Hey everyone. I haven’t posted in the forum here since I took the exams, but I am going thru a potential career shift. I have had my CFA charter for about 5 years now, and have been working in finance for over 10 years. I work in an analyst/relationship mgmt role now, and have been thinking of making the plunge into the Financial Advisor field. I enjoy working with people more than Excel (most of my role is excel), and don’t have a significant fear of rejection. Yes, I know the perils of starting in the FA career, but before flaming this idea as bad please read my situation. A good friend of mine has a little less than 200MM in AUM with about 500 clients for a regional brokerage where he is mainly fee based. He has been in the business a while now and enjoys it. I would be joining his practice, working for him, being paid by him, servicing his book, helping him with scheduling, rebalalancing portfolios, etc. Some of this seems akin to a Sales Asst/Jr Broker role. Our thought is I would work in this role for a while, service his clients while trying to build my own book and potentially pick up some of his lower clients. The longer term potential is this: he has a colleague that may be retiring in a couple of years, and he is thinking of buying that book of business, and I could potentially finance it thru him. My questions are: 1. How wise of a career choice is this? 2. What type of compensation package should I be looking for (base/bonus) as well as how to determine that bonus (strictly a percentage of his book, or a percentage increase in his book over the year?) Could I ask for 25% of his revenue and give him 25% of any client I brought in? 3. How hesitant should a person in my position be given the D.O.L. laws and Roboadvising? Thanks in advance for any input you have!
I wouldn’t worry about roboadvising yet at least. There’s plenty of surveys done that show mid to high net worth clients want a person. Their situations are usually more complex than a kid (who has less money anyways) investing in a passive stock fund for 20 years. Taxes, estate planning, etc. are very important too and most AIs don’t do this.
The skys the limit for advisors in terms of pay. Sounds like though you’ll be doing admin work for several years until this guy retires. And there seems like some risk of whether he can get that book assuming he doesn’t delay retirement.
To answer the first question, why do you want to do it? Money, helping people with their finances, hate current job, etc? 90%+ of advisor are essentially skilled salesman. Most run software to manage portfolios. Maybe make some light executive decisions here and there. Are you cool with this? Maybe its different there, something to look into.
Sorry for the long post here…just so much that can be discussed…
If you’re true motivation is to help others, this is a great career path. The industry is changing and the quality of advice is improving rapidly. The pay can be great, which is why the industry has attracted so many greedy losers historically, but fortunately the bar is being raised and those that are in the industry for the right reasons are becoming more successful.
The servicing existing clients and then buying a book is a good way to enter the industry. There are a lot of complexities around this, it would probably take several hours to lay them out. I’d encourage you to do some research, kitces.com/blog/ is a great resource but there are many others.
What are the ages of the various people in this situation? What’s the B/D? 25% of revenue is way too much, depending on your ability to produce new clients immediately. $200M*1% = $2M in revenue. Assuming expenses and payout eat up 50%, that leaves say $1M in profit. So if we say 25% of that is $250,000, that’s a lot of money for a new guy. A young guy with a CFP that can fully work financial planning software is probably worth $50,000, depending on location. So to be worth 5x that, you’d need to have a really good list of prospects that you think you could bring on in the first several years. More likely, your comp schedule should be a low salary initially, and then a % of revenue for every client that you assume responsibility for. Say you take over a client relationship day 1, perhaps you assume 20% of revenue for that client, with a 5 year transition to 100% revenue.
For someone like you I would add that you should really try to get a good understanding, before you enter the industry, about how the dynamics are changing and how your firm will compete over the next 20 years. My reason for saying this is that I personally believe the sole proprietorship model of financial advising is dead. Roboadvising is indeed reshaping the industry, but only for smaller accounts. This matters to some advisory businesses more than others. More importantly, and as Buffetology points out, the investment piece can’t be your value add as an advisor anymore. It’s too simple to build portfolios and get clients invested in the markets, that’s something that can be reasonably learned in 10-20 hours of reading. It can’t be your primary value for a client. So, you need to be able to add value in multiple ways. financial planning, tax planning, estate planning, insurance planning, etc. In my opinion, this can’t be done competently by one individual. So, if I was getting into the industry, I wouldn’t be doing so using the old model and trying to compete. I’d be looking to be a part of the change in the industry and either join or create a business that can provide value to clients in all of these ways.
