5 Challenges for Self-Employed Finance Professionals

How to overcome the unexpected and avoid the pitfalls of going solo

Self-employment is very nearly a universal goal across most industries. While not practical in fields like commercial aviation or nuclear engineering, it is certainly an option for financial professionals. Many brokers and investment managers understand quite clearly how much of their revenue they must "share" with their employers, and dream of the the freedom and income-generating possibilities that go with independence.

Before taking the leap, though, would-be self-employed financial professionals should consider the following five challenges that go with the do-it-yourself approach.

Key Takeaways

  • Don’t rely on family and friends as clients to help you get started.
  • In many cases, taking existing clients to your new firm is forbidden.
  • To be successful you’ll need to be a motivated self-starter—there is nobody else telling you what to do.
  • Going solo can be a lonely existence with many late nights.
  • Would-be self-employed financial professionals shouldn’t underestimate the costs of the resources needed and the time involved to set them up.

1. Friends and Family Aren't Customers

Many would-be solo financial pros build their business plans around the assumption that they will manage the funds of their family and friends and use this as the starting point for their business (and to tide them over). More often, though, this business never materializes and the end result is not only a lot of hard feelings, but a business plan that is undermined at its foundation.

A lot of people are uncomfortable talking about their financial situation with family members or friends, and this cuts both ways in this context. Many entrepreneurs are reluctant to ask their friends and family for business, and just as many (if not more) friends and family members are resistant to give the entrepreneur that level of access and information regarding their personal financial situation.

It's great to have a rich relative who believes in you (it certainly helped Warren Buffett back in the day), or wealthy friends who are willing to help you get started, but these are far and away the exceptions. At best, you may be able to manage a portion of their funds, but you should not expect to feed yourself on the management of the funds of your friends and family.

If nothing else, think about the dinner table at Thanksgiving and how unpleasant that will be if you've lost money for most of the people sitting there.

2. Your Customers Aren't Your Customers

Whatever sort of new investment business you're contemplating (brokerage, investment management, advisory services, etc.) carefully check the provisions of the employment agreement with your current employer, as well as relevant industry, regulatory and association rules regarding the solicitation of existing customers upon switching jobs. In many cases, approaching existing clients of your firm and soliciting them to move their business to you is explicitly forbidden.

It's not unheard of for companies to work out transition agreements with employees who wish to go independent, with the entrepreneur often having to agree to a profit-sharing arrangement. Existing customers can, of course, switch their business to you if they so choose, but you cannot solicit them. Sometimes even informing them of your departure is not allowed.

What that means is that the large business you've built may be largely off-limits if you wish to venture out on your own—or at least off-limits for a period of time (sometimes measured in years).

Simply going out on your own and poaching customers is a bad idea. For starters, you may be in violation of a contract or civil/securities law in doing so and expose yourself to significant financial consequences. Second, nobody likes poachers—for all of the criticism that the financial services industry has taken over the years, it is still a business where reputation counts for a lot and ruining your reputation from the get-go is a sure way to fail.

3. There's No One Else to Push You

There is an image of the independent financial professional as an ambitious and motivated self-starter. That's certainly true, but it only applies to the successful ones.

One of the hardest parts of transitioning to self-employment for many people is also the part that made it so attractive—there is nobody else telling you what to do. If you want to knock off early and go play golf instead of continuing to call prospective clients or work on your marketing pitch, nobody will stop you.

Working as a solo act requires a certain amount of delusional self-confidence, but assuming that you can take it easy early on, just because you know the customers will show up eventually, is a good way to fail.

4. It Can Be Lonely

It's common to the point of being a cliché to talk about managers and supervisors who live easy off of the work done by their subordinates. This is particularly true in Wall Street, where senior analysts and bankers may leave at noon on Friday to play golf. But the first-year employees are stuck in the bowels of the firm assembling pitch books until 11 p.m. on Friday night.

Many new entrepreneurs are surprised to learn just how much work goes into running a business. Much of this is invisible in a large firm with multiple branches—the accounting, HR, legal, compliance and other functions may not even be done on-site or in-country. When it's your business, though, it all has to get done and, ultimately, by you. This can result in many late nights or weekends spent attending to tasks that aren't even why you got into the business in the first place.

This can lead you to become something of a recluse or hermit—not necessarily by choice, but because you have to get the work done. If you value a job where you can just "unplug" at 5 or 6 p.m. every night, going independent may not be for you.

5. You Lose Resources and Brand Name

One of the biggest surprises that independent financial professionals discover is how expensive it is to replicate the resources they are accustomed to when working for a larger firm, such as information sources like Bloomberg and FactSet. While these data sources are invaluable for competing as an independent financial professional, they cost tens of thousands of dollars each year and can represent significant upfront costs for the newly independent professional.

Not only can large firms like Merrill and Edward Jones negotiate more competitive rates for seat licenses, but they have more options in paying for those resources. Not so with the lone independent. There is virtually no negotiating leverage there to speak of, and customers are not going to pay higher fees just because your expenses are harder to leverage. This is also the case when setting up systems for clearing, custody and so on, which can take time.

Expenses like rent, support staff, back-office functions, IT and info services all add up, and they're not too hard to quantify if you ask the right questions. What can be more challenging, though, is factoring in the cost and value of the reputation of working for a known brand. Think of it this way: If you deal with a "bad rep" at a nationally known firm, there's at least some chance of getting legal and financial satisfaction through the the arbitration process.

Dealing with an independent, though, can bring to mind images of Ponzi schemer Bernie Madoff and the prospect of somebody taking your money and running to the Cayman Islands. That difference in client confidence may be difficult to quantify, but it does show up as a real "cost" when it comes to establishing your own business and your reputation as an independent.

The Bottom Line

Done right—which means careful and detailed planning backed by significant resources to get you through the startup and initial months—working independently can be a great life. There is no shortage of challenges or hassles, but the rewards flow all to you, and you can decide the sort of business you want to operate.

The key is "done right," which means thoroughly understanding not only the requirements and challenges of the business, but your particular strengths and weaknesses and your ability to respond to both expected and unexpected challenges.

Article Sources

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  2. Vox. "How Mike Bloomberg Made His Billions: a Computer System You’ve Probably Never Seen.” Accessed Jan. 19, 2021.