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Wirehouse Breakaways Must Wait for Profits

By Chris Latham February 7, 2014

Brokers who break away from wirehouses often do so because they’re tired of handing 60% to 70% of their hard-earned revenues over to their employer. But advisors who have taken the plunge into independence say they generally have to wait quite a while before breaking even, let alone turning a profit. Many face unexpected costs when setting up shop for themselves, and even those who partner with hybrid RIAs make sacrifices in the early days, experts say.

Between leaving Morgan Stanley in 2008 with a few colleagues and founding Beverly Hills Wealth Management in 2010, Mag Black-Scott wrote out a list of her anticipated revenues and expenses. Her firm, which has a staff of about 20 people, manages over $500 million in assets. Black-Scott says while BHWM took a little over a year to achieve profitability, breakaways ought to brace for as many as two years in the red.

“If you think something will cost $10,000, it will cost $15,000 to $20,000,” she warns. But she says the “hiccups” on the road to profits are endurable. “Take a step back so you can have a leap forward.”

One of Black-Scott’s costliest investments her first year was in a strong technology platform. Naturally she shopped for the most efficient custodians, broker-dealers and software vendors, she says, but the firm also built an in-house portal from scratch for advisors and clients. Another major startup expense involved labor: staff compensation, medical insurance, retirement plans and administrative support to manage it all.

Mag Black-Scott
Then there’s the expense of paying for investment products that used to be free. Wirehouse advisors have access to internal offerings like trust management and separately managed accounts, and their employer generally cuts deals with external providers of mutual funds and life insurance. Once on their own, advisors must figure out how to continue offering clients the same products or find worthy substitutes — while striking the best bargains with providers to maximize income.

Confidentiality

Of course, much depends on how many clients follow the broker to his or her new home. According to Bob Fragasso, head of Fragasso Financial Advisors in Pittsburgh, the industry norm is between 70% and 85%. But he says that when he left Smith Barney with 10 other brokers in 1996, about 99% of his clients left with him, and he was profitable within six months. His firm, an independent affiliate of LPL Financial, manages $920 million.

Fragasso, author of Starting Your Own Practice: The Independence Guide for Professional Service Providers, planned his leap more than a year in advance. That gave him time to craft pro forma financial statements and prepare for nitty-gritty details like an overnight mass-mailing of announcements to clients as soon as his resignation was official, moving expenses and a 30- to 60-day lag in transferring major accounts.

Robert Fragasso
To make sure Smith Barney didn’t get wind of the move while he was getting ready, Fragasso insisted that all his vendors sign confidentiality agreements. He recommends that breakaway brokers require these across the board, he says, from website designers to liability insurance providers to stores selling office printers. Fragasso, a former Marine, compares leaving a wirehouse with a team to engaging an enemy on the battlefield. “You may not be risking lives, but you’re risking livelihoods,” Fragasso says.

Some breakaway brokers mitigate that risk by stopping short of total independence. Brian Amidei became a partner with HighTower Advisors in 2011 after leaving Merrill Lynch with seven colleagues. They opened an office in Palm Desert, Calif., and a month later linked up with six others from Morgan Stanley. The combined team manages $700 million.

HighTower kicked in a good portion of upfront expenses, says Amidei, some of which the team is repaying over time. Early on, the advisors collected next to nothing in the way of salary, instead investing in office furniture and equipment and upgrading their technology. Gradually they paid themselves more, returning to full salary after a year and a half. But thanks to their sacrifices, they were profitable after just a few months.

Amidei would not reveal HighTower’s cut of his team’s revenue, but advisors, who are equity partners, have been reported to split revenue down the middle with the company. To Amidei, the burden seems light. “If you’re going out on your own, you don’t have an 800-pound gorilla on your back,” he says. “So you could be able to break even pretty quickly.”