Transition essentials for advisers changing broker-dealers

It's no secret that financial advisers focus on supporting the needs of their existing business versus transition opportunities when equity markets are transitioning through a new economic cycle, like they have for the first half of this year. However as we pass this point of inflection, advisers are once again balancing their time to also examine how they can fuel organic growth within their business.

Advisers recognize the importance of having broker-dealer and custodial partners that will enable them to acquire and support an ever greater number of client relationships as demand for their services grows. This leads advisers to explore transitioning to the best possible broker-dealer or custodial business partner to support their needs.

However, before any adviser can even consider making a transition, they must ask themselves one essential question: If my practice were to transition to a new broker-dealer or custodial partner, would our hard-won stable of clients join us?

For practices that can definitely say 'yes,' then the next step is finding an experienced, enabling partner that can successfully shepherd them through the transition process to ensure successful execution and client retention. While there's a perception that transitioning to independence commences and concludes in one fell swoop, in reality it unfolds in three distinct phases over a multi-year period:

* First, there is the exploratory and strategic phase, which encompasses many of the elements that drive and sustain a practice, including determining whether a potential partners offer the right product mix, business model flexibility and technology solutions to maintain an uninterrupted level of client service.

* Second, there's the actual transition itself, which involves the transfer of accounts and broker licenses as well as numerous other logistical items.

* And third, there is what I call the post-transition “evolutionary” phase, which is the most important phase. Here, broker-dealers and custodians can define themselves by serving as strategic allies to advisers in their efforts to accelerate growth in the first full year of the adviser's new affiliation and offer a broader range of financial solutions to their clients.

With the right partner, this final phase marks the beginning of a long term ride that the adviser team and broker-dealer take together in the pursuit of greater scale, more opportunity and better growth.

The following are the most important forms of transition support that advisers should be on the lookout for when considering a move to a different broker-dealer or custodian:

1. DUE DILLIGENCE

Whether it is the registered representative, hybrid RIA or stand-alone custody model, the key for any adviser contemplating a transition is to find an experienced partner that has a proven track record of providing the freedom and flexibility that enables practices to grow and evolve. The right broker-dealer and custodian can help facilitate this process by making their services an open book to prospective recruits, and not only answering every potential recruit's questions but also proactively raising the key questions that advisers may not even have thought of asking, but which will inform their own due diligence process.

These are just a few of the questions that advisers should be thinking about:

* What's the best business model for my practice? Fee-based, or commission based?  Should I have my own RIA, or join an existing RIA?  Or am I better off as an investment advisory representative under a corporate RIA structure?

*What's the right platform to help my relationship with my clients evolve?  For example, are the majority of my clients pre-retirees who are heading into an asset distribution phase of their lives, or am I serving a younger demographic that is still in asset building mode?

* In this increasingly complex regulatory environment, who will provide the expertise to protect my clients and my business?  Will I have access to competitively priced, yet sufficiently comprehensive E&O and other forms of insurance and liability limitation vehicles?

2. LOGISTICS

Once you've decided on a business model and selected a partner, much of the busy work involving the transition begins. At the outset, the most veteran support teams put in place a series of transition milestones to keep firms on track for their targeted separation date.

Among the items that must be addressed include transferring adviser licenses and client accounts, both of which entail a mountain of paperwork. You also will need to have an expert examine the pricing policies of the previous broker-dealer, as well as any employment contracts that you might have with members of your staff to ensure that there are no legal issues.

Ideally, the partner you have selected will be accustomed to such an enormous undertaking, and will be armed and ready to provide the level of support appropriate to the size of your business to sift through and complete the tedious administrative work in a timely fashion.  At a minimum, these forms of logistical support include new systems training, re-branding help, and license transfer assistance. Equally important is legal support, including having outside counsel review employment contracts, privacy policy and broker-dealer protocols. 

3. TRANSITION EXPENSES

There are a number of fixed and variable costs associated with transitioning your practice, including buying or updating hardware systems, hiring additional staff to facilitate the move, paying termination fees to former broker-dealer and other marketing-related expenses to update the firm's letterhead and signage.  The most effective partners are able to work with advisers to find ways to meet such costs without breaking the bank, and to provide an adequate level of financial reimbursement for them.  However, such transition expense support should not be confused with adviser recruitment bonuses, which are a totally separate concept, and associated with the wirehouse space in general.

* Product and technology platform – New technology and product platforms must match – and ideally exceed – the level of service in which your current clients have become familiar. For instance, if there are proprietary products that cannot be transferred, a good partner should be able to provide other solutions that closely mimic those products without the client incurring any costs, inconvenience or changes to their financial strategies. Similarly, enhanced technology solutions are only an enhancement to an adviser when they directly enable the outsourcing, automation and delegation of non-client-facing routine activities, thereby allowing advisers to spend more time engaging in more lucrative client-facing activities that will profitably grow their practices.

* Practice management support – Once the adviser's transition is complete, the first full year of operation is absolutely critical for gaining critical momentum as an independent business.  This means retaining and growing one's client base, and building the right administrative, operational and strategic foundations to enable sustained ramp-up of one's business.  This is where advisers need to ensure that they have a full spectrum of practice management support and expertise that can help them think through and execute against each aspect of owning an independent business:  Marketing and branding, human resources / staffing structures, what kinds of client demographics to focus on for the next stage of growth.

All of these elements necessary for a successful transition requires the right team and does not happen overnight. In fact, as many of the most successful independent advisers I have worked with are quick to point out, nearly all successful transitions are in reality continuing journeys, versus a self-contained event marked by a clear beginning and end.

Bill Morrissey is executive vice president of business development at LPL Financial. Most recently, he has led the transition to the LPL Financial platform of Householder Group and VisionPoint Advisory Group, two leading independent hybrid RIA groups.