The Cost Of Inertia
By Steven Dudash
March 25, 2015

Wirehouse advisors often complain about being part of unwieldy company bureaucracies. They say their executives have a limited understanding of how to best serve retail investors. They also complain about unreasonable sales quotas and the pressure they face to push proprietary products.

But many don’t consider a jump to the independent space for one reason: simple inertia. Doing nothing for now seems to offer them greater safety. Any recruiter can testify to this.

The transition to a new broker-dealer and custodial platform can pose some near-term logistical hurdles, true, but these are usually not much of a deterrent for advisors considering a move. The far bigger issue is money. They simply believe the financial risks are too great. At the end of the day, the safety of a W-2 paycheck every two weeks is hard to give up.

But this mind set, while understandable, is remarkably shortsighted and can cost successful advisors millions in compensation over their careers. Inertia has quantifiable financial costs, too, and every wirehouse advisor should know what they are.

The Fundamental Question

Those seeking independence need to ask themselves a fundamental question: “Will at least 60 percent of my book of business come with me in the first year?” Sixty percent is what it will take just to break even, and you’ll need more than that to thrive.

Obviously, it’s impossible to know beforehand if you can get 60 percent. But take a good, hard look at your book and be honest and realistic about your clients. Will they follow you or won’t they? If they won’t, the financial benefit of going independent is limited. Actually, it’s worse than that — you won’t survive.

But if you can confidently say that 60 percent of your clients will follow you to a new firm, then let’s take a look at some of the financial costs successful and experienced wirehouse advisors are incurring by choosing not to go independent.

The Real Costs Of Inertia

First, the “front-end” costs. Wirehouse advisors who generate $1 million in revenue typically capture about 45 percent of that before taxes. On the independent side, that same advisor can take home as much as 80 percent, a $350,000 difference per year.

Of course, an independent advisor has additional needs, including office space, back- and middle-office support systems and all the other turnkey platforms experienced professionals need to provide exceptional client service.

But thanks to well-resourced independent broker-dealers and super-OSJ groups, it’s very possible that transitioning advisors can gain access to much the same level of services and support, along with office space, at a cost of only 10 percent to 20 percent of total pretax annual revenues. So for independent advisors who do $1 million in revenue (assuming they capture 80 percent), this means it’s possible that their initial net take-home pay is 20 percent to 30 percent higher than that of a wirehouse advisor with the same level of production.

And given the freedom and flexibility that exists in the independent space, it’s not unusual for highly motivated former wirehouse advisors to recapture the total value of their books of business 12 to 24 months after completing the transition — which will only further elevate the level of annual compensation.

The “back-end” costs of forgoing independence are just as great. When it’s time to call it a day and retire, independent advisors, as true owners of their books, can monetize client relationships in a onetime liquidity event in ways that wirehouse advisors can only dream about.

A successful independent advisor who produces close to $1 million in annual revenue can typically sell his or her book for around two times its trailing-12-month revenue. And assuming that the current trend persists and buyers significantly outnumber sellers in the future, the potential for realizing significant value via the sale of an independent practice will likely only grow.

Wirehouse advisors — who do not technically own their books of business and cannot sell them on the open market — do not get this opportunity. And because of that, they could be passing up an additional $2 million (if the advisor generates $1 million in revenue each year). What’s more, the sale of that practice is taxed at capital gains rates, which are far below the top marginal income tax rate of 35 percent.

There’s no question that inertia is frequently the easiest course of action for successful and experienced wirehouse advisors, at least in the near term. But as with most things in life, near-term comfort comes with long-term financial costs. It’s important that wirehouse advisors equipped to make the jump to independence now fully appreciate those costs.

Steven Dudash is president of IHT Wealth Management (, a Chicago-based team of experienced wealth management professionals.