There are a few reasons why I am interested in getting into it. I get satisfaction from helping others resolve a challenge, their finances being one of those. And of course the high revenue ceiling is an additional motivation. I do not enjoy my current analyst role- it is far too much excel and being stuck in a desk, and is not rewarding. I understand sales is good chunk of the FA role, and I think I could do well at that. But of course the thought of leaving a stable, yet unfulfilling desk job for the uncertainty of a FA job comes with a little trepidation…
[quote=“Huskie87”]
What are the ages of the various people in this situation? What’s the B/D?
/quote]
Huskie87- thanks for the insight, the more info the merrier. The guy I would be working for is in his upper 40s and the B/D is Ameriprise. He is independent but offers holistic retirement planning. The person he would potentially be buying a book from I believe is in his 50s…
First thing, keep in mind that probably 1/20 of these deals actually get done. Advisors love to get courted by another person thinking about buying them out, but often find some reason not to do it. Just consider the possibility that this might not happen and make sure you’d be willing to make this move even if this deal doesn’t get done.
Your friend’s business is the exact type that I believe is going to face an uphill battle in the coming years. His book is probably a mix of a few clients with $2-5M, a decent group of $250k-$2M, and the majority being below $250K. The sub 250k crowd is facing competition from robo-advisors, and B/Ds like ameriprise make these clients unprofitable for advisors who refuse to dip their toes into commission products like non-traded REITs or managed accounts. You know, things that are profitable for the advisor and B/D, just not for the client. As a wholesaler once told me ‘2 out of 3 aint bad right?’…douche.
The $250k-$2M crowd is going to be your bread and butter. These are clients where you can be profitable by treating them right, charging them for financial planning and adding value through a decent knowledge of insurance, tax and estate planning. There’s going to be increasing competition here from online advising, such as vanguard, wealthfront, etc.
The $2M up group is where the single advisor model is already antiquated. Not to say that you can’t get clients here, it’s just going to be clients who don’t know any better…who can be poached easily. It’s much more profitable to go independent, assemble a team of experts in each area of the business (CFA, CPA, JD, CFP, etc.) and scale their abilities across a client base, with the advisor as the quarterback. Your advisor might believe he’s holistic, but he probably hasn’t visited other firms to see what he’s competing against in this area of the market. Having seen it, and worked in it, I’m extremely confident that no individual can provide that level of service and competence. Even if he could somehow have all that collective knowledge, he still needs to compete, and a group of experts looks a lot more professional than one guy in an office. I might be wrong, but I think this is the future of the industry. Once you scale, you can even go down-market profitably (into the sub $1M).
Not trying to discourage you from entering the industry, I just think you’re entering a dying business model. But, I don’t know your friend or his business…so lots of assumptions made here that might be inaccurate.
I would add too, that big names known for discount online trades like Scottrade, Etrade, etc, have entered the game within the last 5+ years. They all offer some form of guidance/advising now and are pushing it very hard. Granted they have a tougher time getting those multi million accounts, but to Huskies point, its not easy getting those large accounts. You can do it, but if chose this path, be ready for some hardships earlier on until you get a sustained book.
Thanks. It doesn’t sound too encouraging, but I greatly appreciate the candid advice!
Is there any job you can take right now that is not at the risk of obsolescence? Unless you want to enter medical school or something, I doubt there is a really future proof thing you can do.
^Even that field is not impervious to the displacement effect of AI
Nah, doctors will just charge you for more kinds of tests. When I go in for an exam, there are tons of weird tests that I am pretty sure didn’t exist 20 years ago. Furthermore, they don’t even ask you if you want those things - they just charge everything to insurance. When your premiums go up, you blame the system, not the doctor, since the cost and service points are not the same. Basically, it is the issue with healthcare here. Unless some politician pushes for some major reform (they probably won’t), costs will probably keep rising and the consumer will just spend more and more. Unlike financial services, for instance, where costs are decreasing.
Yeah, I wouldn’t avoid a career in advising if you’re worried about AI. Many clients want a person they can talk to and an office they can drive to, even if that includes paying more for those ‘perks’.
