How Much Independence Do You Need?

"You may be an ambassador to England or France

You may like to gamble, you might like to dance

You may be the heavyweight champion of the world

You might be a socialite with a long string of pearls

But you're gonna have to serve somebody, yes indeed You're gonna have to serve somebody Well, it may be the Devil or it may be the Lord But you're gonna have to serve somebody" - Bob Dylan

Recruiters and many firms drone endlessly about why you need to be "Independent." What does that even mean? Independent from who? Independent from what? What kind of Independence? Independent alone or Independent in some structured collective?

The promoted narrative runs so deep I regularly hear: "I am thinking about being a RIA." When asked why the response is often "Because I want, what I understand, is the ultimate freedom."

My goal today is not to belittle the business of recruiting or headline the education desperately needed. My goal is to expose the obscured limits of touted options and the often neglected necessity of diagnosing NEEDS.

I think you all appreciate there is no such thing as limitless Independence in our profession. We all will always have an implied or explicit fiduciary duty to clients. Associated Broker Dealers, and ever necessary securities custodians, will always have business model and structural limits. Regulators will always regulate progressively with guardrails, razor wire and firing squads. Those bounds are as firm as the rule of gravity. To break fully free you would have to leave the profession. My geophysicist followers are free to point out one can never leave all gravitational force only lessen the impact by making distance from the orbiting masses. Next time we meet up in bar we can debate black hole theory...

What must be appreciated is Independence and employment come in flavors. The lines of demarcation are far from clear and the features, and detractions, are different in their impact. Let me give a dramatic example:

There is one large, and several regional firms, that recognize the advisor-client relationship is sacrosanct. If you ever leave they will not pursue your relationships. There is a large Independent Broker Dealer that affords no such protection. If your "franchise" is canceled by you or them they will solicit your clients like a pack of hungry badgers! There are several supported RIA affiliations that take it to the limit. If you ever depart their bubble not only will they chase your clients. You are contractually prohibited from "announcing, soliciting, inducing or ACCEPTING" the former clients at your new firm... Not knowing which will do what is a wee bit important to know before you spend 100 days of due diligence and being cajoled into doing something that is a disaster in the making!

The above examples can be deal breakers but what of the more nuanced items. As an independent or a RIA how are you paid and what are you charged? Some firms, like the cable company "bundle" platform charges for technology, research, quotes, insurance, managed money accesses, etc, etc... Cheap and easy, maybe. But if the services don't fit your needs and you have to add costly features is it still a bargain? Other firms have a full A La Carte menu and perhaps multiple custodial options all at different pricing values. Full unbundled customization might seem appealing but not if you need a bookkeeper just to keep track of the fees, charges and tariffs while paying for overlapping services you can't breakout and may not need.

I can ramble for pages on details that are often if not always missed by advisors and frequently their guides as well. We have not even talked about the much abused "culture" and "fit" differentiations. I say abused because culture and fit are endlessly and continuously evolutionary. There is no constant. What has to be measured is historic direction. Where did your considered firm come from, how were they mutated and where are they going or think they are going? Is their plan plausible and match your own?

The last shinny "new" object, I can't ignore, is equity. Of late every new sexy offering includes "equity." I admit I am a pundit. Properly structured, immune to dilution, well priced equity that fairly tracks value to corporate success is brilliant. My problem is that in four decades of observing, and participating in, these structures I have never seen one that fully met its typically lofty promise. You need to have the capacity, and support to fully deconstruct every equity offering. Much like a pre-IPO funding investment, success can only be vaguely predicted if you know the whole company in detail. Good rule of thumb, based on historic results, is to discount the promise by 50% and then apply a time value discounting model to the surviving half compared then to a comparable all cash offer. If equity is a cherry on top go for it. If it is the critical end-game value it probably is not for most advisors.

The landscape is complicated and confusing. But to close the circle on this rant it should be obvious that no matter the decision and resulting choice you can never be a monolith. There are always "interested" parties. Accept that. What we are all striving for are partners that share our ethics, values, professionalism and yes our goals.

If you're gonna have to serve somebody make sure the one you serve has to serve you as well. If the balance tips to your favor, BRAVO!