I knew that if I failed, I wouldn’t regret that, but I knew the one thing I might regret is not trying.
—JEFF BEZOS, FOUNDER AND CEO OF AMAZON
You’ve made the psychological leap: coming to terms with your inability to reconcile the constant demands from above to turn your friends, family, and valued customers into cutting boards on which you carve out your slice. You’re ready to take that bold step into the unknown, confident you can do good and do well simultaneously. Your family is on board for the wave you’re about to ride, and you’ve put a few shekels away to weather any storms. You are committed to putting the large firm in the rearview mirror.
You’re steeled for that, no matter how you go about this—unless it involves reassessing the nature of existence while cloistered in a monastery. There is a lot on your plate that will drain you emotionally. You’re processing all this, dotting all your “I’s” and crossing all your “T’s.” But before you get rolling, there is something you must first determine.
We’re not questioning your relevance or riffing on the Who; what kind of person are you? Some people are introverts; others are extroverts. Some people are outdoor enthusiasts; others are avid homebodies. Some people live by their emotions, while others live by logic. Our internal software’s code and nurtured environment determine our strengths and weaknesses, likes and dislikes, fears, and desires.
For example, many introverts report that while they can spend hours being gregarious and socializing with others, they find the experience draining. After a long session of networking, introverts need to decompress. Extroverts get jazzed by socializing and generally leave a social situation wanting nothing less than more socializing. (Of course, many people are somewhere in between.) It would be unwise to thrust an introvert into one social situation after another, even if they appeared adept at it. However, that is impossible to avoid if you’re unaware of the kind of internal software that individual has.
For your break from servitude, you must first ascertain which qualities you have and which you lack that might affect your success at going independent. This self-reflection is a moment for honesty about oneself.
Do you want to be an entrepreneur and own everything, including the headaches, or an intrapreneur where you’re responsible for your earnings but you pay someone else to run the business and deal with all the gnat bites of everyday business ownership?
Do you want all the problems, most of the glory, and a more significant chunk of the profit, or do you want to outsource the business operations, freeing you to concentrate on advising your clients?
Do you want to own your own restaurant or run a Burger King franchise, where the company provides the recipe for French fries and Whoppers, lends you its brand, advertises on your behalf, provides software for billing and human resources, and the like, takes its cut, and demands you follow company-specific guidelines?
In the first case, where you want to be the boss, it’s time to start your own Independent RIA. In the second scenario, you should bolt-on with an independent RIA firm like the two we operate.
It’s a big decision you must make before you take flight. So, who are you?
One way we determined who we are was to take a DiSC® personality assessment. Daren is a big fan of utilizing this tool to help understand one’s sense of self. Lots can be discussed about this model, but here is a high-level overview. As described by DiSCprofile.com, “DiSC® is an acronym that stands for the four main behavioral styles outlined in the DiSC model of personalities … D stands for Dominance, i stands for Influence, S stands for Steadiness, and C stands for Conscientiousness.”5
“D = Dominance: A person primarily in this DiSC quadrant places emphasis on accomplishing results and ‘seeing the big picture.’ They are confident, sometimes blunt, outspoken, and demanding.”
“i = Influence: A person in this DiSC quadrant places emphasis on influencing or persuading others. They tend to be enthusiastic, optimistic, open, trusting, and energetic.”
“S = Steadiness: A person in this DiSC quadrant places emphasis on cooperation, sincerity, loyalty, and dependability. They tend to have calm, deliberate dispositions, and don’t like to be rushed.”
“C = Conscientiousness: A person in this DiSC quadrant places emphasis on quality and accuracy, expertise and competency. They enjoy their independence, demand the details, and often fear being wrong.”
“No DiSC style is ‘better’ than any other, and we all use each of the four styles as we go about our daily lives. DiSC simply helps us find out which style we tend to gravitate toward most—our comfort zone. With that knowledge, we can understand our underlying tendencies and preferences and adapt our behaviors to interact with others more effectively.”7 For instance, if you’re a ‘D’ (Dominance) type, you might find it beneficial to tone down your directness when dealing with more ‘S’ (Steadiness) types, who prefer a more cooperative approach.
