Has your advisor left for greener pastures? This occurrence is not uncommon, especially with all the changes in the business of financial advice. Like downtown Harrisonburg, the financial industry has seen many positive changes over the last decade. Improvements to the Friendly city include great restaurants such as Jack Brown’s, Billy Jack’s, and Jimmy Madison’s, among others. The financial industry has also improved with greater transparency and generally lower fund fees. You deserve to know how much you are paying for your investments and why your advisor believes they are best for you.
The purpose of this article is to explore why advisors switch firms and to explore if this change will benefit you. Then you can determine if you want to move with your advisor, or look for a new relationship. If your advisor cannot explain to you in simple terms why this change is better for you financially, maybe it is time for a second opinion.
Your advisor should be stable, consistent, transparent, and independent. You should demand all of these things. We are here to educate and to empower you to ask the right questions, so you can gain the clarity and confidence to know you are making the best decision for you and your family.
Before we dive into the details, I want to make it clear that we have no plans to leave our current firm, LPL Financial. Later in this article we will explain why we came to LPL back in 2012. LPL has been a great partner and provides us with many of the services and technology we need to run our business and serve our clients. LPL was founded on the core values of independence and freedom.
As an advisor, we must know our recommendations are in the best interest of the clients we serve. While I cannot predict the future and have no way of knowing if our values will always align with LPL 10 or 20 years from now, I am more excited about the direction of the firm with each conference I attend, and with each advisor I speak with.
Before we discuss the list of questions to ask your advisor, I think it is important to understand why advisors leave in the first place.
So why do advisors change firms? First off, please realize that most good advisors are fiercely driven individuals. They want to do a great job, they want success, and they want to be in control. The two reasons below are not the only reasons advisors change firms, by any stretch.
Advisors may switch to carry out their their succession plan, for better technology, better culture, and a variety of other reasons. But all of these secondary reasons ultimately affect the advisor’s ability to make money and the desire to have more control over their business and client relationships. With that said, the two of the main reasons advisors leave are for:
1. Money. Most of the time, changing from one broker-dealer to another rewards the advisor with an up-front bonus. This bonus can be substantial depending on the assets under management. The amount of bonus can vary depending on whether or not the advisor goes independent, joins a wirehouse, or some other type of firm (please read further for a description of each). Some advisors who go independent may not receive a bonus at all. However, quite often the advisor receives a substantial bonus when a move is made.
In addition to the up-front bonus, the annual revenue paid to advisors can vary greatly. Traditional bank or insurance company broker-dealers typically pay out between 35%-60% of revenue to the advisor and will keep the rest for the services they provide (see below). Independent firms pay out between 90%-100%, so the move to go independent can result in substantially more revenue, especially when the advisor has a lot of assets under management.
2. Control. Perhaps the advisor’s old firm has changed and is no longer the firm that the advisor fell in love with. Perhaps the advisor’s business model has changed and the advisor knows the structure with his current firm does not line up with where his business needs to go in the future. Regardless, few seasoned advisers will ever go through the paperwork and hassle to make such a big change if the move will result in loss of freedom or control. They will simply not go through the trouble if the move will result in more people telling them how to run their business.
So let’s explore the different types of financial firms to understand the reasons why an advisor moves. In other words, why will this change give the advisor more money and more control?
Wirehouses (big banks): Wirehouses are the more traditional brokerage firms, and are some of the largest financial institutions in the country. They historically have also produced proprietary products that are only available to advisors of this particular firm, which their advisors offer in addition to other products.
These firms often have tiered levels of management. For instance, financial advisors may have an office manager who oversees the day-to-day activities and production of the local office. There also will likely be regional managers who are overseeing a larger geographical area, and so on and so forth. This organizational structure historically has been very much a sales culture, and many experienced advisors want out of this environment.
Advisors have a great deal of structure in wirehouse firms. For instance, most of the technology and systems are already pre-built for them. This structure can be a positive or can be negative depending on the advisor’s business model and the quality of the services offered. Often times advisers are W-2 employees of the larger organization and have benefits such as health insurance, 401(k), etc. Payroll, computer systems, and other aspects of owning a business, are all handled by the larger organization. Office space and administrative staff are also included. Because most or all of the overhead expenses are covered by the bank, the advisor payout is typically lower than other business structures as noted above.
Independent financial advisors. There are many types of independent financial advisors who still need to enlist the services of a larger organization to help them run their business effectively. Independent financial advisors are not employees of an organization. Rather, they are business owners who pay the larger organization to handle trading costs, technology, custody of assets, compliance and supervision, and other services necessary to run a firm. Independent financial advisors are also responsible for hiring their own staff, handling payroll, employee benefits, securing their own office space, and many other responsibilities common to other business owners.
Independent advisers are typically paid a higher percentage of revenue that is generated as noted above. While the payout is higher, the headaches of running a business can be greater, due to the increased complexity of hiring staff and managing technology and other business assets and resources. Independent financial advisors typically have minimal or no conflict of interests when serving their clients and have much more control over how they run their business. They also have more control when deciding to sell their business or pass to the next generation. Some of the larger organizations independent advisors partner with are LPL Financial, Raymond James, and Ameriprise
Insurance company broker-dealers. Many years ago, it was commonplace for financial advisors to be employees of insurance companies. At one time, these advisors could only offer mutual funds or annuities “manufactured” by the particular insurance company. Due to changes in the industry which have been very good for consumers, these advisors can now offer a myriad of other solutions as well. As a result, insurance companies have formed their own broker-dealers which are independent of their insurance company parent.
Advisors with these firms often are W-2 employees of the insurance company and also receive non-employee compensation from the broker-dealer. There are many different types of arrangements, so the full details are beyond the scope of this article. Often times advisers who begin their careers in this model find that the limitations of being under the umbrella of an insurance company inhibit their growth and the ability to serve clients. This was the case for us, as we were once part of an insurance company broker-dealer before going independent and joining LPL Financial in 2012.
In my case, I questioned whether or not the larger organization’s values were in alignment with my own. The technology was not what my clients were demanding, and I felt the organization’s desire was to take more and more control over my practice.
What will YOU have to do to stay with your current advisor?
If your advisor changes firms, what are your responsibilities? There will be a ton of paperwork. There is no way around it. The good news is that your advisor should complete most or all of it prior to you signing. If your advisor is expecting you to complete a bunch of forms, then perhaps you may want to question the advisor’s commitment to you and your family. You are too busy managing your life to go through forms that the advisor deals with every day. Your life has changed since the last time you completed paperwork with them, and your advisor should take the time to go through everything with you to make sure your information is accurate.
Transfer fees will likely be assessed when you move accounts. These fees are usually in the $100-$200 per account range. Make sure you ask your advisor whether or not the firm will pick up these charges, or if you are expected to pay them.
Now you are equipped to better understand why your advisor made the change, and what will be required of you to move with them. Up next, we will outline specific questions you should ask in the meeting with your advisor.