these advisors look at it and say, “It would take so little for them to make us happy. So don’t pay a retention package to the whole firm. Just pay it to the top 10% or whatever it may be.” It’s just never going to happen. It’s just not how it works. It’s not how it goes. The big firms are back in the recruiting game. They are much more likely to pay an absurd recruiting or transition deal to an advisor that is infinitely less proven than a retention package of a 10th the size to a well-tenured top advisor. It’s crazy, but it’s how it goes.

The Right Time To Switch To Another Independent Broker-Dealer Firm [00:35:04]

Michael: So Mindy, we’ve talked a bit about some of the, I guess the pushes, right? What are some of the points that tend to trigger advisors to want to look at leaving or making a shift? Can you talk a little bit about the pulls? You said it usually takes some of each. There are some pushes. There are some pulls. So what are the pulls that you see these days that actually cause people to want to make a change?

Mindy: Well, first of all, let me make the comment that to move if you’re motivated only by pushes, but there are no pulls, that’s a move I’d encourage you to rethink. Because to move because you’re angry or frustrated but not because you found a better mousetrap or a mousetrap that you believe is better enough, that’s probably not a good combination. So let me just make that comment.

But some of the pulls towards something else. So first of all, let’s talk about the breakaway movement. The notion of people going independent. You’ve got people that just have natural entrepreneurial DNA that they are not able to scratch while they are an employee. That’s the bottom line. But one myth of that, I think, is that a lot of people think, “Well unless I have the entrepreneurial spirit of Bill Gates or Mark Zuckerberg, I can’t go independent.” And that part is not true. There were certainly degrees of entrepreneurial spirit. And while you need to have a certain modicum of entrepreneurial spirit because of the ecosystem that’s been built to support the independent movement, there are many ways to go independent and essentially outsource or insource every aspect of the support mechanism you rely upon at a traditional firm. So you don’t have to necessarily be as entrepreneurial as Mark Zuckerberg. But that said, so one…

Michael: And meaning that just because I can like, “Oh, you don’t want to deal with the investment stuff? Fine, there’s a whole bunch of TAMPs. Oh, you don’t want to deal with a more back-office platform? Call Dynasty or Carson Institutional or one of those. You’ve got choices now that say if you only want to do certain things and let go of the rest the way the mothership provided in the past, there are actually a lot of providers that can do that for you in an ongoing stable environment.

Mindy: Or you can hire into it. Or because now you’re getting a take-home economy of 60% or 65% on the dollar as opposed to high-30s or low-40s net, you can afford to hire a chief compliance officer and insource that work. So yes, it’s very easy to get the business supported and not necessarily have to take the heavy lift on yourself.

But that said, one is entrepreneurial spirit, that you just can’t be satisfied where you are.

Two is absolutely, this is a big one, particularly as we come out of this crisis, is the notion of wanting more freedom and flexibility and creativity, and the ability to customize the service model, whatever that may be.

Three, it may be desire to shop the street and create competition for price and service for things like lending or structured products or insurance or any investment vehicle for that matter. The notion of not being limited to the inventory of investment solutions or lending products or whatever it may be that your firm makes available.

Four, it could be feeling… wanting more freedom from a compliance perspective. And not looking to be uncompliant or the wild west, but looking, instead of being managed to the lowest common denominator because you’re 1 of 15,000, instead being able to move to a world where it’s a compliance culture built customized for your firm and your client base.

So those are some of the drivers toward independence.

I guess some of the others definitely are the notion of wanting to build an enterprise. You’re jazzed by the ability of adding inorganic growth to the mix of being able to recruit or do M&A as a way of creating more operating leverage and widening margins and eventually building a firm that has real enterprise or equity value that you can sell for many multiples of the deal you might get to go to another firm today. So those are some of the motivators or the pulls toward independence. But there are many, many, many people that don’t have any desire to be independent, and rightly so. Just it’s not the right thing for them.

Michael: And to me, that’s part of what speaks to why at the end of the day, so many advisors in the employee model stay in the employee model. My gut is there’s some piece of us deep down that knows or gets a sense early on of, do you really want to be responsible for all that stuff, all that burden, all those questions and things you have to figure out as an independent or not? And if that doesn’t sound appealing to you today, that probably wasn’t appealing to you 5 or 10 or 15 or 20 years ago as well, which is probably why you picked the employee model that you did at the firm that you did in the first place.

That decision of employee model versus going to one of the independent channels isn’t just a decision now; it’s a decision we make or opportunity crossroads we have multiple times throughout our career. And by the time people are in one of those channels for a period of time, it’s usually a reflection of their preferences in the first place. Because as you note, if you’re wired as a pretty hardcore entrepreneur in the first place, you don’t tend to last very many years in an employee model in the first place because you tend to butt up against those constraints very, very quickly.

Mindy: Yes, I agree with that, but I think I go back to what I said, that there are some people that think that they’re going to go independent would say by default that they’re pushed by the things limiting or frustrating them where they are. And so the only way to ensure that I’m never vulnerable again is to not be an employee. The only way to make sure that I have complete ownership over the client service model and control over my P&L and the only way to ensure that I’m not managed to the lowest common denominator is to be independent. But if you’re not equally pulled, as I said before, if you’re not jazzed by what’s on the other side, by what it means to be a business owner, by the heavy-lift that it takes not only to build but to run and own and manage, then you shouldn’t do it. Independence should not be a by default kind of thing.

But that’s what I was saying before. There were plenty of people that are not drawn to being independent. And I would say when I’m talking to somebody, it’s why Baskin-Robbins makes 31 flavors of ice cream, because different strokes for different folks. So again, when years ago, the options that an advisor who was sitting at Merrill Lynch and wanted to make a change or was thinking about making a change or wished he could make a change, the options were binary. It was either stay put or go to another wirehouse. And there was little else to consider. The good news today is that even if you have no interest in independence and you want to be an employee, you could go to another wirehouse, but it is equally valid to go to a regional firm. Raymond James and Stifel Nicolaus and RBC are crushing it in the recruiting wars. One, because they’ve upped their deals. So their economics are better. Two, because they’ve upped their talent, their investment platform, their technology. Everything about it has become much more comparable. So the regionals have become a really solid landing spot for somebody that is frustrated by the bureaucracy of a major firm but likes the turnkey infrastructure of being an employee and has no interest in being independent.

And then there’s this whole sort of new category. Probably one of the most popular categories is what we call the quasi-independent boutiques. And that’s where First Republic and Rockefeller sit. Those are great examples of firms that are attracting absolute top talent. The corner office folks from the wirehouses. I know because I’ve moved a lot of those advisors. These are advisors that looked at independence multiple times over the years, were really intrigued by it. There was much of that independence that was very appealing to them. But the basic things they couldn’t… it was a bridge too far. There were basic things about it they couldn’t live with.

One was there was little to no transition money. Two was, again, independence felt like a bridge too far. They didn’t really have a desire to be a business owner in the end. Three, they couldn’t wrap their heads around the fact that to build a firm or work for a firm without a brand name just couldn’t work for them. And four, there were things about sort of the buck stopping with them that was unappealing.

Models like First Republic and Rockefeller are crushing it, and really crushing it amongst top advisors because they’re sexy names. They offer very significant transition money. They’ve built a great community of advisors, meaning you join and other top advisors are there; they’re built on RIA infrastructures. Both firms have models built using third-party custodians for safe asset custody, but the advisor is still able to shop the street or have access to an open architecture for investment solutions and lending and the like. They’re not managing 15,000 people but 100 or 200 advisors. And so culturally, it’s a whole different ballgame.

So the pulls to models like those, if you go to a First Republic, it’s because if you’re in a market where they are, they’re not in a lot of markets, but there’s a very real referral mechanism from the bank. That’s a real draw. So aside from the deal and getting more of an RIA feel, you’re getting referrals from the bank. Again, more culturally appealing, if you will, more boutiquey, less management to the lowest common denominator.

