Everyone at one time or another dreams of owning their own business. For investment advisors, going independent can come with advantages, but it also involves specific risks and requirements not found in other industries.
Starting a freelance practice has many moving parts. Creating a checklist of what needs to happen can bring some order to the chaos. Categories to consider include entity formation, acquisition of space, client transitions, and identification of practice associates. Other considerations include choosing a guardian and licensing and compliance requirements. Most importantly, reflect carefully and ask yourself: Are you really ready to own and run your own business?
Working with professionals in all of these areas—legal, commercial real estate, transition counseling—can smooth the process, help avoid pitfalls, and provide a team to answer tough questions. Trying to do something as complex as setting up an independent financial advisory practice without professional help can lead to complications, costs and headaches.
Here's a roundup of 10 tips to consider when starting an investment firm based on a recent webinar our team waited.
1. Have a vision
If someone says they want to start their own firm, it's often because they see ways to make improvements for the client. Before committing to creating a firm, visualize what would be different in a new practice—how would client needs be better served? What would the employee culture feel like? Equally important, consider what works well in the current situation and should be replicated in the new practice. Have a clear vision early on of what the practice could look like to guide the startup process and keep it on track.
2. Decide on the business model
There they are different paths to independence. Some advisors may want to start out as an investment advisory representative of a larger RIA firm, while others may want to start an independent RIA. However, others may choose the hybrid approach of dual enrollment as one RIA and a broker/dealer. Analyze the many options available to determine the best fit for you based on your abilities to run a business and support your practice.
3. Conduct a skills assessment
Few individuals have all the skills necessary to run a business, especially if they come directly from a W-2 wire position, so it pays to assess personal strengths and weaknesses. Remember, strategic hires can help fill the void in weaker areas.
4. Consider financing
If financing is required, the lender will evaluate property compliance management, human resources, legal issues and the full range of management responsibilities. The future cash flow of the business will serve as collateral for financing, so lenders need to be sure that the business owner has the necessary skills to make the practice successful or has hired the right team members to fill any gaps. .
5. Consider personal financial status
Starting a new business can be devastating to a personal financial situation, so it is wise to plan for a period of reduced income. Changing broker/dealers or custodians may result in temporary delays in cash flow. Some loss of customers may occur. Getting through the lean times without having to tighten your belt too much will be easier if one goes with a personal emergency fund to draw on.
6. Get ready for financing
If financing is needed, a lender will need to see three years of tax returns, business and personal financial statements, compliance documentation and a variety of because of the shape statements for the planned enterprise. Having these documents ready to go will speed up loan approval.
7. List the legalities
Working with a specialty attorney early in the process to review all contracts and membership agreements is essential to understanding every possible parameter related to what you can and cannot do after separation. An advisor should know the legal (including regulatory) and financial implications of moving their book of business before committing to doing so.
8. Choose a guardian
Regardless of the chosen business model, a freelancer needs it choose a custody firmand this process takes time and due care. Repairing customers for a new caregiver it can be a long process, so it's best to start early.
9. Plan for surprises
No matter how well one plans, surprises can always arise. One of the most common is the discovery of the current firm will not allow movement of the business book without an upfront payment or a lengthy legal battle. Working with a team of professional consultants experienced in RIA transition can help avoid many of these issues.
10. Plan for continuity from the beginning
An exit strategy may seem like the last thing on your mind when starting a business, but the truth is, it's never too early to start. succession planning. Advisors leave the business for a variety of reasons besides retirement: changing careers, moving to follow a spouse, etc. It is important to have a plan to protect and recover the value of the firm from the beginning.
Alicia Chandler is president of Indianapolis-based Oak Street Funding