The competition of roboadvisors and online only advisors is simply a change in competitive forces…the industry will still exist and there will still be tens of thousands of advisors
Why can’t AI do a ton of weird tests that charge a lot instead of a human? Upfront costs for long-term savings for the company. The entity, not the consumer, would be the driver here. My cousin is a doctor and told me AI is becoming smart enough to take away many day to day tasks of the doctors. Early stages, but I do not believe the medical industry is not immune from it.
They could in theory, but there is no sign that healthcare spending is decreasing. Many things can be speculated or have potential to happen, but not everything does. That’s why I mentioned that finance costs are decreasing. Automation or other things could or could not be driving down finance execution costs, and evidence shows that this is happening. AI or robots could drive down medical costs, but there is little support for this actually happening in the real world.
I thought that Trump was going to end Obamacare and then healthcare will finally be affordable to anyone who might need it?? I mean, the Dude don’t lie, so it’s gonna happen and we’re gonna love it. Anyone who doesn’t love it is gonna be unamerican and get buried in the Wall, because Yaina!
any thoughts of just buying someone else’s book. does that work out in the long run, how much do they usually go for?
As with most answers…it depends. Usually 2x revenue.
Problem is, the guys that want to sell probably have the crappiest books. A lot of guys that depend on 12b-1 fees are looking to get out now before regulations change and make them illegal. You could buy their book, but if that revenue stream runs out, now you’re trying to get those clients in for a meeting to convince them to change their investments so you can get paid more. Many advisors who rely on 12b-1s probably haven’t met with the majority of their clients in years, so good luck getting those clients to come in for a meeting with someone they don’t even know.
If I was buying a book, it would be from someone who already has built a great book with multiple revenue streams (AUM fee + fin planning + insurance sales) and who is willing to transition the book over multiple years. Buying a book and letting the advisor walk away is just asking for poor continuity. Instead, I’d want to sit in with the advisor over multiple years before becoming the client’s main advisor. Remember, clients can choose to walk away, they need a reason why they should continue to use you. Year 1, I’d sit in as the new guy, observe, smile, do meeting prep for the advisor. Year 2 I’d be actively involved in the meetings along with the meeting prep. Year 3 I’d lead the meetings, with the advisor observing. Clients who are still there by year 4 are not going to leave when they come in and see me without the advisor being there.
I’m doubtful. I don’t think AI isn’t going to be replacing doctors anytime soon. Also, liability is big in the MD world. Faulty AI would be entirely liable by the company who manufactured/designed it, which seems very likely at this stage. We can’t even design a robot to kick a soccer ball without falling on its face. I think what’s bigger than AI replacing doctors is nanotechnology to treat certain illnesses and disorders. We also have an array of robotic devices designed for a specialized task, but replacing a doctor is just a bit much.
My family office might not be the best example since we’re a bit more knowledgable with investing. We’re definitely exploring the robo-advisor route since our wealth advisors in the past didn’t really do much in terms of estate, tax planning, etc… We had our estate attorney and accountant handle most of that and/or just figure it out ourselves. Prior advisors also just wanted to sell us a bunch of useless and expensive financial products to line their own pockets. I was livid when I found out our prior FA got my family to invest in a shoddy non-traded REIT, Leaf Financial. The guy got a nice commission upfront while we ended up losing the entire investment. He didn’t really care about nor really understand the risks. Our current advisor is better (doesn’t try to sell extra stuff), but he basically just offers portfolio theory (Vanguard and DFA funds) for 70-100bps so we’re going to phase him out over the next couple of years.
I think this idea that HNW’s will always need these financial advisors is a half-truth and wishful thinking by many. Those that really provide good value by offering more than just simple wealth planning and portfolio theory, provides access to solid private investments, are very transparent and honest with fees (and why they charge them), and have a strong network that helps HNWs in other ways (legal, business contacts, etc…) will have a place. The rest, which I’ve found seem to be the vast majority of FAs, are a fairly commoditized and will be left in the dust by the Vanguard’s of the world.
I hate to see people lose their jobs, but given how much this industry has robbed investors through high fees, crappy products, and bad advice I think a change is long overdue…
You might want to have a conversation with a securites lawyer about that nontraded reit