And then look, transition money is a reality. I am blessed and privileged to work with, to have represented and representing currently some of the best advisors in the industry. And “best” I am not defining by the amount they produce, but the caliber of their integrity, if you will, of who they are as human beings. And while the economics of a move, the transition package is a reality and a motivator for some, it has never been at the expense of what’s best for clients. And I’m the first to tell an advisor if your number one motivator is money, A, I’m probably not the right recruiter for you, and B, I’d really encourage you to think about why you’re doing this and if you should.

The Range In Choosing A Brokerage Platform And Why Advisors Must Understand Their Own Priorities [00:46:03]

Michael: Help me understand how you look at just the landscape of the choices out there when you’re looking at making a shift. Because I feel like the industry tends to at best put these into three generic buckets: wirehouses, independent broker-dealers, and the RIA channel. And you already just noted a couple of sort of in-betweens between wirehouse and IBD, right, the sort of regionals like Raymond James and RBC. There’s kind of this in-between between IBD and RIA with, I think as you frame them, quasi-boutiques, like First Republic and Rockefeller that are sort of some RIA chassis but attached to banks or broker-dealers.

So how do you think about just the landscape? What are the buckets of choices that you should think about as an advisor when you’re trying to decide what is my platform or where do I affiliate?

Mindy: Well, so for us, it all begins with that self-assessment, if you will, that we walk advisors through. And again, it’s not some formal checklist that we expect people to send answers into. It’s more of the basis of a conversation. But the output…

Michael: And out of curiosity, can we… is that self-assessment questionnaire something we can actually make available to our listeners?

Mindy: Definitely. Oh, definitely. Yes. Yes. The caveat being, and believe me, I’m not trying to say you couldn’t use it unless you worked with someone like us. I don’t mean that at all. Certainly, people can take themselves through the questions just to get a sense of sort of where they’re at. And it offers a lot of clarity. It does two things. It offers clarity to an advisor, and it also oftentimes highlights the differences and similarities amongst partners or members of a team, where both are answering the questions, and Bob says, “I want X” and Sam says, “I never want X.” Well, how do you reconcile that?

So it’s a very, very good exercise and I’m happy to make it available. That said, it is the answers to those questions that really provide the entire basis for A, should I go at all? Meaning, is there enough meat on the bone or enough motivator, enough pushes and pulls to warrant this? Because moving is a hassle. I’d love to tell you that the firms have gotten better at it and the transition process is more seamless, and it is, but it is still a hassle.

No one should want to go through the disruptive exercise of a move unless there’s good enough reason to do so. So the output from those questions will help to shed light on, should I go? Are there any differences amongst partners or team members?

But part of the reason why it’s a little bit of a hard exercise to do on your own without guidance is because it is part and parcel of the education process. And what I mean by that is, the answers are critical, but it’s, what do you do with those answers if you don’t really understand sort of how the landscape has evolved and what the options are? And so what I mean by that is, is that if we’re having that self-assessment conversation with an advisor, it’s A, a conversation. It’s a back and forth.

We help them to sort of figure out what they’re going to do with that information. But it’s also, we use it as a time to educate, to say, “Well, okay, you said that you value turnkey support, and that money is important to you, but you can’t deal with the bureaucracy of being an employee, and you want to be a business owner. But let me point out to you that those run counter to each other. So let’s talk about the ways you might reconcile that.

In part, if you’re willing to relax the notion of wanting max upfront money but still be independent, that might speak to the independent broker-dealer channel.” I’m just giving you this as an example. Or for somebody that says, “I want maximum upfront money, and I also want maximum take-home economics.” Well, that doesn’t exist in the same package. They run counter to each other.

So the educational piece is about someone like me saying, “Look, if you want max upfront money, that means you go to a traditional firm.” And today, the firms paying the biggest deals are the wirehouses, are RBC, are Rockefeller, are First Republic. Those are the top payers today, but they are not the tops in terms of payout. So if payout is most important, that’s where you go independent, some version of independence. Either you decide one is more important to you than the other, you must weigh that and pick and choose which is more important, or you stay put because you’re never going to get exactly what you’re looking for.

There is no such thing as perfection. That’s where understanding the landscape, understanding the options and what they mean, and what the pros and cons come in. Because I can’t tell you how many times a day, a week, a month I will say to an advisor, “If I could wave a magic wand and create the perfect firm that gave you the best payout, the best take-home economy, the biggest transition money, and the most amount of independence,” everybody would go, “But that doesn’t exist and it never will.”

Michael: So for folks who are interested in kind of going through this assessment, at least the initial self-education or self-discovery or stuff to think about process, we’ll have a link to this out on the site. So this is episode 176. If you go to kitces.com/176, we’ll have a way to download and get access to Mindy’s self-assessment tool, and obviously links out for Diamond Consultants if you have more questions after you go through the assessment, which I’m sure some people will.

So Mindy, help us understand a little more, though, just I want to make sure we get the categories and the choices that are out there.

What is it about RBC and First Republic that makes them able to give better upfronts but not better ongoings? How do you categorize the space out there in terms of who does what and what goes in each category as I’m trying to think through all these different types of firms?

Mindy: Well, first of all, it’s a choice that RBC, let’s use them as an example, makes that says, “We see a real opportunity right now to win this race for top talent. And we know that the realities of wanting to win it means that in order to do so, we need to be more than competitive in terms of our transition packages.” And so, I’m just using RBC as an example, Mike Armstrong, who comes from the world of Morgan Stanley and really gets that phenomenon better than most, has made a decision to write deals that’s really allowed them to win.

And in no way am I suggesting that the advisors going to RBC or any of these top payers are only interested in the deal. Because here’s the way to think about it. When people ask me about deals, I say to them, “It’s a very appropriate question. It’s the right question. It’s just not the right first question.” So what I mean by that is, is that the reality is if an advisor is leaving Merrill Lynch and he or she isn’t uber-entrepreneurial, one of these Mark Zuckerberg types that just have extreme entrepreneurial DNA, and the most important driver to him or her is to build an enterprise or to have total freedom and control over every aspect of the business, then that person is driven, not by upfront money, but is much more long-term-minded, is really going to value the overall enterprise value and building equity more than anything.

But for the rest of the folks, the reality is that if you’re leaving any traditional firm, you’ve got a good percentage, and the longer you’re there and the more you produce, the more unvested deferred comp you have. And the reality of that is absolutely not wanting to leave it behind without being compensated for it. And so it’s not that these people are money hungry. It’s that there are certain realities, depending upon either how close they are to retirement, or depending upon how much money they leave behind, if they’re going to be an employee and they’re going to give up the freedom of business ownership, they want to be compensated for it. So a firm like RBC or Wells Fargo or First Republic or Rockefeller says, “We know that in order to win this race for top talent, we need to be uber-competitive.” So that’s part of it.

I think the second part is, is that okay, so then an advisor needs to decide or we help them to decide, so, okay, transition money is important to you, but can you, would you be willing, is it appropriate to think about not necessarily getting the most amount of upfront money? Because, for example, RBC as a regional firm has a payout that’s a little better, not much better, but a little better than, say, Morgan Stanley or Merrill Lynch. So, the other benefit of an RBC might be, it’s a regional firm. It has many fewer advisors. It tends to just respond better culturally for a lot of folks. So it’s a good home, it’s a good in-between home, best of both worlds home for somebody that’s looking to leave the wirehouse world, frustrated by the wirehouse world but doesn’t want the bridge as far as independence.

