I’m on a roll, it’s time to go solo.
I get a lot of questions from advisors wanting to know about the process. How does it work? How much does it cost? Is it worth it?
Plus, I have friends and blogging friends that are also curious and would love a look behind the scenes of starting a financial planning business.
Since it’s almost been a year underneath my belt of starting my own firm, I thought I would share a little bit of how it all went down.
Plus, I’m trying to get a sense of how much I have spent in the past year in doing so……thank goodness for my CPA!
Before I begin, let’s first start with a bit of a back story so that you can understand exactly what had happened…..
The First Step
In 2007, three others advisors and myself left A.G. Edwards and Sons, which had recently been bought out by Wachovia, which is now Wells Fargo, and started Alliance Investment Planning Group. We were an independent financial planning firm under the independent broker dealer, LPL Financial.
LPL Financial is the largest independent brokerage firm and the big difference between them and an Edward Jones or a Merrill Lynch (or any major brokerage firm), at least from the advisor standpoint, is that they allow you to create your own company at the local level. That’s why we operated as a DBA (Doing Business As) Alliance Investment Planning Group.
Essentially, in that relationship, I was an independent contractor utilizing their services and then LPL held my licenses: my Series 7, and my insurance licenses.
Keep in mind that many advisors don’t take this step although it’s becoming more popular. From a payout standpoint, it definitely pays to take some risks. Let me explain…..
With A.G. Edwards, my payout was 40%. That means for every commission or fee earned, I would give the company 60% of every dollar. That was my price for having the company name behind me, back office support, my fully furnished office (phone, computer, desk, etc), a receptionist and anything else you would need to run an office.
For many, it takes away all the added pressure of running a business so that you can just focus on your existing clients and also getting more. . Unfortunately, if you’re an obsessed entrepreneur like myself; it just wasn’t quite enough.
Moving to LPL meant that we now become true business owners. We had to find our own office building, buy our own computers, desks, printers, filing cabinets, phone systems, 47″ TV’s (I will argue to this day that it’s a necessity! 🙂 ), receptionist, etc.
Why would would anyone want to deal with that? Because the payout increased from 40% to 90%.
Yes, that’s a pretty substantial raise. What made it even more substantial is that we were able to split costs 4 ways. (We eventually added 3 more advisors so everything was split 7 ways.) That means: more money in my pocket!
My revenue increased dramatically because of this. In fact, it has increased 4-5 times more where I was at when I left A.G. Edwards in 2007.
Trapped in a Box
My practice continued to grow and honestly I had no reason to change. No reason whatsoever.
There was, however, this one little thing that occurred that eventually made me realize that change was not only coming, it was inevitable.
That “occurrence” was my blog.
As my blog continued to take off, and I got tired of the compliance hurdles, I knew that I needed to make a change. If you have a Series 7 license, anything you do online comes with great scrutiny and everything, I mean EVERYTHING has to be pre-approved first.
Pre-approval is very time consuming, but that wasn’t the most frustrating part. I was also limited to what I could say and how I could say it. As an example, my post 7 Financial Advisors I Would Like to Punch in the Face would never have been approved. Never! And that’s why I enjoyed writing it that much more. 🙂
Dropping the 7
To get the freedom that I wanted required me dropping my Series 7 and then forming my own RIA, registered investment advisory firm, with the state of Illinois. There were a lot of hurdles in my way in that I didn’t know how it all worked.
- I didn’t know if could stay with LPL Financial.
- I didn’t know if I could still be in the same office building with my current partners.
- I didn’t know how to even begin.
I had a lot of fact finding to do.
Thanks to some good contacts, I learned that it was possible to operate in the same office as my other partners, I would just to create a separate entity, hence, Alliance Wealth Management, LLC, was born.
I had to get new phone number, order new business cards, and change my literature to reflect these changes.
Now, the question was who was going to be my custodian. The custodian is the provider that offers statements, a trading platform to buy and sell investments, among other things.
