Independent alpha: Making the breakaway math add up

Advisors continue to break away from captive environments for independence, with some 6,873 making the leap in 2022, according to the Diamond Consultants Advisor Transition Report. The desire to become a business owner continues to be strong, especially as the support infrastructure, product access and upfront capital in the space keep improving.

However, these advisors are simultaneously forgoing massive recruitment bonuses from competing firms and a less labor-intensive transition process.

Clearly, any advisor breaking away knows what they’re giving up — so how can they justify making this leap?

For some, the ability to create a legacy and own their destiny, along with the empowerment of business ownership, is enough. But in most cases, the answer starts and ends with growth.

HOW CAN I GROW FASTER AS AN INDEPENDENT THAN IN A CAPTIVE ENVIRONMENT?  

It’s no secret that independent advisors retain more of their revenue than in an employee construct. But without growth, it will take many years to offset the “bird in the hand” of a lucrative up-front and back-ended recruitment package.

We call this calculus the “independent alpha” — the excess beyond an advisor’s expected growth rate in a captive environment.

For example, a wirehouse advisor who typically grows 5% per year could expect a similar growth rate if they moved to a competing W-2 firm. However, when going independent, this same advisor may have an expected growth rate of 9%, which means their independent alpha is 4% per annum. 

Simply becoming a business owner doesn’t generate growth, so what actions can an advisor take to produce this excess return? From consulting with hundreds of advisors who have broken away, as well as dozens of podcast interviews with advisors who have successfully made the move, there are several effective growth tactics that independent advisors deploy.  

For instance, they bill on all asset, including 401(k)s not custodied at their firm, and get paid on all accounts regardless of size. Plus, they’re flexible about how they price relationships, including planning retainers and subscription fees.

When it comes to the services they provide to clients, advisors layer in activities such as tax preparation, estate planning and concierge services, not only to satisfy growing client requirements but also to justify a fee increase or generate new sources of revenue. Likewise, they spend more time with clients and focus on growth with less red tape and time fighting compliance than they might have in the wirehouses.

It’s no secret that independent advisors have greater latitude in differentiating their business in a local market by expressing unique viewpoints in a creative and scalable way. These advisors also use social media and marketing to target new clients — creatively and without limitations.

One of the most prolific growth mechanisms found in independence is recruiting experienced advisors and the acquisition of like-minded practices. Inorganic growth provides a more succinct path to scalability and, when done with the right partners, can create incredible returns.

These business owners also make it a mission to invest in the areas that are most important to the business — whether this means hiring new support team members or junior advisors to add capacity or opening an office in an untapped market.

And ultimately, they are free to bolster their value proposition and prospecting pitch by operating similarly to a family office by being platform-, product- and solution-agnostic.

Evan Mayer of Fortuna Wealth is an example of an advisor deploying some of these strategies to generate an impressive independent alpha. Mayer shared on a recent podcast episode that since leaving Truist in 2019, he has more than tripled his practice; he credits hiring servicing advisors to bolster capacity, the ability to create video blogs and his own commentary, starting a podcast and being empowered to solve clients’ problems without red tape for his new edge as a business owner.

While not every advisor can expect to triple their business, leaning into the unique elements of business ownership typically leads to impressive results.

Most often, starting small and trying out one or two of these techniques tends to work best. As a business owner, it’s up to you to decide the level of growth that’s meaningful — and what your independent alpha must be to feel confident about making the move.

Louis Diamond is president of Diamond Consultants.