So one of the questions may be, would you… and this doesn’t appear on the self-assessment, but part of the conversation is, so you say upfront money is incredibly important to you, but how important are other things that are motivating you? And are you willing to sacrifice, for example, max upfront money so we don’t go to the firm with the best deal, but we go to the firm that pays a good deal, a solid deal, but also offers you A, B, and C? Does that make sense?

Michael: It does. I get it at that level, but just there are 3,800 broker-dealers. I don’t know how to choose from a list of 3,800 broker-dealers if I’m not familiar with the list of 3,800 broker-dealers. I think for the average advisor, just say, what is the difference between Merrill Lynch, RBC, and LPL?

Mindy: Okay. So that’s where…

Michael: You have called them wirehouse, regional, and independent. Not everybody knows what those words mean.

Mindy: Right. Okay. So, wirehouse is a term that came into being hundreds of years ago and essentially referred to firms that had national footprints, the biggest brokerage firms. Obviously, the regional firms have national footprints now, too, but we define the differences between them as a lot having to do with size and being attached to commercial banks or investment banks and the like. So the wirehouses being the firms with the largest number of advisors, the Merrill, Morgan, UBS, and Wells would be the wirehouses.

Then we go to the regional firms. And that’s RBC. That’s Raymond James. That’s Stifel Nicolaus. That’s Janney Montgomery Scott. It’s D.A. Davidson. They are firms that culturally, one, are much smaller. They’re flatter organizations with less layers of management. Probably have, let’s say anywhere from 500 to 2,000 advisors but never more than that. And so they’re good sort of middle-of-the-road options. Years ago, the regional firms had a hard time competing with the wirehouses. They were wirehouses light, in a lot of cases super-light. The technology wasn’t quite as good. The caliber of talent wasn’t quite as good. The average production wasn’t nearly as good. The platform wasn’t nearly as good. They’ve caught up big time. They’ve really leveled the playing field. So today, the choice to go to Morgan Stanley or Raymond James has much more to do with sort of a cultural difference, and there’s a vast difference in deals that may make the difference than it has to do with a national footprint or the quality or caliber of the platform.

LPL falls into the category of independent broker-dealer, which essentially is a broker-dealer platform, but that has literally, in LPL’s case, thousands of advisors that instead of being W-2 are 1099. They are independent business owners, but they use the broker-dealer’s infrastructure, if you will, for compliance. And so the bridge that’s further is the RIA or RIA hybrid space. And the difference between those two is in the RIA hybrid space, the core of the business is an institutional custodian like a Pershing, Fidelity, Schwab, TD, etc. And if that advisor does any sort of commission business, he or she may use what we call a friendly broker-dealer for the accommodative or occasional commission-based business. The independent broker-dealer model is for an advisor. They pay some nice transition money, and it’s much more supported independence. So it tends to draw advisors that are less interested in building an overall enterprise by recruiting and doing M&A, and more an advisor that, let’s say is doing $700,000, $1 million, $2 million in production, who’s really just interested in the independence to run his or her business the way they want to. Did that answer your question?

Michael: That helps. That helps. So I can kind of think of these on a spectrum then. Correct me if I’m wrong here. So as I kind of go down the chain, I started wirehouse, megafirm, lots of resources, national scope brand, but lowest ongoing payouts. You get what you pay for. All that stuff means the lowest ongoing payouts, at least relative to most of the rest of the space. And that’s sort of my first anchor point.

Then I can go from wirehouse to regionals. So I’m still largely in an employee model, but an employee model where there’s a decent chance someone knows my name because I might be 500 to 2,000 advisors. Maybe not the national brand, but competitive resources at least are catching up because of the efficiencies of technology and what some of the regionals have built.

Then going down the spectrum, I can go to independent broker-dealers. My upfront payouts get smaller, my ongoing payouts get better. I’m no longer an employee in a W-2 model. Now I’m living in an independent contractor world relative to my broker-dealer, but they’re still giving me, call it supported independence, some additional infrastructure, but I’m still living in the brokerage model.

Then I can make the leap into hybrid space, where I’m a broker and an investment advisor rep, or I have my own RIA. Now my center of gravity may shift to be, the RIA custodian is the center of my relationship and I may get an accommodative broker-dealer, but my center has shifted. And I guess sort of the extreme on this spectrum at the other end or I’m just full-on independent RIA and running entirely on my own.

Mindy: Fee-only RIA. Correct. Yeah. No, that’s absolutely right. When I describe the landscape, I call it… I tell people often, draw a horizontal line on your paper. And if you think about a horizontal line, a continuum, if you will, you’ve got the biggest bank-owned wirehouses to the left. Again, Morgan, Merrill, UBS, and Wells. Then you go to the regional firms; then you go to these quasi-independent boutiques if you will. And then everything to the right of that midline of the quasi-independent is some version of independence. And that’s independent broker-dealer, then it’s hybrid RIA, then it’s RIA. And within the fee-only RIA or within any of the RIA constructs, there are sort of subcategories of decision points, data points. Do I want to leverage a platform firm? Do I want to hire an outside consultant? Do I want to use a service provider, etc.? And that’s part of what we talked about before about how the ecosystem has really grown to support and scaffold the breakaway advisor.

Michael: It’s an interesting framing. So when I think about some of the players that are out there that support some of the RIA channels. You hear labels like HighTower and Dynasty. So you would put them into these subcategories of independent RIA. I guess those are platform firms to you?

Mindy: Well, yeah. So they go into the ecosystem category, the bucket to support the independent advisor. Now, HighTower has changed its stripes over the years. When HighTower first launched a decade ago or so, they launched as a model, almost like the way, say a Rockefeller is. Different name, but basically, that sort of idea. They were kind of a quasi-independent. It was a partnership model where they were paying advisors 100% cash in… 100% of their trailing 12 in cash on a forgivable-loans note structure, plus 100% of equity in HighTower to join. And advisors were employees, but they were employees with a voice. It was a quasi-independent. When HighTower brought in private equity firm Thomas H. Lee and they changed out Elliot Weissbluth for Bob Oros, etc., they changed their stripes.

And today, HighTower is not in that quasi-independent business, but instead competes with Focus Financial. They’re an investor in an advisor’s independent practice. So where an advisor is either breaking away and first going independent and wants to sell some equity to a partner, or already is independent and reach sort of a capacity issue or some sort of an inflection point and needed to take on an equity partner. So that’s HighTower today. They act as a service provider in an ancillary capacity, but it’s not their main value proposition.

Dynasty is a full-on service provider. They’re a firm that focuses on the breakaway market. So the advisor that’s leaving say UBS that wants to go independent and recognizes that the lift of building and running and managing a firm is just a bridge too far. Yet I want to be independent. I don’t want to be an employee of Rockefeller, even though I could. I don’t want to be an employee of Raymond James, even though I could. I don’t want to go to another wirehouse, even though I could. I want to be independent, but I don’t want to deal with the heavy lifting.

So Dynasty is a great solution. And Dynasty would be the great solution for the high end of the market. Dynasty is expensive – fabulous but expensive – and for the high-end advisor. When I say “high-end”, I mean the advisor that isn’t quite totally plain vanilla in terms of what they offer to clients and to their advisors. And so there have been many new service providers born just to compete with Dynasty that are no better or worse but serve as sort of a level below or a level or two below a Dynasty. That would be a firm like a TruClarity or tru Independence that does something similar – manages or runs the middle-office and back-office infrastructure, if you will, does all the heavy lifting of building out the RIA so that the advisor is free to just really focus on their core competencies.

Michael: I’m struck by this spectrum that, particularly now as you’re describing some of the RIA options, we’ve got kind of what essentially become employee models like HighTower, service provider models like TruClarity, tru Independence, Dynasty, the ability to basically just run your own firm entirely and just sort of hire the staff or the occasional providers that you need. Firms where you can sell entirely and tuck into their existing infrastructure as a full-on employee.