LPL Financial has an RIA platform, I just didn’t know if it would all work out. Sure enough, it did, so currently, that’s who I’m using.
This was an easy transition for many of my clients since they would continue to get the same statements and most would keep the same account numbers.
So, once I found out that I could be in the same office and I could stay on with LPL as my custodian, it was time to begin the process. That’s when I contacted a compliance attorney that would set up all the documents that I would need and help me get registered with the state.
I also needed to set up a new LLC and then contacted my CPA who helped me with that process. In May of 2011, the transition was ready to begin.
Setting up Shop
As mentioned above, I end up sticking with LPL Financial as my RIA custodian. So in that regard, there wasn’t any cost in switching. A few other ones I looked at were Schwab, Scottrade, E trade, and Fidelity. The biggest reason for me sticking with the LPL was
- Less paperwork. (It still was A LOT, but less if I would completely switched)
- Easier story for my clients. (I had left A.G. Edwards in 2007 and going through another change I thought might be too much).
- Convenience of billing. (See below)
With most of my revenue coming from assets under management (I earn a % of my clients assets invested with me), LPL takes care of calculating the fee, deducting the fee, and then sending me the appropriate payment.
When I researched a few other custodians, I learned that this was something that I had to do on my own, and that honestly did not excite me at all; so as far as costs associated with being with LPL, mostly it’s just ticket charges. Mutual funds were ranked anywhere from $5 to $26.50; equity trades are approximately $15, and other investments such as bonds or UITs are somewhere in the $50 range. Note that I don’t do a lot of these trades, so I don’t know the exact cost. Most of my trading costs involve mutual funds, stocks, and ETFs.
The Major Expenses
Compliance. The first major expense was compliance. I had to find someone to set up my ADV (client brochure) and begin the process of setting up my advisory firm with the State of Illinois.
LPL had a few vendors that they referred me to, and I tried calling a few of them, but their timelines did not mesh with mine. Their costs ranged anywhere from $2000 to $5000, depending mostly on what state they were located. The ones in New York seemed to charge the most.
Through my blog, I’d met another advisor who had gone the RIA direction, and he referred me to his compliance guy that he had used. The setup fee was $3,000, and he took care of the entire process; and let me tell you, the $3,000 was totally worth it.
- Total cost: $3,000.00. Recurring cost: $2,000 per year.
LLC Setup. The second major expense was getting the LLC set up; unfortunate to live in the state of Illinois, where just to set up an LLC runs you around $450 to $500 (note heavy sarcasm). I could have set it up myself, but I honestly don’t feel comfortable, so my CPA helped in that process. Total cost there was $850.
- Total Cost: $850. Recurring cost: $250 per year.
Business Lost. The other major cost for me was the business that I lost. I had a decent amount of money tied up in variable annuities and some 529 and 403(b) accounts that I wouldn’t be able to transfer.
In addition, I had a relationship with a local credit union where I was their choice advisor that they would refer all their investment business to me. That was another relationship that I had to give up if I was going to start my own firm. While, it’s hard to tell the exact numbers; I’m estimating that I gave up approximately $36,000 every year of recurring income to go the RIA direction.
- Total revenue lost: approximately $36,000 per year.
Insurance. Oh the joys of having your own business. With my profession, you need both business liability insurance and professional liability insurance (E&O). The business liability runs we $1,470 per year (that also includes worker’s comp for my new employee) and $3,654 per year for E & O. The E & O is about $1,000 more per year than I was paying with LPL but I decided to go with a carrier that specializes in investment advisers.
- Total cost: $5,124 per year. Recurring: same.
Office expenses. Since the office was already set up, we already had phone systems intact, and the way that it worked before was that we all just split the phone bill equal ways with my other partners. Now that I had to have my own dedicated phone line, I had to add two full extensions and a fax line for my new office.
Luckily, we were able to program those new lines on the existing phone systems so there wasn’t the cost of having to buy new phones.
Furthermore, one of my partners in the office has a good friend who works for the local phone company, so I was able to get the installation costs waived, which was a big savings, but having to get my new phone systems still added on an additional $140 a month to have my own phone system.
