Shining a Bright Light on the High Costs of Breaking Away

Shining a Bright Light on the High Costs of Breaking Away

Once You Break Free of the Wirehouse, You Need to Run From the Platforms and Aggregators, Too!

There is always a dark side to success.  The RIA market has been booming for years, consistently taking assets away from the traditional bank/wirehouse community, and now manages nearly $3 trillion in assets.

As the overall assets under management has risen in the RIA community, a slew of opportunistic middlemen have put up their shingles, offering “platforms” or an “aggregator solution” to help captive advisors break away and remove the operational aspects of the transition to independence - a truly valuable service that is needed by breakaway teams who have never had to manage these critical issues before. 

The rub here is that these middlemen are using the lack of experience and knowledge of these advisors against them to extract exorbitant rents.   As a result, the high costs associated with the aggregators and platform providers is limiting and slowing down the breakaway movement, especially for the larger teams – a very unfortunate result for not only those advisors and their clients, but also the industry as a whole.

In many ways, the financial crisis of 2008 was the greatest thing to ever happen to the RIA industry.  High net worth clients began to value the open architecture, transparency, and conflict-free business models offered by independent advisors.  Once clients began asking for it, advisors began flocking in droves to the independent channel.  Most, if not all, of these advisors had never set up or run their own business before, so a cottage industry evolved helping these teams enter the independent channel.  The typical advisor thought, “I want to go independent, but I just want to focus on my clients.  I don’t want to worry about running my own business.”  They were flocking to plug-and-play solutions, regardless of the cost.  They just had to get out of the shackles of the wirehouse world, and they needed to do it quickly.

Fast-forward to today: the industry has continued to evolve and billion-dollar RIAs are no longer the rare unicorns that they once were.  In California alone, there are over 40 fee-only RIAs that manage over $1 billion in assets.  RIAs have lifted their heads from their client servicing responsibilities to realize they have built real businesses!  They have started hiring dedicated managers of their businesses to handle HR, IT, Compliance, and Business Development.   They have documented business plans, with specific revenue targets and growth strategies.  These aren’t lifestyle practices any longer, these are true sustainable business built for the future.

There is a lot at stake for a wirehouse team considering setting up their own RIA.  Following the 2008 financial crisis, it was enough to attract clients simply by saying “I’m an independent advisor conducting business under the Fiduciary Standard.”  As previously mentioned, there is now fierce competition of real businesses competing for RIA clients.  No one wants to figure out the transition experience on their own (See “A Breakaway Artist Confesses the Mistakes He Made Ushering PBIG’s Hou-Sear Team”) -- the fear of losing clients during transition is just too high.

Unfortunately, while the industry has evolved to become more sophisticated, the transition solutions for wirehouse advisors, particularly the billion-dollar teams, have not.

Currently, due to the lack of alternatives, these teams meet with the legacy opportunistic platform providers/aggregators that can offer the valuable startup services such as real estate, office setup, technology, branding, website, and even “swag” that they need to exit their current firm.  The sales pitch they receive is that by plugging into these larger organizations, they can provide teams economies of scale where they can negotiate great pricing with the various vendors and service providers on their behalf.  Here’s the fly in the ointment: for these services, the aggregators want a percentage of firm ownership (bottom-line earnings) and the platform providers charge expensive basis points on AUM.  

Breakaway advisors find themselves wondering where the promised value-add services are, now that they are established RIAS writing big checks every year to these middlemen.  Confirming this trend, we are now beginning to see high-profile stories of advisors who had joined the aggregator platforms, only to realize they can do better on their own, such as PagnatoKarp (See “After chats with Phyllis Borzi, a flagship HighTower team executes a ‘deliberate’ breakaway to for a $2.5-billion RIA”

As an example, consider a $2 billion team with $15 million in revenue and $10 million of bottom-line earnings.  If an aggregator wants 50% equity for their services, that would cost this team $5 million per year, in perpetuity.  If a platform provider wants to charge 5 bps for their services, that will cost this team $1 million per year for the length of the contract. 

These teams sit back and realize, “With $2 billion of AUM, I can get great pricing on IT, Compliance, and Custody all on my own.  I don’t need a long-term relationship, I really just need help setting up my RIA and transitioning clients.  This long-term contract seems awfully expensive just for transition services!” 

When running the numbers, teams realize that it is not economical to make the move to an expensive aggregator or platform provider solution, and as a result, end up staying with their wirehouse firm – a suboptimal outcome not only for their clients, but also for themselves and the industry as a whole.

For the truly entrepreneurial advisors, they realize very quickly that the equity and/or AUM pricing eliminates operating leverage – something they are trying to achieve by going independent.  Operating leverage is a simple, yet powerful business concept where every dollar of additional revenue is more profitable than the last, because operating expenses don’t grow at the same rate as revenue.  In the wirehouse world, an advisor’s payout percentage doesn’t change once they top out on the production grid, resulting in no operating leverage. 

RIAs, however, enjoy economies of scale and own 100% of their revenues, and do gain leverage from each incremental revenue dollar.  That is, unless they’ve sold a percentage of bottom-line earnings, or have agreed to pay a fixed rate based on AUM.  In those scenarios, the payment to these service providers continues to rise as earnings and/or AUM increase, effectively wiping out precious operating leverage.