I feel like there’s this shift underway where, in the early years, we had the spectrum sort of in sequence of independence: wirehouses, regionals, independent broker-dealers, hybrids, and then full-on independent RIA. And now it feels like the RIA community is, in its own domain, reinventing all of the other stages up the line. That now I’ve got employee models for RIAs that maybe aren’t quite the size of wirehouse but are at least moving in the direction of regionals. I’ve got RIA platforms like Dynasty and TruClarity that look a lot like independent broker-dealer platforms, just happens to be on the RIA side of the channel, not the brokerage side of the channel.

That there’s this effect, to me, that’s occurring, that RIA is no longer really just at the tail end of the independence spectrum, at the opposite end of wirehouse, that RIA is now becoming more of a parallel channel to support certain different business models, right, like AUM fees or ongoing fees and not FINRA commission-based products, but that it’s more of an alternative channel for the whole spectrum, not just the endpoint on the spectrum.

Mindy: Oh, for sure.

Michael: Is that a fair characterization?

Mindy: It’s a very fair characterization. And the way I would characterize it is the quintessential leveling of the playing field. So one of the negative sales point that a wirehouse manager may use to try and convince an advisor who’s between, do I join Morgan Stanley, or do I go independent? The Morgan Stanley manager who’s attempting to recruit that advisor might say, “Oh, but the technology will stink, and you’ll never get access to all of the sexy and sophisticated and robust solutions that you need. And the infrastructure won’t be there, etc.”

But that is absolutely either a completely uneducated statement or a naive statement or just a sort of desperate hail Mary statement because it’s not true. So that’s not to say that everybody should go independent, certainly not. But the decision to or not to go independent could never or should never today be based on the fact that I couldn’t support the business the way that I want to.

So years ago, we would have an advisor that would say, “I’d love to go independent, but I have international clients. I’d love to go independent, but I have institutional clients. I’d love to go independent, but I have ultra-high-net-worth clients,” meaning those would be the eliminators. The reality is that we see all kinds of independents regardless of who they service and the kind of business that they do. Because I just interviewed for my podcast, Michael, just last week, an advisor who left Morgan Stanley.

In fact, the day I interviewed him happened to be his five-year anniversary from breaking from Morgan, and he was in a great mood, excited. But what he said was… we talked about research and he said… he’s a research… a geek, a nerd. He loves to read everything. He hasn’t sacrificed anything in terms of what he gets access to. And in fact, he still gets access to Morgan Stanley Research. So literally, not only is he not sacrificing what he had, but he has it and infinitely more.

This level playing field means that from a technology standpoint, forget about leveling, the modern technology that’s available in the independent space blows away what’s available in the… the legacy technology available in the traditional space. And again, not even a little bit meant to be a sales pitch for independence. It’s just meant to say that that’s not a valid argument anymore.

Michael: Yeah. Again, it’s a phenomenon that we’ve talked about a lot on Nerd’s Eye View in the past few years as well. Just this shift that… I don’t think there was any question 20 years ago, that the wirehouses had the dominant tech. They had all these resources to build these fully integrated systems. The independent RIA channel had just a bunch of homegrown software that we made ourselves. An advisor who had a problem would make technology to solve the problem.

Friends hear about the solution. Friends want to buy software as well. Advsor now runs software company on the side. When you go back to the roots, that was the origin of Junxure CRM, Redtail CRM, Orion, Tamarac, iRebal, TradeWarrior, like, one major independent platform after another, they were all these homegrown solutions that took 10 and 20 years to grow to some size.

But now, we live in this environment where independent software companies have tens of thousands of users more than any individual company or even wirehouse. And suddenly just the power in technology has actually shifted to the independent channels because it’s the independent software providers now that have the most size and economies of scale. It’s not actually the big firms anymore.

Mindy: Yeah, and the advisors are not limited to legacy technology for UBS or Morgan Stanley or Merrill Lynch to invest in technology. It’s moving a battleship to, for an RIA to be able to custom-choose and then custom-outfit the technology that best suits their firm is they’re nimble. It’s a whole different ballgame.

It’s interesting because in talking with advisors that went independent 20 years ago or 10 years ago – so the mavericks, the people that were the first to do it – they’ll tell you that the lift was much harder than it would be today to break away. That they had to figure it all out for themselves. They had to piece it together for themselves. There weren’t service providers or platform firms. Nothing was as mainstream or easily accessible, and the playing field was definitely not as level as it is today. What that speaks to is what we said at the very beginning of this conversation, that the people that went independent 20 years ago were the real uber-entrepreneurs that wanted it at all costs, no matter what, even though the infrastructure wasn’t there, even though it meant a lot of pain, even though it meant a tremendously heavy lift. Today, while it’s still a heavy lift, nobody is denying the fact that it’s disruptive to move and it’s a big leap and all that sort of stuff, there’s so much more support today. And that’s part of what’s really driving it.

Contrasting Benefits And Disadvantages Of Each Platform [01:13:51]

Michael: So as we think about this spectrum, can you just sort of walk us through major benefits and disadvantages to each? If I’m an advisor, I’m just trying to figure out like, “Where do I want to be or building?” So let’s start with wirehouse. What do you view as major benefits of being at a wirehouse, the major disadvantages of being at a wirehouse? Where are my trade-off points?

Mindy: Sure. And there definitely are trade-offs. So the benefit is name brand to the extent you see that as a benefit, right? Cachet, familiarity. Two is not only familiarity of brands but familiarity. It’s a world you’ve lived in, you’re comfortable in. And chances are really good that if you move from Merrill Lynch to UBS, it’s not going to feel all that different. You hope that there will be some things that will be made better or things you’ll be able to do differently, but overall, it’s kind of a lot the same. And that’s how most advisors see it. It’s turnkey. It’s everything all in one place, all under one roof. Certainly, the wirehouses have, for the most part, really good leadership in terms of at the branch level. Good, high-quality leadership. There’s an infrastructure. There’s a good community of advisors. They’ve got scale. They’ve got the ability to invest in and innovate. They’ve got the capital. You’ve got the compliance infrastructure, etc. Those are the pros.

The cons are that if you’re feeling unhappy, for example, at Merrill Lynch, chances are really good that a move to UBS isn’t going to move the needle a whole lot. And there may be some reasons why you would choose to do so, but chances are pretty good it’s not going to move the needle a whole lot. Some of the other cons is that this whole bureaucratic, heavy-handed, draconian compliance infrastructure makes it impossible for an advisor that wants to be able to customize, to do things for clients outside the box. And I don’t mean outside the box in terms of illegal, I mean outside the box in terms of just creative, customized service. They really can’t do that. If you want to be able to communicate more freely, you really can’t do that. For most advisors, the investment platform is more than good enough. It provides more than good enough array of products and solutions. But I’ve worked with many advisors who service ultra-high-net-worth clients who find, for example, the alternatives platform to be limited. The inventory or menu of options with respect to private investments or some alternative investments is really weak.

The inability to shop the street. The inability to, if you have a client, I’ve had many advisors, their straw that broke the camel’s back was an advisor who said, “I had a $20 million client that came to me over Mother’s Day weekend,” this is a true story, “A couple of years ago. And the client needed a loan, but the client didn’t have a lot of collateral. So I went to my firm,” which was a wirehouse firm, I won’t name, “And my firm’s lending department essentially looked at it and the metrics and said no, wouldn’t do the loan.” As a result, that client wound up going to… I can’t… it was either HSBC or First Republic. I can’t remember. It was one of the two. Because this example comes up a lot. But that particular example was either going to HSBC or First Republic, who absolutely took the loan, did the loan. They got great terms and service. And as a result, that advisor that I was talking to at Merrill not only lost this $20 million, I think it was a prospect, like a solid, warm prospect, but… so not only lost the loan but lost the prospect or the client completely.

