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The Rise of the Super-Breakaway Team

December 1, 2016

If increased competition and growth are signs of an established and healthy business environment, then now is a great time for RIAs. What once was a cottage segment of the industry has steadily evolved into the fastest-growing business model among the traditional wealth management firms.

While large, established RIAs continue to dominate headlines with their exponential growth and purposeful M&A, we are seeing an increasing number of breakaway advisors quickly establish themselves among the upper echelon of advisory firms.

Long thought of as starting on the ground floor of the RIA industry, new breakaway teams are quickly emerging with the size, scale and organizational maturity to compete with established firms. In fact, we believe we are on the cusp of seeing a new category of “super-breakaway” teams — those ready to join the ranks of the most competitive advisory firms right out of the gate.

First off, it’s important to emphasize that “going independent” is misleading. What these breakaway firms are really doing is changing their business model from a product sales focus to an advisory focus, from a suitability standard to a fiduciary standard, and from a commission-oriented business to a fee-only compensation model. The organizations where they work are not adequately structured to support their wholesale shift to an advisory focus, and this misalignment ultimately leads teams to make the final step from employee to entrepreneur.

Previously, we mostly saw teams under $1B in AUM breaking away from wirehouses while larger teams rarely chose to leave. Many of those breakaways under $1B looked to merge with existing RIA firms which offered them the benefits of scale along with needed independence. With the increase of regulatory complexity and market volatility, these established RIAs were still an option and offered stability as owners found their footing.

However, according to DeVoe & Company’s latest RIA Deal Book, this year has seen more large breakaway teams set up their own operations, even amid an increasingly consolidated and competitive RIA industry. Why?

Recently we have seen that while many RIA firms are working to grow, acquire, be acquired or expand their geographic footprint to compete, new breakaway firms have recognized that, with the right team and operations partner, they can fully embrace a new business model while retaining their own independence (and revenue) and still remain competitive.

Pershing Advisor Solutions recently worked with the 6 Meridian team to announce the establishment of a new $2B+ RIA firm. 6 Meridian knew launching and operating their own firm would let the team engage with new opportunities by providing more options for how they manage money in-house and work with leading third-party investment managers.

6 Meridian outlined a value proposition in advance, focusing on how independence could help better serve existing clients, and worked to position themselves to immediately take advantage of growth opportunities.

But the move does not come without challenges.

As business owners, breakaway firms must make decisions about which technologies to deploy, which investment solutions to provide, how to customize the client experience and how to manage to profitability.

Some have chosen to hire a professional manager to leverage their expertise of managing business operations, so that the owner can focus on their business priorities. The big surprise in this regard is that it tends to be a more cost-effective decision than relying on the guidance and supervision of a home or branch office staff. This is because the advisors and the manager have a wealth of experience to make ideal decisions unique to the business they are trying to build.

To help them break away, 6 Meridian enlisted the help of Pershing Advisor Solutions to provide them with resources that will help position them as one of the largest and most innovative RIAs. By engaging the right third-party partners, 6 Meridian was able to hit the ground running regarding back-office, operations and compliance so they could focus on serving their clients.

In many ways this emergence of the “super breakaway” team is a byproduct of past success.

A decade ago, leaving the captive environment to set up an RIA firm was a leap of faith. But with so many pioneers already charting a path to success with the help of expert guides, the processes of converting to a new business model is less stressful.

Firm leadership can finally begin to align its structure to be more of the client advocates they strive to be, rather than having to focus on the business transformation aspects that can be so time consuming.

Overall, we expect this competition to continue to drive RIA firms to become more focused and efficient, and continue to advance the industry’s virtuous growth cycle.