Breaking Away Is Harder Than Ever. Advisors Say It’s Still Worth It

The dream role she landed at JPMorgan soon turned into a dead-end job for financial advisor Nycole Freer. After seven years at the brokerage, her boss was unwilling to promote her to partner or offer equity ownership. That spurred the now 35-year-old financial planner to go independent in 2023. Leaving behind a cushy office job in Newport Beach, California, she quickly faced an uphill battle to build her own book of business. 

“You almost feel like: ‘Wait, I didn’t sign up for this,’” Freer said. After roughly a dozen networking meetings per week for more than 10 months, she finally landed her first client and opened her own firm, Eden Financial. “That at least gave me hope,” she said.

Like Freer, the next generation of financial advisors at the biggest firms is increasingly struggling to build meaningful careers. Many say it’s difficult to act in their clients’ best interest at large brokerages that often still work on commissions. Legacy firms can also rely on outdated technology and offer few pathways to equity ownership. A J.D. Power report found that more than 1 in 3 brokerage advisors are looking to leave their company in the next two years. 

“The biggest thing for me was building my own brand,” Freer said, adding that JPMorgan wouldn’t let her post on social media or allow her to publish a children’s book on finance. “Near the end, I just felt like I was slowly dying.” 

The Bigger, the Bulkier

The breakaway movement has gained steam over the past two decades with the number of independent firms roughly doubling between 2000 and 2022. And it’s not just a brokerage problem anymore. More than 4 in 10 independent advisors now say they’re also considering leaving their firms, according to J.D. Power. 

But for those who do make the leap, the challenges are also increasing. That’s due in part to the business being a victim of its own success. Record M&A deals in the Registered Investment Advisor (RIA) industry in recent years have enticed monster private-equity firms to buy up businesses. And the resulting consolidation may be starting to take its toll. 

“Advisors thought they were leaving a wirehouse, but found out they just joined a smaller wirehouse,” said Andrew Marsh, vice chairman of Dynasty Financial Partners. In fact, over a quarter of unhappy advisors are now a flight risk, driven in large part by changing company cultures, according to the report. 

With more advisors now breaking away than ever before, the landscape is becoming increasingly difficult to navigate. For Marsh, who co-founded one of Canada’s most successful wealth management firms, it’s a simple matter of scale. “In the beginning, we were nimble, fun, and entrepreneurial because it was easy to be,” he said of founding Richardson Wealth in 2004. “But once we got $32 billion in assets, a thousand employees, and chief risk officer, that all changed.”

Sign on the Dotted Line

One of the biggest hurdles to going independent is surprisingly mundane: employment contracts, which can differ significantly at wirehouses and smaller independent firms. Brokerages that sometimes employ thousands of advisors generally take a cookie-cutter approach, Marsh said. As W-2 employees, advisors are generally given a loan to get their practices started and have to stay with the company for a set number of years until that obligation is forgiven. They’re also paid on what’s known as a grid, a scale that gives higher earners more generous compensation, and is usually reviewed annually.

The biggest difference, however, is that brokerages are also governed by an industry pact, called the broker protocol. Set up in 2004 by Merrill Lynch, UBS PaineWebber, and Smith Barney (now part of Morgan Stanley), the protocol is a set of rules that clarifies ownership and helps minimize lawsuits that stem from moving millions of dollars in client assets between firms. There are currently some 2,500 firms that are party to the pact.

As long as those rules are followed, moving firms can be pretty predictable. Marsh estimates that anywhere from 70% to 90% of the clients move to the new firm with the advisor. “It’s pretty cut and dried,” he said.

Not Following Protocol. Not so at RIAs, where those rules usually don’t exist. Independent firms are generally not part of the broker protocol, and that leaves a lot of questions for advisors looking to set up their own shops. “Are clients allowed to follow the advisor? What are the non-contact time frames? When are client assets put up for grabs?” Marsh said. Those unanswered questions leave a lot more room for risk, meaning advisors will need to study employment contracts thoroughly and plan for a departure months in advance. “Make sure you get really good legal advice,” he said. 

Smaller firms can also make it harder to leave. After speaking with a lawyer, one of Marsh’s advisor associates found out that he would have to leave all of his clients behind. “There’s a lot more handcuffs that people have to be aware of that can throw a wrench in the works,” he said. 

Let’s Do That Again. While there are plenty of challenges in breaking away from large firms, most advisors who’ve made the leap say it’s worth it. The vast majority of advisors were satisfied with their decision to become independent in a recent survey from Charles Schwab. The report found:

• Almost 8 in 10 advisors said they would make the decision to become an independent registered investment advisor again.
• Seven in 10 are happier now as an independent RIA, according to the survey of more than 200 brokers and breakaway advisors.
• Some 67% would recommend making the switch to other advisors.

In fact, most of the advisors surveyed said they wished they had made the decision sooner. “I didn’t imagine it was going to take anywhere near this long,” Freer said about opening up her own business. “But, I’m so glad that I did.”