So when an advisor feels that they’re beginning to outgrow that, and/or, probably the final thing would be the vulnerability. This management to the lowest common denominator has created a sense where advisors are constantly looking over their shoulder, am I going to be terminated? Is there something that I’m doing right today, and if I do it tomorrow, it’s going to be considered wrong? And so when they outgrow that, it may be time to go elsewhere.

Michael: So then, to put this in context, help me understand a little bit of the financials as well because I know this is going to shift as we start comparing and contrasting some of the other channels. So when you talk about things like transition money and payouts, because it sounds like those are two of the big triggers that start to differ across platforms. I understand there’ll be ranges because different firms do it at different levels, but can you give us some sense of what does transition money typically look like if I’m then going to get recruited to another wirehouse and what do payouts look like on an ongoing basis? So that we can understand when we then compare and contrast some of the others.

Mindy: Yeah. So the payouts are not that dissimilar, even when you go from wirehouses to regional firms. Most employee payouts range anywhere from, say… I’m talking about gross payout before any advisor paid expenses, anywhere from probably low-40s to approaching 50%, where cash payout probably goes as high as 48% or 49%. So the payouts are not that different, but the transition money is very different. So, Morgan Stanley and UBS are back very much in the recruiting game, and Wells Fargo. You’re probably talking about 3X deals all in, where a portion is paid upfront. Probably half of that is paid upfront on a 9 or 10-year forgivable loan structure, and then the other half is on the back end earned by hitting pre-agreed asset and production hurdles.

As you move to the regional firms, the payout may be a little better, but you’re not moving from a wirehouse to a regional firm because there’s some great delta in payout. But in terms of deals, RBC’s deal actually compares very favorably. It’s not dissimilar. It’s dissimilar in structure, but in terms of the total deal, it compares very favorably against the wirehouses and all the top payers. But firms like Raymond James, for example, is a phenomenal firm. Advisors love it because they’ve got the multi-channel association model. So there’s advisor choice. And because culturally, it’s just a firm that has always differentiated itself by really believing that the advisor owns the client, and living and breathing that in everything that they do. But deals, transition deals really fall way off. With Raymond James, if you’re talking about 125% all in, it’s a lot. So you can see the deals can be very different. And so…

Michael: Wait. So a regional, my transition might be something like 125% of my trailing 12?

Mindy: So the regional firms, there is no sort of, let’s put it in the bucket and say all regional firms pay X. The wirehouses will pay similarly. The regional firms are firm-specific. So again, RBC, under Mike Armstrong’s direction, decided that we see an opportunity to recruit wayward wirehouse advisors and disenfranchised wirehouse advisors. And so we’re going to pay up. Raymond James’s philosophy has always been very different. We recruit based on culture. And they lose a lot of the big teams that they’ll look at because if a big team has a choice between a deal that’s 3X or a deal that’s 100 or 1.25X, that’s a big differential.

Michael: So I just want to make sure I’m comparing these well. So I understood regionals would vary more. If I’m thinking of a benchmark number for wirehouses on transition is, you had said sort of a 3X there. Is 3X or 300% trailing 12 still a reasonable number to think about as kind of a benchmark number if I’m looking to maximize payouts?

Mindy: Yes.

Michael: Okay. So when I get down to regional, so my transition goes lower. I know part of that trade-off, though, is my payouts are higher. So what do… ?

Mindy: Not much higher.

Michael: What do payouts pay?

Mindy: Really truly not much higher. Especially when you get to the multimillion-dollar advisor, the payouts are pretty comparable. There may be a little… a percentage point or two more in terms of cash comp versus deferred, regional firm versus wirehouse. But again, there’s not a tremendous difference or there’s not a tremendous delta in terms of payouts. But the differences…

Michael: So talk to us in terms of then just benefits and disadvantages overall. Why do I choose a regional?

Mindy: Well, okay. So you choose it because culturally, you want to be 1 of 1,000 versus 1 of 15,000, for example. So size. But size also means a flatter organization where there’s more direct access to senior leadership or easier access to the head of compliance or the head of trusts and estates or just easier access. Culturally, the regional firms tend to operate under the philosophy or the belief that the advisor owns the client. Whether or not that’s what the contract says, that is how they believe, and so they view advisor as client. It’s just a cultural difference that oftentimes people can’t really appreciate until they sort of go to home office visits and whatnot.

But there is a tremendous cultural difference between a regional firm and a wirehouse. Regional firm, another pro, tends to feel for a lot of people like the best of both worlds. I don’t want to be in another wirehouse for all the sort of negative… the cons we just talked about, but I also don’t want to be independent. I have no interest in being a business owner, whether it be because I’m just not wired that way or because I’ve only got five years left to go until I retire, and it’s just too late. I don’t want to do that. So the regional firms are really, for a lot of folks, a good middle ground.

Technologically, certain firms like RBC, the technology is very, very good, and infinitely better than it once was. But in the case of some of the regional firms, the technology doesn’t compare with some other firms. And so an advisor, that’s a personal decision, an advisor needs to do their due diligence, touch and feel the technology and determine if its capabilities are good enough for what it is the advisor needs it for. It used to be that the, as I said, the regional firms were light everywhere, technologically, leadership-wise, advisor community-wise, all of it. That is not the case. They’ve really caught up almost across the board. There may still be some differences.

And again, even if I’m… if you’re an advisor and you and I are having a conversation, you and I are having a private conversation about your options, I will say to you, for sure, there’s only so much I can tell you in advance. The rest is just you’re going to have to touch and feel for yourself based upon your business and your needs to determine if it’s good enough or if, in fact, it’s not.

But the regional firms are really winning today. They’re really crushing it today, and they’re having record years because one of the things that has really changed more than anything in the last number of years is a change in advisor sentiment. And advisor sentiment change was fueled a lot by client sentiment change. Clients began to demand, have begun to demand that they want their advisors to act in their best interests. And clients have begun to realize that there are other options behind one way to get their needs met. And so, in many cases, they’ve forced their advisors to think about, “Is my firm, in fact, the best place to service my clients?” So in a lot of cases, the clients have sort of fueled advisor movement, if you will.

But the change in advisor sentiment has gone from advisors worrying about, “Is this good for my business?” And as a result, ultimately… And it’s sort of all the same. So if it’s good enough for my business to serve my clients at Merrill, it may as well be good enough at Morgan Stanley. Advisor sentiment has really shifted today to advisors really valuing, in a lot of cases, the big picture, wanting to build something beyond just their practice, build an enterprise.

So valuing what it means to build equity and be able to equitize their partners, or their staff, having control over the P&L. They value things like higher payout, better take-home economy. And when you begin to go to the independent space, that’s where the take-home economy, the payout, there’s a wide chasm between the employee payout and the independent payout, etc. So advisor sentiment has really shifted.

Michael: So, what are disadvantages, then, for the regional model, for the regional tier in this progression?

Mindy: Well, I think generally speaking, well, they’ve come a long way and in the last number of years have all really been recruiting big time. And have not only recruited more but recruited higher caliber talent. So they’ve raised the average production. But generally speaking, the community of advisors is probably a lower-level producer. So it is likely more the exception than the rule to find a $4 million team or a team managing $1 billion at these regional firms than it is within the wirehouse world, etc.

Again, the regional firm is a category that’s probably the least able for me to describe as a whole, to put in a bucket and say, “This bucket is characterized as X.” Because the regional firms are really… there were vast similarities and vast differences between RBC and Janney Montgomery Scott, and Janney Montgomery Scott and Raymond James. And so it’s very difficult to reduce to sort of a box. In some cases, though, the technology may lag. In some cases, the community of advisors may lag. In some cases, the caliber of branch leadership may lag. And so it’s hard to sort of paint it with a broad brush.

