Breakaway Advisor: What You Need to Know About Compliance and More

Ryan Shanks January 31, 2022

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As financial advisors, many of us likely recommend a diversified portfolio to our clients. We do so for a variety of reasons, but one of the most important is the inherent risk of a single event impacting a client’s investments. The same can be said of your career.

For many financial advisors, there’s a very real fear of being locked into a firm that doesn’t align with your needs, your career goals, or even your client’s needs or best interests. Much like a strong portfolio, you’ll likely be looking for a way to pivot. Your goal may be solidifying your legacy, opening up new investment opportunities, leveraging new technology, seeking a mentor or seeking to become a mentor, or simply looking to diversify the investment field or experience. Regardless of the driving factor, exploring opportunities to become a breakaway advisor may be appealing.

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What is a Breakaway Advisor?

A breakaway advisor is a financial advisor who is currently in a captive environment working as a W-2 employee or 1099 independent contractor for their brokerage firm, bank, IBD, custodian or wire-house.

Over the last 2 years many of us have learned that the name on the front of the building is not as important as it was 50 years ago and clients are comfortable working with their advisors in a digital capacity. 

A breakaway advisor is someone who knows their primary asset is their book of business. As such, they seek to break away from a captive environment into one with autonomy and ownership of all the work they do.

 

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Who Should be a Breakaway Advisor?

If the thought of being a breakaway advisor has crossed your mind, it’s likely worth exploring and the characteristics that make a successful advisor translate well to this kind of career move. In looking at the types of people who are excellent candidates for this shift, consider that breakaway advisors are often:

-Independent workers who prefer autonomy
-Highly motivated
-Purpose and/or goal-driven
-Very confident in themselves and their vision
-Thick-skinned and unrelenting in pursuit of goals
-Not afraid of risk

Given those characteristics, especially the purpose-driven nature of those seeking to break away, it’s important to look at purpose. Individuals who break away do have a very clear sense of why and that becomes an important driving force. The top reasons advisors break away from their firms include:

Independence

Autonomy is appealing to many.  You may want to head in a different direction; have grown weary of administrative requirements that don’t further personal, professional, or client goals; want to enjoy the freedom to cultivate relationships in a less restrictive environment; or be seeking greater flexibility in a variety of ways.

Culture and Direction Clashes

According to research by TD Ameritrade, one of the big drivers behind breaking away comes down to a misalignment between advisor and firm when it comes to corporate culture and strategic direction. RIAs, for many advisors, can provide better alignment when it comes to not just personal values, but also the values and investment goals of clients.

Compensation

In that same survey by Ameritrade, compensation packages and the ability to generate more revenue was a factor in the move for many. However, this did not appear to be as big a factor now as it has in the past.

Career Advice and Support

For many advisors, a firm just isn’t offering the support they need to further their career (mentoring) or on an administrative level. Some RIAs boast amazing perks when it comes to marketing resources and assistance with vital client communication.

Technology

To stay ahead of information and competition, a financial advisor needs access to the latest technology and the software or applications that are going to keep them one step ahead. From relationship management to forecasting tools, much of the financial world is driven these days by technology, and staying entrenched in legacy systems just isn’t appealing for a lot of advisors.

What to Consider Before You Become a Breakaway Advisor

Every advisor will have their reasons for breaking away from their firm, but every advisor will also have to confront some of the challenges. Being honest with yourself about what you want and what you need, and your motivation for leaving, can help with some of the challenges. However, you’ll want to make sure all other pieces are in place before pulling up your roots.

Some things you’ll want to consider:

1. Where you want to go- You’ve got a lot of options. Are you looking to use an RIA and set up your own shop? Join another firm or wirehouse? Find a partner?

2. Discover your priorities- For some this means independence, yet for others, it means being able to service clients in the way you’d like and they need. At many wirehouses, there’s a catalog of products and a playbook by which you service clients. If that’s not the route you want, or what’s best for your clients, it might be time to consider other options.

3. Client communication- If you’re at this stage of consideration, you already know that being a financial advisor or wealth manager is, in large part, about relationships. How you nurture and maintain them is vital. For that reason, you want to start considering how you will communicate changes to and with your clients, especially the ones you hope or know will come with you.

4. Legal and regulatory requirements- The final piece, which will discuss more below, is making sure you’ve got all your boxes checked when it comes to certifications, licenses, and compliances. Not only are there state regulations required but both the Financial Industry Regulatory Authority (FINRA) and Securities Exchange Commission (SEC) have regulations as well.

