Independence for Advisers Has Its Rewards

The second annual “Insights on Independence” examined advisers’ motives for staying with a firm or leaving. The independent channel is seeing the most growth from advisers on the move, and is yielding the greatest increases in compensation.

Families were a big motivating factor, the study found. Fidelity explored the motivations and experiences of advisers who moved firms in the last five years (“Movers”), those who considered a move but opted not to make a switch (“Fence Sitters”), and advisers loyal to their firms (“Entrenched”). The findings revealed lessons for firm leaders and recruiters, as well as advisers considering a move.

Moving firms can pay off. Financial advisers who moved firms saw a 22% increase in their compensation over 2008, versus 17% for advisers who stayed at their firms. Those who moved to an independent business model, such as a registered investment adviser (RIA) or an independent broker/dealer, realized a 36% increase since 2008.

It’s a family affair. When family is involved in the decision-making process, they had a major influence in encouraging Movers to make a switch (40% of Movers’ family members encouraged the move, compared to only 4% who discouraged it); yet, family had the opposite effect for Fence Sitters, more often discouraging the move.

Movers and Fence Sitters reflect future face of advice. Movers and Fence Sitters were more likely to be Gen X/Gen Y advisers and to embrace the move toward more fee- and team-based business than their entrenched counterparts. Female advisers were most prevalent in the Fence Sitter group, and least likely to be Movers.

Learning from Others 

“This study illustrates the changing face of the advice industry,” said Sanjiv Mirchandani, president, National Financial, a Fidelity Investments company. “While compensation clearly plays a role in adviser movement, the next generation of advisers is considering the whole package—from the type of services they can offer their clients to whether the new firm is a fit for the entire family. Understanding these dynamics can help firm leaders recruit or retain advisers on the fence, and help advisers better consider their options.”

“Advisers considering a move can learn a lot from the thousands of advisers who have preceded them,” said Michael Durbin, president of Fidelity Institutional Wealth Services. “Today there are a range of strategic partners and numerous firm models from which to choose, making the decision to move complex. The best insights often come from fellow advisers who have evaluated their options and made the switch.”

Nine in 10 Movers (89%) reported they were happy with their decisions to switch firms, and 77% reported they were better off financially. Movers cited upside earning potential as the leading reason for making a move. Other top motivators included confidence clients would follow, firm reputation and better work/life balance. Advisers migrating toward independent models also cited the ability to offer better investment solutions and client service as key criteria for selecting that channel.

Movers reported that 79% of the clients they wanted to follow them moved to the new firm. These advisers were also able to strengthen their books of business, increasing their share of wallet with 54% of the clients who moved with them. The report recommends that advisers:

• Take time to examine the options. Movers spent, on average, eight months from the date when they first started to think about making a move to the date they actually left their former firm. During that time, advisers explored an average of two different business models before making a move, and 80% of those who moved to the RIA channel explored at least one external support option, such as a strategic acquirer or functional outsourcer.
• Talk to others who have moved. Advisers reported that one of the most important influences in their decisions to move firms was talking to other advisers who had made the switch.
• Prepare for paperwork and technology hassles. Movers reported some complications with the transition. Paperwork (20%) and technology systems and platforms (17%) proved to be the greatest hurdles in the switching process for Movers. Movers reported that aligning with external resources can help facilitate the operational aspects of a transition.

On the Fence?

Fence Sitters reported that “life” often trumped work in their decisions not to move firms, citing family reluctance, “bad timing” for the family and commitments such as caring for aging parents. Families of Fence Sitters who were involved in the decision-making process more often discouraged a move (only 8% of their family members encouraged the move, compared to 23% who discouraged it).

Fence Sitters also reported fear of the unknown and concern about losing clients as top reasons for not making a switch; they, like the Entrenched advisers, were more risk averse than the Movers. These concerns were particularly acute for Gen X/Gen Y and female advisers.

The study found that Fence Sitters are an attractive group of advisers with the highest average assets under management (AUM) of all three groups—$155 million AUM compared with $149 million AUM for Movers and $147 million AUM for Entrenched advisers. Yet, Fence Sitters were the least satisfied, with only 37% saying they are satisfied with their firm. Key areas of dissatisfaction included marketing support and flexible and competitive compensation.

The 2013 Fidelity Insights on Independence study was conducted by Bellomy Research Inc. between November 7 and December 11, 2012, among 783 advisers, whose assets under management are more than $10 million who and belong to one of the following categories: voluntarily moved from one firm to another (Mover); considered a move, but decided not to (Fence Sitter); never considered a move (Entrenched), within the last five years. Bellomy Research Inc. is an independent third-party research firm not affiliated with Fidelity Investments. The study did not identify Fidelity Investments as the sponsor.

The 2013 Fidelity Insights on Independence study can be downloaded here.