Michael: So then take us to independent broker-dealers in this progression now. So we make a couple of big shifts. We’re no longer two employees. We’re now independent contractors, but we are still under a broker-dealer environment. We are still subject to their oversight. We’re using their support and infrastructure. So how do you frame now benefits and disadvantages of independent broker-dealers when we’re comparing them in this progression of wirehouse, regional, IBD?

Mindy: Yeah. So most often, if an advisor wants independence, but he… So when we go through the self-assessment we referred to, one of the questions as we begin to get to a place where it’s clear that an advisor would prefer to be a business owner as opposed to an employee, one of the things that really defines for us or makes it clear to us which version of independence or probably more importantly, how independent or how entrepreneurial they are, is questions around how much support do you want and how much do you value choosing every aspect of the business versus having the technology be chosen for you or choosing the compliance oversight or the CRM or whatnot?

So independent broker-dealer is sort of independent light. And I don’t mean light in terms of where the quality is not as good, but it is more proscribed. It’s a broker-dealer platform. So a purist might say it’s not conflict-free. An advisor generally is not free to choose their own technology. So many of the IBDs or independent broker-dealers today now have RIA channels where an advisor can opt to have much more freedom of choice. But the pure independent broker-dealer models tend to attract a less enterprise-building-minded advisor, meaning an advisor that wants independence but doesn’t really have interest in growing a firm with multiple locations and recruiting and doing an M&A and the like. And it also tends to attract an advisor that likes the guardrails, the compliance infrastructure, not having to choose which technology, etc.

Michael: Okay. And then how do you frame the disadvantages?

Mindy: Well, so a lot of times an advisor that starts out in the IBD world, the independent broker-dealer world, they realize that they get a taste of independence and realize that they want more independence than the independent broker-dealer allows them. That they may not realize when they first break away that they are jazzed. They begin to see the impact of expanding operating leverage, meaning expanding margins by… that if I keep my expenses the same and I recruit an advisor with $1 million in production that now drops to the bottom line, I am expanding my margins. They never realized how jazzed they would be by that. How interesting it might feel to be able to do M&A or want more freedom. Or, to them, when they looked at the independent broker-dealer model, they saw much more freedom than they had as an employee and didn’t realize that they may want even more freedom than that. So probably one of the biggest disadvantages is it may require two moves. For someone that gets a taste of independence and realize he or she wants more, that eventually, they want the RIA space, whether it be to become fee-only or to have infinitely more freedom of choice, make the core of the business a custodian as opposed to the broker-dealer and not be limited, it may require a second move.

Michael: And so then talk to us about how we think about transition dollars and payouts when we’re looking at this space.

Mindy: Yeah. So payout for an independent is driven by, if you’re under a broker-dealer umbrella, the tariff that you pay to that broker-dealer and the transaction cost. So that’s broker-dealer by broker-dealer, but there is also transition money. And we’re not talking the kind of transition money that’s paid in the employee space. Again, this is all over the map. Depending upon the broker-dealer, there could be transition money anywhere from 25% of an advisor’s trailing 12 months revenue to 100% of an advisor’s trailing 12 months revenue. And broker-dealers like Wells Fargo FiNet and LPL would be in that latter category. But they’re also more expensive in terms of the ongoing fees, and probably a little more limiting. So what you gain in upfront money you give up in terms of, it’s more expensive, and so the net payout is less. So again, payout is sort of all over the map.

But payout or take-home economy as an independent is defined or driven much more by how that advisor manages their own P&L, how much support staff you have, whether you have class A office space or Class B, and whether you have fine china or paper plates or whatnot. So how you manage the expenses. And in the RIA space, the purest RIA, there is no transition money. So if you are becoming an RIA, unless you are either selling equity or taking a loan, an RIA model is all about valuing the long-term building of an enterprise. It’s not about the short-term upside. In fact, it costs you money. So that’s why you’ve got to really want it. And for a lot of folks, it’s a bridge too far.

Michael: And so is there a general benchmark around at least what payouts typically are in independent BDs? Understanding that part of the reason why they’re higher is you have to do more of your own infrastructure because you’re not an employee model where they provide it to you. So you don’t… a higher payout doesn’t necessarily mean higher take-home. Just, in sort of the truest sense, more control and independence to figure out where you’re going to pull those levers. But is there… ?

Mindy: Right. Well, there’s a difference between gross payout and net payout, right? So the net payout is what you have control over.

Michael: Right. So when we talk about at least gross payouts, what are typical numbers to think about in the independent BD world, as I’m trying to think about that coming from maybe an employee model where I’m used to getting paid, whatever it is, 40% or 50%?

Mindy: Yeah. So typically, in the independent broker-dealer world, you’re looking at, the published payouts will be 85% to 90%, meaning the other 10% to 15% is what’s paid to the house. And then you pay your local expenses from there. So generally speaking, we look at as an independent net payout. And again, this is really individual based upon whether you’re in independent New York City or an independent in Tuscaloosa, Alabama. But generally speaking, we’re looking at net payouts for an independent of say 60% to 70%, with 65% probably being the average.

Michael: And the idea being just, that’s what you get with a little more control, a little more economies of scale, right? I don’t have to pay all of my national firm’s overhead and infrastructure. If I’m good with my small local office and a virtual assistant and don’t need the rest of the infrastructure stuff, I can literally save on that as an independent and not pay for that and therefore have a better net payout. If I’m in a more expensive area or I need more staff structure, I can also end out with a much lower payout or much lower net.

Mindy: Absolutely. That is what I mean by control of your P&L. So much of what drives wirehouse advisors, the pushes, if you will, that… and oftentimes, the straw that breaks the camel’s back for a wirehouse advisor is realizing that I am giving up more than 50 cents on every dollar I generate to my firm. And while I appreciate A, B, and C, I’m also paying for D, E, and F, and I don’t need it. And one of the things, I think based upon the conversations I’ve been having in the last couple of weeks as advisors navigate the corona crisis, is the notion that in working remotely, they’re relying on or leveraging their firm’s infrastructure even less. There’s no manager on site. And many of them telling me, “My manager calls and he checks in how I am and gives me an attaboy every once in a while, but they’re not really adding a lot of value. I’m not leveraging the infrastructure because I’m the one who had to buy the computers for my staff. And I had to train them on it. And the only leadership my team is getting is from me. We’re not sitting in an office. We’re not together.” And so the pain or the reality or the acknowledgment that I’m paying X amount, giving up X amount of every dollar I generate to my firm for services I don’t use, I think is going to be even more heightened as we come out of this crisis.

How The Independent RIA Channel Is Replicating The Brokerage Channel [01:37:41]

Michael: And so then how do you think about and frame independents? I guess independent RIAs and even hybrids. Because they’ve got all these steps of their own and more and more service providers now at various tiers, do you still think of them on this spectrum? The next step out after we go wirehouse, regional, and IBD is hybrid RIA and then full RIA, where we can talk about benefits and disadvantages in the same scope, or do you think of them differently?

Mindy: No, no, no, that’s exactly right. Now, again, as the ecosystem has really expanded, those subcategories matter. So yes, the next tick on the continuum, if you will, is the hybrid RIA and then the fee-only RIA. The difference decision point then within them is, how much support do I need? Do I want to pay for a service provider? Do I just hire a consultant that I pay a fee to transition me and help me build it out, but then it goes away? So there are more decision points, but yes, the next step on the train is hybrid RIA or fee-only RIA.

Michael: And so how do you think about the benefits and disadvantages there as you’re kind of going through this comparative spectrum?

Mindy: Benefits and disadvantages, hybrid versus fee-only or versus the IBD space?

Michael: Hybrid versus the rest of the ones we’ve done on the spectrum.