You can take the DiSC® profile assessment or one of dozens of other personality profile tests and determine whether you are destined to be a CEO or an independent advisor. You probably already know which sounds like a more comfortable fit for you, and your gut instinct is an excellent guide. When the two of us independently took the DiSC® assessment, it told us what we already knew about ourselves: we are both tailored to run our own shops. Daren is a strong D, confident and bottom-line oriented, and Carmine is a strong i. Take a look at what his report says about him:
Carmine likes to deal with people in a favorable social environment. He does not like other managers looking over his shoulder.
If that doesn’t scream “Run your own shop!” we don’t know what will. And so that is what we set out to do. We select people for their cultural (values alignment) and personality fit with the rest of the firm. There is plenty of room in the marketplace for us all to prosper. Our firms attract advisors who appreciate how our corporate culture values integrity, empathy, and conscientiousness, and we seek out advisors for whom these are inherent values.
Another consideration concerning the form your departure should take is the amount of assets you have under management. If it’s over $100 million and you’re adept at business, it could make sense to become an independent RIA. You must register with your state if you manage less than $100 million in assets. This nightmare is on par with probating a contested will in another state during COVID with an incompetent judge and no internet access, except with the state regulatory filing, and there is no payoff in the end.
Compared with state filings, which are difficult to comply with, time-consuming, and costly, an SEC filing is a stroll in the park through fields of lavender on a sunny day. (Well, not really, but it is somewhat more straightforward). Imagine something so Byzantine that it makes an SEC filing look like a cakewalk. That is a state filing. In that case, you’re likely well advised to bolt-on with an RIA until you grow your book of business to over $100 million. Keep in mind if you’re under $100 million, you must register with the states you do business in; yes, that’s plural—state(s).
Some financial advisors chafe at the idea that they aren’t best suited for running a business, but they should understand that this is normal. Most advisors are great at advising, but lousy business owners are not cut out to be entrepreneurs. If you’re not sure, read the book E-Myth by Michael E. Gerber.
Being an advisor and running an advisory business are two different skill sets and mindsets, with little correlation between them. Just because you can bake cakes doesn’t mean you should be the one selling them. Being adept at listening and helping a client plan, matching financial instruments with client needs, anticipating the market, and guiding families to sound decision-making have little to do with opening, structuring, and marketing a business and managing employees. It’s not just that being an entrepreneur is only for some; it’s hardly for anyone.
Half of all companies fail in their first five years; 300,000 enterprises go belly-up annually. The odds that you’re a great financial advisor and a great business operator are slim, and it’s essential to understand your signature skills before you join the wrong half of businesses. Keep in mind most small businesses fail within five years for one reason or another. We’re not trying to scare you; it’s just important you are very self-aware about your skill set. The cards are not necessarily stacked in your favor. This is why there are around 260,000 financial advisors in the United States8, but there are just under 15,000 independent RIA firms.9 The people cut out for the entrepreneur role are outliers. It takes a unique combination of skills, personality, and masochism to be an entrepreneur. Some people get joy from all the heartache of owning a business, and others only see misery.
Let’s face it: there is a certain appeal to being a superb money manager and concentrating solely on that. Many professionals in our field break free of the golden handcuffs but say, “I don’t want to worry about the twenty-five pieces of technology I have to buy to build my own firm. I’m okay giving up a little revenue and bolting-onto an existing entity that offers all this.” You must decide if you’re drawn to the packaged product or if you’re an entrepreneur who wants to start your own entity from scratch.
Here’s how Daren described his need to carve out his own path:
I don’t like someone else telling me what to do with my day. If I am inclined to something, I try it and expect to learn at least. I love being a CEO, working with advisors, and leading my staff. I am comfortable firing on all cylinders. He equated this to someone who wants to own a restaurant: they must be willing to decide on the interior paint color, consider a variety of menu designs, and spend time comparing pasta providers. But it also involves big-picture decisions, like what kind of food the restaurant will serve and what ambiance it should offer.