As with most career moves, curiosity and consideration must be followed by actions that ensure you’re ready to go before making any big moves or announcements.

financial advisor reads a binder full of financial industry regulations 459061095What Breakaway Advisors Need to Know About Compliance and More

Your career goals will likely impact what requirements you’ll need to fulfill for your goal of becoming a breakaway advisor. This is why you’ll want to make sure you fully consider your long-term career goals, any niche markets or clients you want to serve, and how you decide which situation (RIA, OSJ, wirehouse, independent) is right for you. However, you’ll want to make sure you have the necessary licenses and certifications to move forward.

1. Educational background- It’s not a compliance requirement, but as long as we’re discussing certifications and licenses, it’s worth reviewing your educational background as well. You’ve got your bachelor’s degree, but as you venture out it may be worth considering a master’s degree in finance, economics, or business administration.

2. Certifications and licenses- Again, this becomes incredibly important if you’re considering expanding your clients or services. For example, if you are hoping, in the future, to become an RIA yourself and open up opportunities for other breakaway advisors, you’ll want to take the Series 65 Exam or the Investment Advisors Law Exam, both administered by FINRA.

Further, the National Association of Personal Financial Advisors (NAPFA) strongly suggests having the necessary certifications to meet the needs of your business and your clients. These can include one or more of the following:

  • Certified Financial Planner (CFP)
  • Chartered Financial Consultant (ChFC)
  • Chartered Financial Analyst (CFA)
  • Personal Financial Specialist (PFS)
3. Insurance- If you venture out on your own, you’re going to want to make sure you have the necessary insurance to protect both you and your clients. Due diligence will be required if looking to join an OSJ or RIA.

First and foremost, you need errors and omissions insurance. This insurance is basic liability insurance for financial advisors (and others) that protects you from lawsuits arguing negligence or inadequate performance and is required. Your firm likely had you covered, but now you’ll need your own.

4. Compliance and Regulations- The financial industry is, for very clear reasons, governed by a long list of regulations and compliance requirements. Most firms employ a full-time compliance officer to ensure adherence and stay up to date on changes as compliances are complex and depend on the advisor’s offerings. However, there are a few basics you need to be aware of:
  • The Investment Advisors Act of 1940
    This act requires that all RIAs create and adhere to well-documented policies and procedures to prevent legal infractions. The SEC and state where you practice can assist with required compliances and details related to these requirements. There are a lot of regulations that fall under this act.

  • Rule 206(4)-7 of the Advisors Act
    This rule requires that all RIAs have a compliance officer. Due to the variety of setups within the financial firm, this need not be a full-time employee, but it can be an additional role performed by someone within the group.

  • Form ADV
    The standard 2-part form is utilized to register with both the state and SEC. However, to stay compliant, this form must be updated yearly. Part one, which is fill in the blank and multiple-choice, requires all business information including owner, clients, partnerships, business practices, and any disciplinary actions incurred.

    Part two is a narrative that requires similar information but should also include fees and conflicts of interest. There is also a relationship summary that asks RIAs to summarize the nature of their relationships with clients including the above information and more.

  • Rule 204A-1
    This rule requires that all RIAs create, maintain, and enforce a written code of ethics.
  • Rule 204-2
    This rule establishes the books and records that must be maintained and available for review. These records include the code of ethics and compliance rules noted above, but also refer to: advertising and performance records; all communications from and to the firm; records of all compliance reviews and that review procedure; all brochures and supplements that would be required for Form ADV; and any trial balances or financial statements.
  • Rule 206(4)-4
    This rule requires that firms disclose any and all disciplinary actions and legal events.

  • Fiduciary Duty
    The SEC has established that RIAs and advisors must act in the best interest of their clients as defined in section 206 of the Act.

This is just a fraction of what’s codified in the regulations for the financial services industry. It can be overwhelming and it can be a lot. It’s one of the reasons individuals looking at this route will need to make sure they consider all aspects of the move and how it may impact them and their career.

There’s no doubt that it’s an exciting decision to be considering, especially with so many opportunities and options available in the financial marketplace. If you’re ready to talk about your next career moves, get in touch with the FA Match team today. With decades of experience in financial services and recruiting, we’ve got the expertise to help guide you on your path to career freedom and success.
Download our breakaway advisor planning guide