Mindy: Okay. So the benefit is ultimate freedom and control and flexibility and customization. So the ability to really build a firm in your own vision without having to compromise anything. Of course, the downside of that is you pay for that, and it’s a heavy lift. But one of the advantages is being able to leverage a panoply of consultants, service providers, platform firms, law firms, even recruiters like us. We spend a lot of time helping advisors figuring out what are the components they will need to build a firm. So there’s no shortage of places to get the support that you need. I do a podcast once a week, and I interview a lot of guests who talk about what it was like, their breakaway journey, and what worked and what didn’t. So there are lots of ways to get the information that you need.

So it’s ultimate freedom, the ability to communicate flexibly and nimbly. An advisor said to me the speed to market from idea generation to execution is mind-blowing. The ability to write a book or to write market commentary without having to wait a week or five for compliance approval or not get it at all. The ability to shop the street. The ability to add inorganic growth to the mix, and where the advisor owns the operating leverage as opposed to the firm. So if I have a team, I am the senior advisor on a team at Morgan Stanley, and I recruit another advisor to that team. So we just went from generating $3 million in revenue to $3.5 million in revenue. The increased operating leverage, Morgan Stanley owns. If I’m independent and I recruit that advisor, I own the operating leverage. So that’s a major difference.

But some of the cons are… So if you talk to advisors that have made the leap, the overwhelming, 100% unanimous feedback is, “The only regret I have is that I didn’t do it sooner.” They would tell you there are no negatives. If you say, “Do you feel like you’re missing anything? Have you sacrificed anything? Do you feel like… ?” I’ve had some conversations in the last couple of weeks with advisors as they navigate the corona crisis. And in that crisis, do you wish that you had the scaffolding of a major firm? Is there anything you miss? And the answer is, “Oh God, no. Oh God, no.” So if you talk to advisors that have done it, they’ll say there are no negatives. But for somebody that’s on the fence, or maybe only half-hearted entrepreneurial, the very things that someone might see as a positive are the things that somebody that’s sort of almost half-hearted about it would see as a negative. It’s too much. It’s a bridge too far to manage my own P&L. To have to manage that, etc.

Michael: That’s that self-selection bias that we talked about, right, all the way back at the beginning. That the advisors who are most wired for entrepreneurial independence, they love being in… they love it when they get to a world where they finally get that entrepreneurial independence and say, “I’ve no regrets. I can’t believe I didn’t get here sooner,” not recognizing that not everybody actually likes to have all those… all the control and flexibility and the burdens of decisions and responsibility that comes with it. And it sounds horrible and miserable for everyone else, even as the people who have a preference for that thrive in it once they… as you put it, once their speed to execution just gets faster because they can do it more directly without the rest of the corporate apparatus that slows them down.

But I guess the caveat from the perspective thinking about transitions and payouts as we get to either the hybrid world or the full RIA world, you are in a world of, there’s no more transition money, and there’s really no more… there’s no longer such thing as even payouts per se, like, your payout is you charge 100% of your revenue and you get 100% of your revenue. And then you manage your P&L to say, “What am I going to pay to do the things that I need to do in my business? And what is my net profit going to be as a business owner after I generate my revenue and pay my expenses?” Is that a fair characterization?

Mindy: Yeah, no, no. It’s a very fair characterization, and again, can’t put it in a box because it has everything to do, not only with the local decisions you make, how much staff and how much support and where you choose to set yourself up and how you choose to set yourself up, etc., but it also has to do with the pricing you get from the custodian and which vendors you choose to support yourself. So it’s much more highly customized. That one’s really hard to put in a box. But again, generally speaking, I’d say net take-home pay is anywhere from 60% to 70%, 60% on the lower end if you’re in a big city or have high expenses, and 70% would be… 65% being the average, let’s say.

Michael: And one more question on this, how do you distinguish… ? When we talk about hybrids, the reality is, there’s sort of two flavors out there. There’s, you own your own independent RIA, and on the side you have, call it an accommodated broker-dealer for whatever the subset of commission businesses or the trails that you’re still trying to service but you have your own RIA, you own your own RIA and that kind of becomes your center of gravity. Versus the folks that exist in a duly registered space. I am a “hybrid.” I have a BD affiliation and RIA affiliation, but I’m an IAR of someone else’s corporate RIA. I don’t actually have that same level of ownership. I’m under a private advisor group or one of those types, Stratos and such. How do you think about or compare those in the spectrum, or how do you frame that choice and what you call them?

Mindy: Yeah. Well, I think what you’re talking about, so using Private Advisor Group as an example. For someone who’s not familiar, Private Advisor Group is what we call an OSJ or an office of supervisory jurisdiction under the LPL broker-dealer. And essentially what they are is the middle office, back office sort of heavy lifter, the quarterback, command central, if you will, for affiliated advisors that say, “I’m independent. I have my own firm, I’m 1099, but I don’t want to deal with the minutiae of running the business, the middle office and back office. So I pay not only a fee to LPL, but I pay a fee to you, my OSJ, to manage a lot of the heavy lifting.” And obviously, that impacts net payout. But that just goes to the notion that there’s more choice today. The difference is that, in that particular example, if I’m a hybrid RIA under Private Advisor Group, I am under what we call their corporate ADV, where I am part of a whole, and if there were a compliance infraction, let’s say by one of the other affiliated advisors, that’s on my ADV as well. So a purist may say, “The only way to be fully independent and never vulnerable again is to have my own ADV where I answer only to myself.” A corporate ADV means you’re part of a whole entity.

Michael: So when I think of these on this independent spectrum or payouts spectrum, how do I think about… I get owning my own RIA or owning my own RIA, and I have an accommodated broker-dealer. When I’m in these duly registered roles where I’m still an IAR under someone else’s corporate RIA, do you think about that as close to RIA? Do you think about that as closer to IBD? Do you think about that as closer to like a regional version of an RIA because those are often employee models? Where do you put that in the spectrum?

Mindy: No, I think that’s a fair question. I think that that’s sort of a gray area. In my opinion, it’s closer to the IBD side than it is the RIA side. Because any time there are limitations. In that model, the advisors are custodying a certain amount of assets with LPL, who is the broker-dealer, and they are… even though they… Private Advisor Group has a lot of assets, multi-billions of assets in its corporate RIA. Still, there are some limitations for the advisors affiliated with them. And so it probably sits as a dotted line somewhere between the independent broker-dealer model and the hybrid RIA model. Because what I call the pure hybrid RIA model is where the advisor has his own ADV or his own RIA, not a corporate RIA.

Why The Decision Of Which Platform To Choose Is Not As Simple As It Once Was [01:48:19]

Michael: So as you look overall, what do most advisors not understand about choosing a platform or channel for their advisory business?

Mindy: So, we can have a lot of conversations. And we can talk about this. And we’ve had a really good conversation. And I think we’ve painted a really good picture for somebody that was unfamiliar with how the landscape had expanded. But it’s not black and white. It’s very nuanced. And it’s nuanced based upon, the more the landscape has expanded, the more nuanced or the less likely, I guess is a good way to say it, that an advisor can be 100% certain when they begin the process that, “I know I want to go to Morgan Stanley,” or, “I know I want to be an RIA.” In almost every situation, we have advisors that start out with sort of some belief about where they belong if they were to move or what ideal looks like. And by getting educated and whether that means armchair exploration just by being educated, having a conversation like this, or going out and taking meetings with other firms, they are almost always enlightened.