What billion-dollar teams need today to transition out of the wirehouse world and start their own RIA is to use their inherent economies of scale to obtain the resources and preferred pricing promised by the platforms and aggregators. 

To get up and running, teams only need to work with experienced consultants who operate on a fee-based, project basis for the RIA business’ startup needs (full disclosure:  I am the Founder & CEO of one of these firms, PFI Advisors).  Once the clients have transitioned out of the wirehouse and the RIA infrastructure is in place, advisors quickly realize that they are a self-contained business, easily capable of handling the day-to-day operations of their own firm.

There is no need to pay for these services through the aggregators or platform providers by giving up valuable equity or paying steep ongoing basis points on a multi-year contract.  Rather, by tapping into the deep expertise and knowledge of industry transition experts – those that are independent and not tied to a specific platform – advisors can achieve a quick start up with the latest transition needs.

Teams can pursue their RIA dreams in confidence, knowing that they have the right advice and support to build their dream firm the right way, without having to give up a significant portion of their firm.

This article is based upon a recent white paper, “Pursuing the RIA Dream: New Transition Models for Billion-Dollar Breakaway Advisor Teams.” To obtain a copy, click here.

Matt Sonnen
Advisors in Transition
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Prior to founding PFI Advisors, Matt Sonnen learned the ins and outs of the wirehouse model at Merrill Lynch in the late 1990s. After leaving Merrill in 2005, he was introduce ... Click for full bio

NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work

NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work

Written by: Jon Sabes

When you meet Carl Landry, stand-out college basketball player and nine-year NBA player, you imagine that becoming a professional basketball star was a straight forward run for the 6-foot-nine-inch power forward. 

However, when you go deeper into Carl’s background, becoming a NBA professional was less than certain and little came easily to the 33-year-old from Milwaukee:

  • He was cut from his high school team as a freshman and averaged less than ten points a game when he did play as a senior.
  • He started his college career not at Purdue, but a junior college where it was not clear he would play.
  • When he finally got to Purdue, he tore his ACL in his knee his first year and reinjured it the next year.
  • While his family held a party for him the night of the NBA draft, he slept in the Philadelphia airport after missing a flight following a workout for the 76ers.
  • In the NBA playoffs, Carl had a tooth knocked out, but came back in the same game to make a game-winning blocked shot as the Rockets beat the Utah Jazz 94-92.

Landry, who I interviewed on my podcast, Innovating Life with Jon Sabes (, is a remarkable example of the value of “persistence.” In a time where technology creates the image that anything is possible at the touch of a button, persistence is an under-appreciated trait. When I spoke with Carl, I clearly saw someone for whom success has only come through a force of will that made him a NBA player, but it also made him a better player every year he played. That’s the kind of personality that has produced greatness in business as well as sports.

Carl was, in fact, drafted that night he spent in the airport. The Seattle Supersonics chose him as the 31st overall pick and then traded him to the Houston Rockets where he rode the bench for much of the first half of the season. When All-Star teammate Yao Ming was injured, he stepped in and played a key role in the Rockets astonishing 22-game winning streak (the third longest streak in NBA history). And, that season, after sitting on the bench for 33 of the first 36 games, he was named to the All-Rookie second team.

Carl was the first in his family to go to college. “I told myself that this was my ticket out, so I did everything I possibly could to be the best person in school and also on the court,” he said.

His family life in Milwaukee showed him what he didn’t want to do. “Just being honest with you, seeing some my cousins, peers, they went to work for jobs paying six, seven dollars an hour or they didn’t go to work at all and then living off welfare. I didn’t want that.”

When he was first injured, he had to contemplate the end of a career before it even got started. “When you have an ACL tear, it’s over…no more basketball,” he told me. “I said, God, give me health again and I’ll do everything I can to leave it all out on the line and be a successful individual.”

On my podcast, Carl pointed out another interesting lesson he learned in the NBA: Not doing things just to fit in.

“Fitting in was easy,” he said. “Doing everything that everybody else does was easy. If I stood out in some type of way, I’m going to have different results. I’m going to have stand-out results.”

That’s called the “Law of Contrast” and it produces that exact effect of changing the outcomes that everyone else is experiencing.  Carl is smart, he recognized that differences make a difference, and doing whatever it takes is what is required to make real, meaningful differences.

Every off-season for the last 11 years, he has run a camp for kids in Milwaukee where he tells youth his story of hard work and persistence. “I always tell the kids to apply themselves and always be persistent,” he said. “If you dream, apply yourself and be persistent. With hard work, man, the sky’s the limit.”

When Carl says the sky’s the limit he means it.  He is smart to recognize that it’s important to dream big, because if we don’t – we may be selling ourselves short. “You have to dream bigger than your mind could ever imagine,” he said. “I wanted a nice house. I wanted a nice car. I said, and I got all of that. So, what do I do, do I stop now? Maybe I didn’t dream big enough.” That’s a big statement coming from a kid who grew up to be the first in his family to graduate college and go on to be not only a top NBA basketball start, but a good businessman, father and someone who gives back to the community.

I’m convinced that in whatever he takes on as a basketball player or in his post-hoops career, Carl Landry is not going to stop getting better at whatever he does, and in the process of doing so, make the world a better place.

GWG Holdings, Inc.
Investing in Life
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GWG Holdings, Inc. (Nasdaq:GWGH) the parent company of GWG Life, is a financial services company committed to transforming the life insurance industry through disruptive and i ... Click for full bio