How to Become an Independent Financial Advisor

Many registered investment advisors (RIA) at one time or another have considered striking out on their own to form an independent financial advisory firm. But those attributes that make one a successful advisor at a larger organization don’t always translate into the skill sets that are needed to run an independent business.

Still, with a growing number of mergers and acquisitions happening in the industry, many advisors are concluding that now is the right time to become an independent financial advisor. Additionally, going alone provides added flexibility, more control over your firm's direction and investment philosophy, and the potential for greater financial rewards.

Here are some basic steps on how to become an independent financial advisor,

Obtaining Licensing Requirements

If you don’t already hold them, you will need to obtain several licenses to sell financial products, deal in securities, and provide financial advice. Firstly, you will need a Series 7 to sell securities, such as stocks, bonds, mutual funds, and variable annuities. To obtain this Financial Industry Regulatory Authority (FINRA)-issued license, you will need to pass a multiple-choice Series 7 exam. Depending on what state you plan to operate in, you may also need to acquire the Series 63 and Series 66 licenses, which allow you to sell certain securities based on state regulations. If you intend to sell insurance-related products and services, you will need to hold a state-specific insurance license which is obtained by sitting an exam. You may also need other specialized licenses depending on the type of financial products you plan on selling.

Once you have obtained the necessary licenses to become an independent financial advisor, you will be required to comply with FINRA, the Securities and Exchange Commission (SEC), and state regulatory bodies. You will also be subject to periodic audits and must follow certain ethical and compliance standards when dealing with clients. You will also need to complete continuing education courses regularly to stay up-to-date with industry changes and regulations. Due to the complexities of obtaining the correct licensing requirements, you may want to consider hiring a dedicated compliance manager.

Marketing Your Independent Financial Advisory Business

It’s crucial to market your independent financial advisory business effectively to continue building your existing client base. Start by clearly defining your firm's niche and tailoring your marketing activities to clients seeking those specific financial products and services. It’s then worth detailing a business plan that specifies goals, objectives, financial projections, and guidance for achieving key metrics. For example, you may decide to set a goal of growing your client base by 10% in your first year of operation.

It's also important to establish a strong online presence as more clients consume financial products and services via websites and apps. Make it straightforward for clients to access their account information and contact your firm’s representatives online. To build your reputation as a financial expert in the area you focus on, consider hosting a weekly podcast or offering to speak as a guest on one listened to by your target audience. To gain more business at a minimal cost, work on building your network by asking satisfied clients for referrals or partnering with other industry experts. Finally, set competitive fees that make it easier to attract and retain clients. Providing you add value to your clients, you may even be able to offer premium services not offered by your competitors for higher fees.

Fostering Relationships

One important step any advisor should take before leaving a firm is to evaluate their client relationships. You want to make sure your clients are more than satisfied with your work and that your relationships are strong. Clients want to feel that their advisor knows them well and is looking out for their families’ future. 

Reinforcing these relationships through frequent client contact is key. That’s why advisors planning to make a move should start shoring up their client relationships months in advance. Loyal clients will often remain with their advisor when they move to a different firm or open up a new one. The stronger the relationship, the more likely it is that a satisfied client will follow their advisor wherever they go. 

In fact, many in the industry agree that a key to success when an advisor is going out on their own is to make sure that they are not starting from scratch in terms of client relationships. It’s ultimately much easier to bring existing clients with you than it is to build new relationships from scratch. 

Retaining Your Clients

At many firms, certain protocols have been put in place between brokers and RIAs, which stipulate that signatory firms will not instigate legal action against an advisor who takes basic client data with them when moving to another signatory institution. Also, many advisory firms allow their advisors to contact their current clients when leaving the firm in order to let them know when the advisor is leaving and where they are moving. This allows the client the option of moving their account when their advisor moves, which may also be in their best interest.

Some firms, however, have been known to ask their employees to sign a non-compete or non-solicitation agreement when they join the firm. This can get tricky for those advisors who want to venture out on their own. In this case, it is important that the advisor does not act in a way that can be construed as actively soliciting their clients to exit the firm when they do, as this would be in violation of the contract they signed.

There is, however, nothing stopping an advisor from giving clients their private email or home phone number so that the clients can choose to contact the advisors themselves if they wish to continue a relationship. In those cases, when an advisor is permitted to take their clients' basic contact information with them when they leave a firm, they typically are not allowed to take any information with them concerning their clients’ accounts. In this case, you may want to send out a mailing to your clients letting them know your whereabouts, in the hopes that the clients will then follow up and provide any information they wish you to have. 

Selecting a Custodian

Selecting a secure custodian to keep your clients' assets safe needs to be considered before opening your independent financial advisory firm. Before signing on with a custodian, ask what measures they have in place to protect against fraud, data breaches, and cyber-attacks. It’s also important to select a custodian that specializes in the type of assets your firm and clients will likely make. For instance, if you plan to offer financial advice specifically relating to stocks, consider partnering with a custodian that has a proven track record with that particular asset class. 

From a customer service perspective, it’s crucial that the custodian you choose to work with provides quality support that can quickly resolve any issues you or your clients encounter. If you plan on offering financial services to clients who reside outside of the United States, make sure your custodian provides 24-hour support. Finally, make sure the custodian you decide to go with has advanced technological capabilities. A suite of digital tools and access to useful online platforms, investment apps, and other related technology solutions helps you and your clients manage their assets more efficiently and streamlines the investment administration process.

Financing the Move

One caveat advisors should be aware of before forging out on their own is that the money probably won’t immediately come rolling in. In fact, it could be quite a while before an advisor is able to match their previous income. Often, during the first three to six months of a new business venture, an advisor’s revenues will likely decrease. At the same time, start-up costs will continue to add up, so just breaking even might be a good goal for the first year.

Without a fair amount of savings, an advisor looking to start a new venture may need to take out a certain amount of financing. This may be obtained through taking out a bank loan or a line of credit (although this type of financing is not as easy to come by as it once was) or by talking to a broker-dealer or custodian who may offer financing to advisors through term notes. Either way, saving up at least nine months of income in an emergency fund is a good idea for advisors looking to go independent. It can provide a much-needed cushion as the business begins to grow.

When just starting out, you may want to work from home rather than pouring a lot of money into office space. You can also save money by doing much of the administrative work yourself. But letting a broker-dealer run the compliance end of a new business and outsourcing back-office functions may be a good idea to also keep things running smoothly. 

Consider an Independent Firm

If the move to independence seems too overwhelming, risky or just not financially feasible, you may instead want to join an existing independent advisory firm or an independent broker-dealer (B-D) that offers investment services.

The benefit to this (over starting one’s own firm) is that start-up costs and overhead costs are eliminated—and so are back office and compliance costs, as well as various other administrative costs.

With much of the infrastructure and support in place from the get-go, advisors can focus more time on maintaining existing client relationships and building new ones. These small independent firms may also appreciate being approached by qualified and experienced advisors, as these hires will help eliminate their need to spend time and money recruiting new talent.

Ultimately, it is up to each individual advisor to decide which path best suits them. While some may prefer working for a firm where the infrastructure and support are already in place, others may still crave the freedom of going out on their own and creating their own investment style and approach.

The Bottom Line

Many advisors are making the move toward independence and opening up their own advisory firms. To make the transition easier, you should check licensing requirements, have a detailed business plan, make an effort to retain clients, and understand the starting costs of opening an independent financial advisory firm. If you want to go it alone with reduced risk, you may want to consider working for an independent firm that provides much of the administrative support as you focus on growing and servicing your client base. For those ready to take the plunge, the benefits of independence may provide many benefits over the long term.