Financial Advisors:

What’s The Risk Of Staying Put?

Financial Advisors:
What’s The Risk Of Staying Put?

   21st May 2023 by Gareth

   21st May 2023 by Gareth

Many financial advisors express reservations about switching firms due to perceived risks. However, it is important to recognize that there are also risks associated with staying in one’s current place. Undoubtedly, any move entails certain inherent risks. These include potential financial implications such as leaving behind opportunities or starting anew, the possibility of client portability falling short of expectations, interrupting established momentum, and legal concerns surrounding employment agreements and adherence to protocols.

The Two Paths Ahead

Despite the risk perception, thousands of ambitious advisors change firms or go independent each day without being deterred by these potential risks. They do their extensive research and planning, giving them the confidence their efforts will lead them to a new professional environment where they can grow more rapidly and be of greater service to their clients.

But what about those advisors who choose to remain in one place for the long haul?

Typically, they do so due to reservations that the perceived risks associated with a move outweigh the advantage of leveraging the longstanding relationships they have cultivated at their current firms. This is particularly true of advisors who have been with their firm for over decades. They get referrals often. They know who to contact when they need an exception. Most importantly, they are highly respected and have the ear of the senior most persons in their firm.

The Risks of Staying Put

While such lifers find comfort in their current position — every now and again an unexpected change in circumstances reminds them that nothing is forever. No one knows for certain what the future holds, and the risk of the unknown applies whether you stay put or change your station. The risks of sticking with the status quo don’t end there.

1. Loss of control

There is a growing trend of large wirehouses wanting to mitigate risks and streamline their businesses as a result. This is thought to result in increased bureaucracy, excessive management, and more pressure on advisors to sell the firms various products and services. In effect, it is increasingly the firm that has major control (directly or indirectly) over the advisors’ services.

2. Suboptimal product recommendations to clients

Firms are increasingly mandating advisors to choose from a select number of possible recommendations to clients. This means that an advisor cannot simply pick what they believe is the best set of products for a particular client and are thus restricted in their services. Furthermore, in the event that an advisor acquires knowledge about an improved approach to catering to clients, there is a further risk of undermining their own credibility and trust when presenting proposals for prospective ventures or striving to uphold ongoing partnerships.

3. Devaluation of the advisors’ business

Advisors have been enjoying favorable market conditions lately, often referred to as a seller's market. This means that there are abundant opportunities, and businesses are being valued at their highest points. These opportunities can come in the form of forgivable notes from traditional W-2 firms, retirement programs within their own firms, or sales to independent firms on the market.

However, there is a concern about potential future scenarios that could impact advisors' capabilities and restrict their ability to deliver optimal performance. For example, if firms impose additional limitations or tighten their grip on advisors' businesses by leaving the Protocol for Broker Recruiting, strengthening employment contracts through sunset programs, or seeking to establish deeper control over advisors' practices, it may become more challenging for advisors to move their businesses and maintain portability.

Consequently, an increase in advisors entering the market and an oversupply of services can lead to a change from a seller's market to a buyer's market. This shift may result in a decline in the value of advisors’ businesses, as well as a reduction in the price that firms are willing to offer for them.

4. Opportunity cost

If the decision to remain with one’s current firm is based on the understanding that doing so aligns with the advisors vision, values objectives, then it is justified to stay put. However, if it is mere risk aversion, driven by the belief that no superior alternatives exist, it poses a risk of another kind: that of missing opportunities that almost certainly exist elsewhere. There is almost no excuse not to do thorough research and due diligence into other options elsewhere, regardless of whether one ends up choosing an alternative.
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