SPEAKER 1: [00:00:00] Welcome to the first episode of The Breakaway Playbook.  Hi.  I’m Sean Lindenbaum, Regional Director of Network Development at Dynasty Financial Partners.

Today, we’re going to lay the foundation for the series and talk with John about due diligence, what “Independence” really means, the main drivers as to why advisors take the leap and what typically holds them back.

So John, why don’t we just jump right into it and get started here?  I know you’re really passionate about the benefits of making the move to the independent RIA model.  And as you often say, “You’re not truly independent until you own your own ADV.”  Tell me more about that.  What exactly do you mean?

SPEAKER 2: [00:12:00] Thanks, Sean.  In its simplest form, a fully independent RIA owns the ADV, and that’s important from a couple of different perspectives.

First of all, most of the advisors that we work with are coming from a larger firm, sometimes with thousands of advisors that are all on the same ADV.  That leads to a very complex document that has to detail all of the various arrangements and engagements that those advisors have with their clients.

It is only that advisor’s clients that appear on the ADV.  This leads to a much simpler disclosure, a clear and transparent way of describing the engagement between the advisor and the client, any conflicts that may appear and the ways in which the advisor gets compensated.  when the ADV is filed on behalf of the advisor in the newly-formed RIA, it clearly outlines and delineates the relationship that the advisor has with the client — everything from the products and services that they provide to the ways that they’re compensated.  And that leads to a very simple client agreement — between the advisory team and their end client.

SPEAKER 1: So John, with the great success and experience you’ve had transitioning large wirehouse teams to independents, what have you seen that’s really driving them to take that leap?

SPEAKER 2: Thanks, Sean.  So it’s really a combination of things.  What ultimately leads the teams to decide to go to the fully independent model is that they’re seeking more freedom, more choice and more flexibility in terms of the way they want to conduct their business with their clients and how they ultimately engage with their clients on a day-to-day basis.

Some of the things that really drive their decision are around the current environment of where there’s an overbearing compliance component and oversight.  They just don’t feel like they can run the business the way they want to run the business.  There are certain things they would like to do that, as we alluded to earlier, because of this commingled ADV where there may be thousands of other advisors on it.

[00:20:00] There are certain compliance restrictions that have to be managed down to the least common denominator and that just leads to a lot less flexibility and control for the individual advisor.

So they want to have flexibility to run the business the way that they have always dreamed of running the business.  Not that they don’t have certain controls in place in the ways that they engage with the client but they are inevitably or invariably trying to do the right thing for their client.

And it just seems like the constraints that they currently have in the current environment are restrictive so much so that they can’t get basic things done for the clients at the client’s request.

They also want the flexibility of choice.  So in regards to the investments that they may choose, the technology that they want to implement and the way they want to market their new firm, these things become much more easier in the independent model.  They have the freedom and the flexibility to engage those things that are going to make it easiest to run their business and engage with the clients the way they choose.

In many respects, the advisors are coming from a captive environment where only the products and solutions that are derived from that home office are the things that they can present to and provide to their clients or sell to their clients.

[00:22:00] In the independent model, oftentimes, what happens is the advisors start to realize that they are able to become a professional buyer, on behalf of their client, of products and services from across the street as opposed to being restricted to being a professional seller of products that are available to them through the current environment.  .

SPEAKER 1: Okay.  — So now John, at this point, we know the advisor is contemplating making a change.  I mean where should the advisor start their due diligence process?

SPEAKER 2: Well that’s a good question and it’s got varying answers, I’m sure, depending who’s answering it.

SPEAKER 2: I think the due diligence process is going to be different for every advisor.  I mean the reality is all of these conversations start with an initial phone call.

And sometimes, there’s frustration.  Sometimes, there’s just curiosity about what “Independence” is and how does it look and feel.  Other times, they’re trying to accomplish or solve for a specific client situation.

It’s not unusual that I get a call from an advisor that says, “My largest client just asked me why I’m not independent.  What is this about?  What does it mean?  [00:28:00] What do you guys do?”

So the answer about the due diligence is there’s quite a few options out there.  We’re talking about the fully independent RIA model here, and that’s the types of advisors and firms that we support.  But clearly, there’s options for advisors to get out of the current environment that they’re in and they can certainly choose from a whole host of those options.

But as far as the overall process, I would say the advisor really needs to begin with the end in mind.  They have to think about the things that really are driving their interest in making a change.

And maybe those are client-specific.  Maybe those are firm-specific.  It could be specific services that they want to provide their end clients.  But whatever it is, they have to sort of think through what’s driving their initial interest to make a change and then we can work from there.

SPEAKER 1: Okay.  — So with all that in mind, tell me, what are the key considerations for an advisor thinking about the fully independent model and whether it’s for them or not?

SPEAKER 2: Well first of all, I think there’s a lot of confusion out there in the marketplace about this “Independent’s” definition and I highlighted a little bit earlier this concept of owning the ADV.

There are models out there that we would define as “Quasi-independent, partially independent, 1099 models.”  [00:40:00] In all of those scenarios, it comes back to this pertinent aspect of the fully independent RIA and that is who owns the ADV.

So with respect to the advisor’s choice, they really need to get educated on exactly what the definitions are that they’re moving into.

This model is not for everyone.  It certainly takes a certain entrepreneurial spirit.  It has to be someone that has confidence in the client relationships that they have.  Do the economics work?  Do the economics make sense?

Okay.  Thanks, John.  That’s about all the time we have for today.  As you can see, the due diligence process is something that needs time, patience and a well-thought-out plan.

From this point forward, I’ll be leaving you in some of the best hands in the industry.  John will be guiding you through the typical due diligence process in the coming weeks and answering a lot of questions you probably have been thinking about.  So make sure you listen in on every episode and join John on a virtual transition tour like no other before.  Thanks for joining us today.