I’ll be honest: even after careful consideration, I was fearful and wondered whether I would be successful. You’re taking a leap from one ledge across a canyon to another, but the canyon is densely covered in fog, and you must determine where the ledge is on the other side of the divide. It is a leap of faith, and you’re not taking it alone but with a family that relies on you. I understand why so many are hesitant to jump. For me, it’s this leap that invigorates my soul; it’s what fires me up. I love the high stakes that come with running your own ship.
Let’s be clear that this is not an act of blind faith. To continue the metaphor of the leap, we do this knowing that the divide is small and easily broached. Because I did the research and understood the variables that would lead to success or failure, I had clients with whom I had strong relationships, and I had confidence in my ability, discipline, and work ethic to overcome obstacles and succeed. Unlike an entrepreneur who decides to open a dry-cleaning business, build an app, or start a software company, financial advisors who disengage from Global Conglomerate Enterprises, Inc. have something critical to success that should give them more confidence to launch their own enterprise: customers who value their product and service. We call this goodwill.
When you walk away, you trust in the goodwill you have created. We walk away, and generally, our customers follow us, just like a patient follows a doctor, and if you can’t keep everyone you want to bring with you, it’s not like you’re starting from scratch. I have always had great confidence in my ability to start over from scratch because I knew what it took to start from scratch in the first place. Don’t get me wrong: many people helped me along the way, but I knew I had what it takes to re-create and reinvent should I need to.
There is a big difference between eschewing all your income for two years while you bootstrap the business and pour everything you make back into it as an app developer or software company might do and taking 75 percent of your income with you the day you walk out the door and set out your shingle.
As much as I like to congratulate myself for leaping into the swirling mists of uncertainty, the fact is that it’s hard to completely fail at this endeavor, particularly if you plan for it. And if a financial advisor can’t plan for his financial advisory business to succeed, he probably needs to improve at his job before considering any alternatives. The ones who fail do so because of their lack of humility and ability to discipline themselves and because they overestimate their ability to forge client relationships.
How did I plan? I had a ‘Go!’ binder developed over time once I realized I couldn’t remain at the brokerage any longer. The law varies depending on what you’re allowed to take with you when you leave, so speak with a knowledgeable attorney. But once you know you’re going to leave, you would be wise to have a plan and be ready at any moment to execute it. I interviewed with every nearby firm to learn as much as possible. I studied each firm and its approach.
I learned from interviewing all the players on the street that I was exchanging one set of challenges for another by moving to another brokerage At least by going independent, I would have some control over which challenges I faced. The more due diligence I did, the clearer it became that I should go directly out on my own rather than make an intermediate transition to a hybrid broker before creating an RIA. I wanted to avoid dragging my clients through multiple transitions since I ultimately wanted to be an RIA. It was time to bolt, not bolt-on.
Nonetheless, armed with a plan, the confidence to execute it, and the belief that I could start from scratch should I need to, I was scared out of my mind. It didn’t help that my wife likes certainty and was hesitant about this massive change. But I convinced her, at least intellectually, that it was the right thing to do, got the critical buy-in from her, and made the transition with her support. That is worth emphasizing: this is a team effort and impossible without your life partner on board.
How could I succeed if my wife didn’t understand that the ensuing months would require my full attention to the business? She cut me much-needed slack and covered for me numerous times with the kids, and without that support, the transition would have been much more challenging. I would have felt more torn by inner conflict over my roles as husband, father, friend, and business owner than I already did.
Carmine’s experience was similar yet entirely different.
My wife walked by me when I told her I planned to leave—this moment occurred after that safari I mentioned in Chapter 1 when I was deep inside my head and not fully present. She knew something was wrong and was unsurprised when I concluded that I had to skedaddle. She didn’t even break her stride when I announced that I would make the life-changing break and establish my own firm. As she kept walking, she exclaimed that she had faith in me. I swear, that woman is a saint!
