If You’re at a Wirehouse, Run the Independent Numbers
Most of us view life from our own unique perspective. We make decisions based on our experiences and education and sometimes our intuition enters the picture. Last week I had a conversation with an independent advisor who related an interesting story to me. Although I have pondered this issue a number of times before, something clicked inside me this time. Here’s the story.
It seems this advisor was being recruited by a manager of a regional brokerage firm. The manager told this advisor that he would no longer have to worry about paying his own expenses and that he would have the full support and resources of the brokerage firm behind him. To the manager, it seemed reasonable that this independent advisor might find the offer attractive. But to a person who has tasted independence and has found success there, accepting this manager’s offer would be akin to taking a step backwards.
What was really interesting was when the advisor told this manager that he was already receiving a 90% payout. The manager just stood there like a deer in the headlights. Was it possible that this manager was unaware of the higher payout of an independent? Then it hit me. I remember when I worked with a large brokerage firm many years ago. I knew what I was told. I drank the Kool-Aid, so to speak.
For example, they would pay the same commission on every product of a particular type, even if these products paid different commissions. They call that a haircut, but I didn’t know any better. Then I joined a regional firm that had a slightly higher payout. Later, I joined an independent broker/dealer with a 90% payout. Wow, 90%! I didn’t know that was possible. How could they survive on only 10%? Now, as an RIA, I receive a 100% payout.
For those who are currently working in a wirehouse or bank system, pay close attention as we do a little math. Let’s say you could transition $10 million of your current book if you became an independent advisor. Further assume you receive a 90% payout and your average velocity (the average percentage you receive on assets) is 1.00%. You would gross $100,000 in the first 12 months. Could you live and run a business on this? If you had $20 million, you would receive $200,000 a year.
The point is that at some level of assets, you could very easily pay your own expenses and realize a much higher personal gross income. Besides, you would also be building a business which would someday provide you with a very nice retirement. Are you ready to sacrifice the gold watch? Once you taste independence, you’ll never want to go back.
You forgot to back out expenses. If you gross $100,000 — you still have rent, phones, computers, software, etc . . . What are the real numbers an independent keeps?
As an RIA you are running the business. You can decide how much you want to spend on overhead. If you understand tech, then those numbers go way down. VOIP PBX phone systems are really cheap and better than traditional pbx systems.
Software cost isn’t bad. You pay for what you need. What always made me mad at the wirehouse was I was paying for software for other brokers to use. As an RIA i only pay for what I need.
In my wirehouse days I was averaging a 47% payout. Now I get 100% After overhead, I still keep about 90-92%. That is without including the ridiculous tax write offs…
Hi Warren,
I didn’t forget to back out expenses. I said, “Could you live and run a business on this?” My business expenses run around $2,500 per month. My point was that as my business grows, I get to keep more. There comes a point where, even after paying all business expenses, it is much more rewarding (profitable) to be independent, that’s all.
Cali,
Would you tell me more about VOIP?
Thanks,
Mike
Mike-
Check out services like Packet 8. I have an office with two assistant and a line at my office at my home. Cost me about 50 bucks per month per line. I can block calls, forward them to my cell, have only certain numbers go to my cell, Voicemail gets sent via email, integrates with Outlook. Lots of options.
The key is you have to have a good internet connection. Make sure you have good UPload speeds. If the speed is two slow, then the phone will sound funny.
I have been using VoIP for a few years and never had any issues.
Mike,
I use VOIP. I like it, but I have had issues with reliability of the internet connection, so that is really important. Even with that, given our business model it is really the only way for us to go. Once we improve the Internet reliability it will be a no brainer.