How Would You Define Advisor Independence?

This isn’t meant to be a trick question. Still, having spoken with countless advisors, I’ve found their answers can differ significantly.

This is because the term ‘independence’ lacks any standardized definition within the Canadian wealth management industry. Instead, over time, people have generally come to associate independence simply with what it isn’t — working for the bank. As a result, there are bank advisors and everyone else (i.e. the independents).

But there’s a challenge with labelling advisors this way. If you dig deeper, you’ll find that independence still means different things to different people! For example, advisors have shared with us that they feel they are independent because:

• They are not limited in what product solutions they can offer their clients
• They can deliver their own branded client experience
• Their dealer doesn’t get involved in their day-to-day operations
• They own their client relationships
• They can sell their business outside of the firm

While every advisor may have elements in their practice that indicate some degree of independence, absent of a standard definition, the term will continue to be misused throughout the industry.

The two objectives of this article are i) to challenge whether those who are widely considered to be ‘independent’ are actually realizing the full benefits of complete independence and ii) attempt to characterize advisor independence so that teams understand the full set of options and models available to them to achieve their personal and business goals.

Let’s begin with a definition.

Independence and the Dealer Model

Independence is defined as “not influenced or controlled in any way by other people, events, or things.” Already, you can probably see the challenge of mapping this definition to any advisory team working with a dealer.

The dealer model has been the traditional path to building an advisory practice in Canada. If you want to become a financial advisor, you need a dealer who sponsors your registration and provides you with technology and support in exchange for a fee (the grid). The challenge with the dealer model is that the dealer always retains some level of control over their advisors — even those considered independent. While the dealer is often (but not always) independent from a larger one, the advisor is not. This can provide both benefits and challenges for the advisors. Specifically, there are three main areas where this control tends to surface, creating obstacles for advisors and their clients alike:

Technology

Technology limitations tend to be one of the primary motivators for an advisor/advisor team to begin to search for a change. Advisors frequently share their frustrations with their dealer’s (many) legacy systems, insufficient integration, absence of workflow management, and disjointed client experience. Poor technology leads to inefficient operations that trickle down into the client experience. In most cases, advisors have been promised change from their dealers, but they have been slow to deliver. At the same time, smaller, more agile competitors have modernized quicker — threatening the advisor business. This lack of control over technology keeps advisors from delivering the experience they feel their clients deserve,

Marketing and Compliance

Many reading this understand the frustration when an advisor who wishes to start a podcast, blog, or YouTube channel has the idea struck down by their dealer’s head office. Or how about when routine trades that are consistent with a client’s IPS are flagged? These are scenarios we’ve come across more than once. The challenge is that when you work for a large firm, they tend to create policies based on their previous experiences across hundreds (or thousands) of representatives. This creates an undue hardship for high-performing, compliant practices. The dealer seeks to standardize policies to create efficiencies, while advisors seek unique solutions to meet their target client needs, putting the two parties at odds.

Control of the Business (not just the practice)

Having spoken with a number of advisors who have been through a dealer sale in the past — some more than once — someone else selling your business without consultation can be the single biggest disruptor to one’s practice. The resulting repapering, client calls, transfer of accounts, and new systems are difficult for everyone involved.

Well, nearly everyone.

The dealer’s primary objective is to maximize shareholder value. When management decides to sell, they receive an enterprise valuation based in part on the business you’ve brought them. Additional value from broader business is created, but you do not capture it proportionately. Shareholders and management benefit, while advisors are left cleaning up afterwards. Advisors should not only consider whether the dealer model maximizes the value of the practice they have built, but also whether they stand to receive value from the broader business when it comes time to sell.

A Different Model

The previous examples are a handful of the ways in which a dealer is able to exercise its control over their Advisors. Can we really call this independence? While there is benefit to having someone provide the range of dealer services and oversight — is this model right for you and your business? This is a personal decision that each advisor should evaluate on their own. Do you want more control of your practice and your business?

We believe there is a need to help advisors create more choice and control in their business. Entrepreneurial advisors should be empowered with the same options as other professionals; Lawyers, Accountants or doctors. While the US market has seen a rapid expansion of the RIA model — which gives advisors full control of their business, Canada has been slower to develop. We are focused on helping advisors understand their different options and, where right, forge a path to their own business.

So what would true independence actually look like? How would an entrepreneurial advisor design their own business from scratch?

First of all, it would be set up to be their business. Incorporation would offer additional benefits, such as the capacity to keep earnings within the firm and the option to incentivize team members or partners with equity. As the business grows, the advisor’s time and effort invested would be reflected in the value produced, which they would exclusively capture.

To maximize the value, the advisor would prioritize streamlining operations by using modern wealth management technology. Adopting open architecture infrastructure would future-proof the business by allowing it to adapt and integrate the most recent wealth tech into its practices. This technological freedom establishes the groundwork for delivering exceptional client experiences.

Finally, autonomy over operations would be a key advantage. Marketing policies would be tailored to promote growth, and compliance policies would be tailored to the individual firm’s philosophy.

A New Definition

So, all of this leads us back to where we began, with independence meaning different things to different people.

Let’s try an expanded definition. While most advisors have some level of independence over their practice — broadening it to even greater control of the business opens up new options for advisors:

A fully independent business owner controls the mission, vision, and value-creating operations of their business. They retain control over their daily operations and how they align with client values. Additionally, they can capture the full benefits of their business’s value either at the sale or through succession planning.

Do you have the level of independence that you want?

Here are some guiding questions to assess whether you are running a fully independent business today:

Are you currently a business owner?

• Can you receive the fair market value for your business if you decide to sell?
• Can somebody else (i.e. your dealer) sell you?
• Are you able to fully incorporate and retain earnings within your corporation?

Do you control firm policies and risk management?

• Can you make trade-offs on the risk profile of your practice and portfolios?
• Do you have a say in establishing compliance procedures?
• Can you work with compliance to alter these procedures if need be?

Product decisions

• Can I select product solutions that are appropriate for my clients?
• Am I limited in how I offer solutions to clients?
• Do I create my own KYP processes?

Client experience

• Can you incorporate the best of wealth tech into your core services? Portfolio management, financial planning, productivity tools, CRM, etc.?
• Are you proud of the client experience you can offer?

How Purpose can help

I’d be remiss if I didn’t mention that Purpose Advisor Solutions helps entrepreneurial advisors set up, launch, and operate their own practices. We offer different ways to partner that can suit all types of advisors.

Whether you’re looking to start your own registrant or join an existing firm that supports this version of independence, core to our business offerings is the idea of the advisor as a business owner. You own and grow your business under your terms. Serve your clients’ dreams without compromise. Build the life and legacy you envision. And satisfy that hunger to get out there and do what you believe in, with the backing of a partner who believes in empowering the person best qualified to bet on your future:

You.

Let’s talk

-Paul Morrison is an Account Executive at Purpose Advisor Solutions.