We did have a more substantive discussion later that week. It went a full minute. My wife was concerned about what might happen to our health insurance, which is a big deal when you have young kids and you’re pretty sure your husband has a brain injury. We talked it out, and once I clarified that I had a plan, she was satisfied and never mentioned it again. It never was an issue, so I presume her faith was vindicated.
I spoke to a dozen advisors who had treaded the golden path to freedom and asked about their regrets, mistakes, and lessons. The same issue came up repeatedly: the advisors all said that their biggest regret was not doing it sooner, that they made a mistake not doing it sooner, and that the lesson they learned was that they should have done it sooner. That validation sealed the deal for me.
I asked them what was the worst thing that happened to them in breaking free and establishing a new enterprise. Their answers armed me with a list of issues I could easily overcome. For example, one of the advisors mentioned that he didn’t document the year-end amount for an older client’s individual retirement account (IRA) and, therefore, couldn’t determine the required minimum distributions in advance and couldn’t access the information from his former firm. That’s terrible news for him and the client because it could result in a penalty equaling 50 percent of the required minimum distribution. It’s a bit of oversight that could lead to a month of migraines.
For example, a client had $1 million in an IRA, and their required minimum distribution was 4 percent. That’s either a $40,000 distribution or a $20,000 penalty. If you’ve just left a firm promising it would accrue to the benefit of your clients, losing $20,000 because of a clerical error is hardly the best way to bolster your case. Imagine that the same client travels in social circles with half a dozen other customers; it could have led to a significant loss of business for the financial advisor. (Spoiler alert: he tracked down the information, and everything worked out.)
When I heard that, I made an essential mental note: don’t do that. Document the client’s prior year account balances before leaving so that you know the required minimum distributions for those over age 73. Today, I counsel any advisor joining our firm who has clients over that age to save on their end the client’s December statement from the prior year so that once the account gets transferred, they will know how much they are required to take this year. Warren Buffett is often credited with saying, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” I’d be a genius if I learned only from my mistakes, but others have also been very accommodating.
Asking yourself who you are and digging deeply has many positive implications beyond the professional side. This book is different from that kind of book, so don’t expect us to wax poetic about the power of therapy, meditation, or deep dives into the essence of your being. Each of us has a growth coach—the same one (which is how we met)—and we always consider this question. The point is that asking and answering this big question can lead to insights that help us find the right path for us and avoid one that is a bad fit.
When deciding whether to bolt-on or bolt, the next question is, how do you want to spend your time? If you would be happy as a clam spending every working minute focusing on money management, learning about new financial products, considering your client needs, meeting with them and building relationships, running various sets of numbers to uncover the best options tailored for each client, and fostering the business relationships that lead to more clients, well, good luck with that!
In actuality, the paperwork is voluminous, and avoiding it is not an option. But you can spend 80 percent of your time on financial planning and 20 percent on all the detritus that fill our professional lives, such as all the regulatory compliance and employer requirements. If that’s your bag, you should bolt-on with an RIA and leave all the ancillary considerations to someone else. You can make a fine living and sleep very well at night.
If, on the other hand, you are energized by a different equation, one in which you spend 20 percent of your time servicing a smaller book of business and 80 percent of your time running a business, developing a vision, culture, and strategies for a successful enterprise; taking a disproportionate amount of the risk; and reaping a disproportionate amount of the monetary reward, then establish an RIA firm and hire qualified people from the former category. Some people prefer driving the bus, and others like riding in it while enjoying the scenery out the window. (We’re not entirely sure how this analogy works, but you get the idea. We’re all hardwired differently and not truly happy unless we follow our personal bliss.)
Before we move on, you need to ask yourself a question that many of those toiling for big companies can’t answer: How are you getting paid? It will be tough to stay once you dig into this question and learn how the game is rigged against you and your clients. In fact, the more you learn about the industry and all the secrets hidden behind the curtain, the more the impetus to make like a banana and split.