And I’ll give you an example of what I mean. We have a team that we’re working with that is a wirehouse team that I have been in dialogue with for, oh, my God, it’s probably a decade. Just a good, strong relationship. We talk every six months. And he looks… it’s a he, a senior member of the team looking for an update on the lay of the land, but happy and well-served. But like we mentioned, lately, there have been some straws that break the camel’s back moments, and they’re pretty sure they want to leave. He asked me then if I would have a phone conversation with him and his partners. We did. We had a two-hour phone conversation. We were going to meet, but then the coronavirus crisis hit. So we wound up having it by phone. And they started out by telling me, “We are really sure we want to go to another wirehouse. We’re just wirehouse guys. We have no interest in being independent. We’re young enough that if we do have a long enough career, we can always go independent 10 years from now. We like the turnkey infrastructure. We like the connectivity of investment banking and commercial banking and all under one roof. We’re wirehouse guys.”

So we set them up. They had a phone conversation, especially in the days of this crisis, a phone conversation with the senior leader from this other wirehouse, and loved it. Great meeting. Great meeting. But when we debriefed, the team said, “But it’s obvious to me that there are certain imperfections, and those imperfections are very similar to some of the imperfections we’re dealing with. And most importantly, there’s no guarantee that even if those imperfections or similarities don’t exist now, that they won’t exist a month or a year from now. So are we trading one set of problems for another?” The answer is, maybe, maybe, but if you choose to go to another wirehouse, and there would be nothing wrong with doing so, you go in, enter with your eyes wide open, right? You know what you’re getting in for. There is that possibility, but that’s why you’re getting paid the big bucks, and you know it going in.

But the outcome for this team, as with the majority of people we counsel, is, “I think we need to look at some other options, even if it’s just to rule them out.” Now, they’re an ultra-high-net-worth team. So the regional firm names probably won’t resonate with them. But we are going to begin to add models like First Republic and Rockefeller and some models of independence. I can’t tell you, we’re just at the beginning of the process where they’re going to wind up going, but 99% of the time, it’s not even that I can tell you that they definitively won’t wind up where they thought they would, because many times they do, but they’re very, very, very glad that they added options they wouldn’t have originally thought of to the process because it’s very important to rule in as it is to rule out. So it’s important to be broad-minded and open-minded.

Advice Mindy Would Give To Newer Advisors And What Comes Next For Her [01:52:25]

Michael: So what advice would you give newer advisors looking to get started today? Right? It’s one thing to say, hey, you’ve been doing this for 10 or 20 years, built a client base, built a practice, and now you’re trying to figure out, “What’s my platform for the next stage? Am I going to make a switch? Am I going to go to the wirehouse or the regional or the IBD or the hybrid or the independent RIA on the spectrum?” But we also have a decision to make when we’re getting started in the first place. So how should advisors think about that first step if they want to be off on a good footing, that they don’t necessarily have to make as many disruptive changes later?

Mindy: Yeah. So my best advice for a younger, a next-generation advisor or a younger advisor is two things. To ask him or herself early and often, “Am I in the right place?” Because the second you realize that you may not be in the best place to service your clients or grow the business, you are much better off moving sooner rather than later. And I don’t say that as a commercial because everybody should move. Moving is disruptive. So again, I stand by you shouldn’t do it unless there’s enough good reason to do so, enough justification. But for the young advisor, there’s no benefit to hanging out and waiting. I’m going to wait until I get some mythical revenue number or a mythical number or a hypothetical number of clients or whatnot to move. That if you have the sense…

Michael: It doesn’t usually get easier later. It just ends out being more complex because there are more clients and stuff to move. Yeah.

Mindy: Right. And you have more to lose, more you’d leave on the table, etc. So there’s no benefit to waiting. So if you get the sense that it’s not right, you probably want to think about making a change sooner rather than later.

The second thing that’s very important for next-gen advisors is that particularly those that work in the wirehouses or traditional firms, the wirehouses have been strongly encouraging teaming for a long time, where you’ve got a senior member and junior or next-gen advisors. And while that’s wonderful in a lot of cases, the reason they’re doing it is because it’s a good mechanism by which to tie teams up. And for senior advisors, they’ve been trying to incentivize a lot of them to sign on to these retire-in-place programs. And by doing so, the message to the next-gen is, “Oh, you’re my heir apparent. You’ll inherit the business.” And while it’s a wonderful way to take on a business that you ultimately pay for, it’s not inherited, make no mistake, that you will pay for, still a wonderful way to take on a business, but only wonderful if you’re certain that your firm is the right place to do it. If not, by signing on to be the next-gen inheritor to a senior advisor’s business in a retiring advisor program, you’ve now tied yourself to that firm for the life of that agreement. And by taking away optionality, by essentially making it impossible for you to move in the life of that agreement, you’ve diminished your value.

So it’s very important to do two things. One, to make sure you’re in the right place and to check in with yourself very often. Doesn’t mean you do full-on due diligence, but just so you’re clear about where you’re at. And that before you sign on to anything, you’re clear that it’s what you want, and it’s what you can live with, regardless of what comes down the pike for the foreseeable future.

Michael: So what comes next for you?

Mindy: So, what comes next for us is we keep doing what we’re doing. Our whole approach has really been all about being value-add, never leading with our personal financial gain, but how can we add value? And if we happen to make a deal or move somebody because of it, great. And if not, that’s okay, too. And so, for me, it’s 100% about sticking to our knitting, 100% about sticking to our knitting, continuing to add value and do what we’ve always done and done it well and continue to do that. I’m proud to say my son joined us five years ago. He is our next-gen, our heir apparent, and doing a great job. I’m jazzed by the freedom. I continue to work deals and to work with advisors because that’s my love. But he’s freed me up to do a lot of the writing and my own podcasting and the like. And I’m excited about that, too.

Michael: Yeah, I know you’ve been doing a lot more writing and have a podcast as well on kind of independence and all these decisions around independence. So we’ll make sure we have links out to the podcast as well for people who are obviously our podcasts and clients since they’re listening to us here if you want another one to listen to and explore.

So as we wrap up, Mindy, this is a podcast about success. And one of the themes that always comes up is just the word “success” means very different things to different people. And so you’ve lived the successful growth of your recruiting business for the past 20 years. Helped a lot of advisors make their own success transitions, but I’m wondering, how do you define success for yourself at this point?

What Success Means To Mindy [01:57:34]

Mindy: That’s a great question. Even in the early days of starting this business, where money wasn’t as abundant, and I certainly wasn’t as successful as many people would define success from a monetary perspective, I never led with money. I never used money, how many deals I closed, or how many advisors I moved or how much money I made as a barometer for my success. And by being true to my one definition for success is by every day looking to add value wherever I can. And trust me, I’m not Mother Teresa. I don’t mean to say that I’m not running a business because I certainly am.

But my definition for success is, I believe verily that if I continue to be true to my values and guide people the way I want to be guided and adding value where I can and looking to add more value than anything I could get in return, that has paid off for me in a million different ways. Financially happens to be one of them. But it truly, while it’s nice to have money, it’s not the main barometer of my success for sure.

Michael: Well, I love it. It’s always a fascinating thing that, I think particularly in our advising world and just the nature of what we do, it’s funny how if you just try to give the people you serve a lot of value and do that in an ongoing basis, good economic outcomes also happen to show up a lot.

Mindy: Well, that’s exactly right. And in a world where there are many recruiters that give my profession a bad name for being transactional and leading with, “Hey, I’ve got this great deal, let me tell you about it,” where the person on the other end of the phone represents a paycheck and not much else, it felt disingenuous to me to be that transactional recruiter early on. And I found my way to an approach that is not a methodology or some sales practice, but it works for me. And part of my definition of success, as I broaden it, is that I have been really, really fortunate to hire and surround myself with people that believe in the same philosophy. And we just keep doing the next right thing, and it works.

Michael: Well, I love it. I love it. Thank you so much, Mindy, for joining us on the “Financial Advisor Success” podcast.

Mindy: I’m grateful to have been included. My pleasure, Michael.

Michael: Thank you.