For advisors giving up the safety net of a large organization and transitioning to independence, the move is “harder than most imagine,” a new SEI report says.

For advisors giving up the safety net of a large organization and transitioning to independence, the move is “harder than most imagine,” a new SEI report says.

John Anderson, head of practice management for the SEI Advisor Network, told Family Wealth Report that he believes advisors “really underestimate” the complexities associated with launching their own business.

“The challenge comes after the transition is made,” he said. “For most advisors, once they have made the move they tend to manage the business the same way they did before they were independent. As an employee, they focused on today and what will happen this year. As a business owner, they need to think five, ten years out or longer. Switching to independence is easy, becoming a business owner isn’t.”

Anderson nonetheless notes in the report, entitled Dotting the Is: How Independence, Integration and Intelligence can Transform your Practice into a Sustainable Business, that the independent RIA segment will likely maintain its pace of “incredible growth” since 2005 (according to Cerulli Associates, the number of RIAs has risen by 37 per cent since 2004).

“Fortunately, for most advisors, there are many services that will help an advisor transition to independence. Those services typically involve changing custodians, broker-dealers or even setting you up with your own RIA,” he told this publication.

Asked to outline what he believes are the main steps advisors can take to better prepare themselves before starting out on their own, Anderson said: “It sounds cliché, but start with a plan. A true business plan begins with personal goals then professional goals. Ask yourself, am I transitioning for the right reasons first.”

He added: “Plan on what you want the business to look like when it is time to retire, not what it will look like next week. Share the plan with associates, stake holders and even an advisory board if possible and hold yourself accountable. Talk to successful practices, and to partners, about the pitfalls they went through when they became independent. Remember it is a business, not a practice.”

Perception gaps

SEI's report says that independence alone is not a compelling enough reason for a prospective client to do business with an advisor - nor is the fact that the title “wealth manager” follows their name.

Highlighting where one of the problems may lie, a 2012 SEI Advisor Network survey showed that 62 per cent of all independent advisor participants viewed themselves as “financial advisors who happen to be business owners,” while just over a third perceived themselves as “business owners who happen to be financial advisors.”

“If you don’t see yourself first as a business owner, how can you effectively grow your advisory firm?” the report notes. “To successfully transform an advisory practice into a thriving enterprise, advisors need to look at their businesses and the client experience with a new set of eyes.”

According to recent insights from Cerulli's 2013 fourth quarter issue of The Cerulli Edge – Advisor Edition, advisors “have a habit of overstating their value proposition and most are investment planners.” Cerulli believes that the term wealth manager is “bandied about freely with little attention paid to what that job title entails.” Based on the firm’s definition of what constitutes a wealth manager, only 3 per cent of advisors surveyed in their study fall under this category, compared to 11 per cent who view themselves as such. 

SEI's latest research also points to a perception gap as regards whether advisors pick up on changing client needs/desires. In 2010, for example, 22 per cent of small HNW business owners to a CEB survey said they would prefer making financial decisions with little input from their advisors – a figure which last year had jumped to 32 per cent. However, last year an overwhelming 83 per cent of advisors polled by SEI did not believe that their clients were more likely to manage a portion of their investments themselves compared to five years ago.

Overall, the report explores what it describes as three “essential ingredients” - or the three Is - involved in an advisor's transition from practice to business. Independence, SEI says, is an advisor’s “most basic asset,” allowing them to make decisions they believe are in the firm’s best interest. It also looks closely at the other two Is: integration and intelligence.