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Exploring Options in the Mid-Market Institutional Advisory Space


Exploring Options in the Mid-Market Institutional Advisory Space

Institutional advisors: do you know what you need in order to best serve clients’ needs and your own business goals?

Institutional advisors – those whose clients are charitable organizations, corporations, retirement plans, Taft Hartley plans, municipalities, government entities and the like – represent a relatively small percentage of the financial advisor population at large, but typically, they have very successful businesses and are highly coveted by the competition.

Generally speaking, these advisors run their businesses from one of two different places: a wirehouse firm or some form of independence (an independent broker dealer or RIA). The world-class resources, support, favored nation pricing, scale, guardrails and brand of a major firm can give institutional clients – and the advisors that serve them – a sense of comfort and stability. Alternatively, more and more of these institutionally-focused advisors are finding their way to the independent space—either establishing their own firm or joining forces with an already established one.

Truth be told, in today’s day and age, platform is largely a commodity and so there isn’t much that an advisor couldn’t access in the way of product or service, whether he is independent or an employee of a bulge bracket firm. The decision around where to run one’s business should come down to the following:

  • How do I want to live my business life?
  • Do I see myself as an entrepreneur or an employee?
  • Do I want turnkey or to build something my way?
  • What do I value more: freedom, flexibility and control, OR brand, scale and in-house access to everything that can support my business?

Some folks operate under the belief that even though they would love to become an entrepreneur and feel limited by their employee status, their institutional clients need the deep pockets of a big firm in order to stick with them. And while many hold to this belief, it just isn’t true.

So what is the truth when it comes to the institutional space?

Ultimately, the changing landscape has brought an evolution and much to be explored in the way of new opportunities for an independent institutional practice. And of note:

  • Errors and Omissions Insurance (E&O) is what protects an independent RIA against claims of wrongdoing. Shirl Penney, founder and CEO of Dynasty Financial Partners says, “The largest malfeasance claim against a team was $10 million. $10 million of E&O insurance costs approximately $45,000 per year; $20 million of coverage costs approximately $75,000 per year.” And, if an advisor doesn’t take discretion, he has significantly less exposure. The custodian would be responsible for things such as fraudulent wire transfer. The truth is that the greatest risk rests with the custodian.
  • Top institutional clients and billionaire family offices believe in a model where safe asset custody, product manufacturing and advice are separated. This model is exactly what being an RIA is all about. Plus, ultra-high net worth and institutional clients value an independent voice and transparency in fees.
  • Independence offers more flexibility, true open architecture access, and the ability to customize the client service model, as well as a broader world-view from a research perspective, and the ability to be multi-custodial with cutting edge technology to tie it all together.

At the end of the day, some people are just more comfortable as an employee, especially given a more onerous regulatory environment. They have no desire to manage the minutia of running a business, or to take on the attendant risk; the easy access to best-in-class resources and solutions is what they value most. There is no judgment in that statement at all. From where I sit, it’s why Baskin Robbins makes 31 flavors of ice cream.

It’s all about choice.  Don’t stay put because you feel jailed by the belief that, “My institutional clients would never get comfortable with me leaving a major firm and going independent.” Clients are far more dedicated to honest, hard-working advisors who they recognize act as fiduciaries with their best interests at heart than they are to the brand name on their monthly statements. Consider, first and foremost, where you can serve them best and use that as your guidance going forward.

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