Risk for Breakaway Brokers Equals Opportunity for RIA Firms

Posted by Joseph Giulitto on June 12, 2012

By Joseph Giulitto

There are challenges aplenty in the world of the breakaway broker. From the obvious considerations of the market over the last decade, to the constant bombardment of the 24 hours news cycle keeping your clients “informed” of all the potential and peril that exists in the financial arena. With ongoing regulatory changes that create a virtual minefield of violations and let us not forget the “do it yourself marketing” that is pummeling the investor to think that they don’t need professional guidance.

If a potential breakaway broker of a larger firm were to sit down and think of all the negative considerations in starting his own RIA firm, it would be hard to imagine that any sensible person would venture into that type of quagmire.

However, with all these potential risks facing a prospective breakaway broker, exists an opportunity for the established RIA firm.

The modern RIA firm has tackled and successfully managed through the challenges of a startup. Once established, the challenges, while still prevalent, exist primarily in maintenance of the current client base. When an advisor acquires a certain number of clients the firm becomes mired in its own success of having to satisfy those existing relationships. The question then becomes- How do I grow? While there are several considerations on how to grow, it can be defined under one umbrella as “effective marketing”. But what does that imply? Does it mean radio ads, magazine articles, or knocking on doors to find new retail clients? Or is there a better way to focus (read spend) those marketing dollars?

The RIA has a couple of options on where to spend their marketing dollars. Advertise and attract the retail client, or work to build a business model that attracts the aforementioned breakaway broker with clients in tow. In my experience, both on the captive retail side as well as the RIA side, the answer became very clear: focus on obtaining relationships already established with the breakaway broker.

According to a recent research study by a prominent custodian “The trend of financial advisors leaving traditional Wall Street brokerages to go the independent route or join existing RIAs has not lost momentum.” This against the efforts and strong legal language that many large brokerage firms are now forcing their employees to sign. Even with the best efforts to keep their retail clients, brokerage firms are losing them to the relationship that exists between the rep and the customer.

While the typical rep considering breaking away would not know his legal rights and frankly would be afraid to explore all the options available to him it is the proactive RIA firm that will be able to provide direction and guidance to the “would be breakaways.” To make it work a growth strategy regarding the recruitment of reps must incorporate not only a sound money management philosophy, it must provide back office, compliance, and legal support for the potential “breakaways.” In addition, having a strong knowledge base of the potential impact on the rep as well as your RIA firm will keep you protected and avoid potential litigation.

Don’t think the big brokerage firms are ignoring the exodus. Charles Roame (CEO of Tiburon Advisors) said he expected the wirehouses to respond by creating a “halfway house” as an alternative for advisors that were considering independence. This “halfway house,” which he predicts will happen at some point this year, would enable advisors some of the benefits of independence and ownership while remaining under the wirehouse/brokerage umbrella.

I share an interesting article regarding this very topic.



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