When advisors at banks couple the prospect of innovative technologies with freedom from sales pressures and greater control over various aspects of their businesses, taking the leap to independence seems like an ever-more-attractive prospect.Steven S. Miric/iStockPhoto / Getty Images
The COVID-19 pandemic has changed the world in countless ways. In Canada’s investment industry, it has led to an upward tick in financial advisors at all levels of the Big Five banks – branch, brokerage and all other distribution channels – exploring the options for going independent.
Because of the online profile I have developed through my advocacy in favour of increased independence in the financial advice business, I usually had an advisor contact me for guidance on possible dealer changes every month before the pandemic. But about two months after the pandemic started, what had been a once-a-month phenomenon suddenly started taking place weekly – and it’s continued at that elevated rate since.
What’s more – and different than before – is that almost all the advisors making the inquiry in 2021 are at major banks, and they’re all looking to make the jump to becoming independent. What has changed to spark all these inquiries? It appears to be a combination of old grievances and new revelations.
In speaking with advisors at banks throughout the pandemic, familiar complaints about sales pressure, rising grid levels, the push to sell proprietary products, and the ever-growing belief that the banks’ long-term plans are to convert all of their advisors into salaried employees keep coming up.
Yet, the new revelations are feelings of being “hung out to dry” with minimal – or even non-existent – support during COVID-19 coupled with the simultaneous realization that advisors and their teams could function very productively from home. Those two factors have led advisors to question if they really needed to work out of a large branch office while paying for the privilege to do so.
One thing these advisors all had in common is they wanted to know how life looks outside of the banking environment.
All of these advisors already know that independence is synonymous with freedom. Even though financial services is a highly regulated industry, independence means fewer “handcuffs.” They also know that “going independent” means walking away from institutions that, as they see it, don’t really care about their clients’ long-term welfare.
The good news for these advisors is that there’s never been a better time to go independent – and the independent route only continues to improve. Depending on what distribution channel they’re considering – mutual fund licensed, securities licensed, investment counsel portfolio manager, or fee-only – there’s a variety of independent dealers and service providers all working on cutting-edge technology platforms and service offerings. They range from digital onboarding to artificial intelligence-powered financial planning software and modern portfolio management software.
All in all, it looks as though several independents will integrate and deploy the kind of foundational technological improvements in the coming months that advisors have, to date, only dreamed of accessing – and that banks will lag in implementing.
When advisors couple the prospect of innovative technologies with independence from sales pressures and greater control over various aspects of their businesses – including technology, marketing and social-media usage – taking the leap seems an ever-more-attractive prospect. That’s why most of the advisors who contacted me were ready to take the next step.
But even as they were ready to start investigating the move, most advisors at banks were missing any consideration of the economics involved. In brief, there are three economic reasons for independence: dealer overhead (or “the grid”), incorporation and the sales multiple.
Here’s how dealer overhead generally works: Bank-owned brokerages take 50 per cent of advisor revenue in return for an office, covering some labour costs, and access to the dealership platform (compliance, processing and technology).
Several independent dealers mimic the approach of the big brokerages but take a smaller cut of advisor revenue, something like 40 per cent. Still others offer only access to their platform, leaving advisors to run all other aspects of their business. For those willing to take that pared-down option, dealer overhead might range from a high of 25 per cent of revenue down to a capped flat fee coming in at less than $50,000.
The second economic reason for independence hinges on an advisor’s ability, depending on the distribution channel, to incorporate. That, in turn, allows them to access small-business tax rates and the lifetime small-business capital gains exemption if and when the business is sold.
The final economic argument in favour of independence is the valuation, or sales multiple, of the advisor’s business as part of an eventual sale or succession plan. For advisors at banks who work on a salary structure, that option isn’t even on the table. Meanwhile, advisors at the bank-owned brokerages who work on commission are generally limited to a deal that might allow them to collect 25 per cent of all revenue over two years.
In contrast, the range on the independent side is a sales multiple commonly set at three to four times annual revenue, which is six or even eight times what a broker at a bank would get. For example, if annual revenue is $1-million, an advisor working at a bank-owned brokerage on a commission structure might get $500,000 from the sale, or 25 per cent of $1-million for two years, while an independent advisor might sell their business for $3-million to $4-million.
The reaction, at this point in the conversation, is pretty much universal: “You’re telling me that if I leave, not only will I be free to serve my clients in the way they deserve to be, free of sales pressures, but I can spend more one-on-one time per client, make more money after expenses, pay fewer taxes and eventually sell my business for way more? And all I have to do in return is take care of the administration of running my office?”
It’s no surprise that these conversations are happening more frequently. They’ve been a long time coming. In fact, the same trend started in the U.S. more than 20 years ago as the registered investment advisor model began to proliferate, and it’s still going strong today.
Fast-forward a year and what’s the result? Several of those advisors have moved, and they have published blog posts and LinkedIn announcements explaining why they made the decision to “go independent,” and what that means for them and their clients. And for every advisor’s exit announcement, there’s another who’s planning to go this route.
Jason Pereira is a partner and senior financial consultant at Woodgate Financial Inc., a financial planning firm under the IPC Securities Corp. umbrella in Toronto, and president of the Financial Planning Association of Canada.