Leaving an Existing Firm to Start Your Own Fee-Only Firm

Leaving a position as an Investment Adviser Representative (IAR) to start your own firm can feel equal parts exciting and intimidating. For many advisors, working at an established firm provides a sense of financial stability. As long as advisory revenue continues to be generated, consistent income generally follows. Depending on the firm's business model, compensation may come from advisory fees, commissions, insurance product sales, or a combination of these revenue streams, creating a level of predictability that's difficult to walk away from.

As a Registered Representative of a broker-dealer, compensation may include a salary supported by pooled commissions, insurance product sales, advisory revenue, and sales incentives. In more traditional arrangements, compensation may be tied directly to commissions earned from the purchase and sale of securities. Similarly, being an appointed agent with an insurance company can provide ongoing sales opportunities across multiple carriers, helping create a relatively consistent income despite a more commission-based structure.

That predictability is exactly what makes the leap to independence feel daunting. Concerns about replacing a steady paycheck, generating new business, and building a sustainable revenue stream are common for advisors leaving an existing firm to launch their own RIA. If you're weighing that decision, here are a few important considerations to help you evaluate your next step. For more on this topic, check out our on-demand webinar, A New Path: Transitioning From the Broker/Dealer World.

Your Existing Firm Most Likely Will Not Benefit From Your Departure 

As an IAR of an established firm, the firm’s revenue is often dependent upon the sales revenue generated from your advisory clients. Therefore, it is in the best interest of the firm, should you decide to terminate your employment with them, that they retain your clients. Therefore, many firms will have non-solicitation, or non-compete clauses in place, to prevent you from taking your clients with you when you leave. As a result, it is important to review any such agreements you have executed with your existing firm to ensure that your intentions do not violate them. If you review an agreement and are unsure, it is advisable to seek legal counsel.

Your Existing Firm Will Have a Compliance Program 

When beginning the process of registering a new firm, it’s easy to place your existing firm’s compliance program on the back burner. This is never a good idea. Whether you are associated with a Broker Dealer, RIA, or Insurance Company, there are compliance implications to starting your own firm.

If you are currently employed by a Broker-Dealer or RIA, your employer will have a compliance department responsible for your supervision. That firm will have access to your profile via the FINRA Firm Gateway, which is the same system you will use to register your new firm. As you are in the process of registering your new firm, IN MOST CASES, your current firm will not be subject to notification until you file your Form U4. The Form U4 is the Uniform Application for Securities Industry Registration or Transfer. Representatives of broker-dealers, investment advisers, or issuers of securities must use this form to become registered in the appropriate jurisdictions.

When you file the U4 for your new firm, your existing firm will usually receive an alert notifying them that you are starting your new firm. You may, at that point, be terminated.

However, some firms, as part of their review of outside business activities, will search all of their representatives on the Secretary of State's website to see whether they are listed as officers, directors, managing members, or owners of any other business. This would usually occur during a branch audit or an audit being conducted by regulators. If you have already listed your new firm with your State Secretary of State, then you are already exposed to the potential that your current employer may discover your intentions.

If you are appointed with an Insurance Company in order to sell annuity products for your broker-dealer or RIA, then the above outlined potential for employer notification is the same. However, if you actually work for an Insurance Company in the capacity of an insurance salesman, and you are not an IAR or Registered Representative, then your exposure is significantly decreased by the fact that there may not be an existing U4 on file for you.

“It’s All About The Benjamins”

Figuring out how to maintain the ongoing stream of compensation and fee revenue is the most challenging part of the transition. As previously stated, your existing employer usually has no financial interest in helping you create a new revenue stream for your firm while decreasing their own profitability. Therefore, it is imperative that the transitioning adviser develop a feasible, coherent exit strategy before going out on their own. Here are some points:

• Know your current Compensation Structure: Having a thorough understanding of how you are compensated is critical. If an adviser has a book of clients for which 65% of their compensation comes from commissions or insurance trails, then moving to a fee-only structure, where this revenue source is completely eliminated, requires some planning. Likewise, if an adviser is paid quarterly bonuses at their existing firm and needs those funds to launch their own practice, this factor affects the timing of the transition.

• Do the Math: Run reports based on your current client revenue. Separate the revenue into categories for evaluation to get a clear picture of what the future could entail in your transition to fee-only.

• Know your Clients: Particularly working within the BD structure, you will find that your current employer operates within many channels of the financial services industry. For instance, one of your clients at Wells Fargo Advisers may also have a Wells Fargo Mortgage, Credit Card, Checking Account, Savings Account, and Car Loan. Anticipate the strong possibility that a client who is heavily invested in a large institution, utilizing them for multiple services, may not come with you when you start your firm. It’s almost certain that the Broker Dealer is going to make efforts to retain that client when you leave.

• Also, don’t count on taking clients with you if they were clients of the firm before you began working for the firm, unless you know them personally outside of your professional relationship. Those clients tend to show loyalty to the firm rather than the individual adviser.

• Evaluate your Personal Financial Situation - Before you make the transition, it’s important to create a household budget and ensure you have enough in savings to sustain your lifestyle during this process.

Don’t Rush the Transition Timeline

One of the biggest mistakes an advisor can make is building a transition plan around a registration date they can’t fully control. RIA registration timelines vary, especially for state-registered firms, and delays can happen at several points in the process. Your former firm generally has up to 30 days to file your Form U5, and in states that don’t allow dual registration, a delayed termination can prevent your new registration from moving forward as planned.

That’s why it’s important to build flexibility into your financial and operational plan rather than trying to force the transition into a narrow window. Greg Vojtanek approached the launch of Fade In Financial with an 18- to 24-month runway. While he stopped drawing from savings by month 15, that preparation gave him the time and space to build the firm thoughtfully instead of rushing decisions based on an overly aggressive timeline.

The same mindset applies to registration. Give yourself room for regulatory questions, document revisions, technology setup, client agreements, and the many other details involved in opening a firm. XYPN’s RIA registration kits can help you organize the process, while our state registration pages provide state-specific information you can review as you prepare.

You can plan the transition carefully, but you can’t control every filing, review, or response time. The goal isn’t to launch as quickly as possible. It’s to launch prepared.

Starting your own firm is extremely exciting. After working within the strict confines of existing rules and regulations, many of which seem outdated and illogical, there is nothing more freeing than going into business for yourself. It can also be stressful, but by following the steps outlined here, you can begin your journey toward a smooth and successful transition.