- Total cost: $140 per month. Recurring: same.
New fax line. One area where I was able to cut costs was the fax line. I figured that I was paying approximately $30 a month just to have an open fax line, and that was without sending any faxes. I looked into some online providers, and the one I settled on was Nextiva. For $60 for the entire year – $5 a month – I am able to have a fax line that works directly with my email system. Thus far it’s been very reliable, and I would definitely recommend it to any small office that needs a fax line but doesn’t send hundreds of faxes per month.
- Total cost: $60 per year. Recurring: same.
New letterhead and business cards. Since I had a new business name, new phone number, and new email address, I had to get new stationary. I didn’t change the logo that much, so our logo graphic designer was able to make changes fairly easily. Overall, I think I had to pay about $200 to get new stationary and business cards, which wasn’t that bad.
- Total cost: $200. Recurring: none.
New website. Now that I had a new business, I knew that I had to have a new website, especially one that looks slick, but I wasn’t crazy about having to pay $300-$500 to set this up. I was lucky, in that a friend of mine offered to essentially set it up for free. I already purchased the domain for $10, and I got a snazzy-looking website. Nothing like saving a little bit of money!
- Total cost: $10. Recurring: $10 per year.
Banking costs. The other most annoying fee is with our local bank. We currently have free checking with compete online access, and my wife is a big fan of being able to pay stuff online; but now, instead of getting paid as an individual, I get paid into my business account, Alliance Wealth Management LLC, and it has its own separate tax ID number, my bank does not allow to do online transfers when you have two tax ID numbers. (Side note – I also have another LLC set up for my online business. )
To be able to transfer money between the three different tax ID numbers, the bank charges us $35 a month to do so. Right now, we are paying it, as it is a convenience, and we’ve been with this bank since I was sixteen years old. I will say that we are exploring other options.
- Recurring cost: $35 per month.
The current rent: Before beginning the transition, my total overhead was $1075 per month. I am sure many people would look at that and laugh. Yes, I live in the Midwest where things are cheap.
Since I’m still occupying the same office, I have the same printer, same desk, computer, bookshelf that I had before, and so there weren’t any greater expenses on that end.
We have a 3500-square-foot building that we pay just about a dollar a square foot a month for rent. We also have one assistant and all the typical expenses you would have in a professional office. All those expenses are split seven ways, which makes my share ridiculously inexpensive. Those costs include the other phone system, postage, Direct TV – that’s for my 47-inch television in my office – heating and air condition, electricity, taxes, and insurance.
- Recurring Cost: $1075 per month.
Other Costs to Running a Financial Planning Practice
What I’ve pretty much outlined up above are the essential costs that I must have to run the business. These others are add-ons, meaning that I could probably get by without them, but they definitely make running a practice much easier:
1. Blue Leaf: Blue Leaf is an online account aggregation program that I’m testing. It gives my clients the ability to log in and sync all of their accounts together, whether they be with me, their existing 401(k), or any statements held elsewhere. Cost: $250 per month.
Try Blueleaf for free. You can test drive their service and if you decide to sign up with them, mention me and you’ll get 2 months for free.
2. Marketing Library: This is an article-writing provider that runs me $20 per month. I use this for newsletters to existing clients as well as getting article ideas for the blog. Cost: $20 per month (Cancelled as of 06/06/2013)
3. Morningstar: With this Morningstar subscription, I am able to do detailed analyses of existing client portfolios as well as break down potential new client portfolio. Cost: $160 per month (Cancelled as of 06/06/2013)
4. Erado: Erado is my email archiving company that houses all my emails for compliance purposes. Cost: $375 per year
5. Arkovi: Arkovi is a social media archiving company. They keep a log of all my social media efforts between by RSS feed, Facebook, UTube, LinkedIn, and everything else. Cost: $40 per month
6. The Birthday Company: This is a service that I use to send out birthday cards to existing clients. It’s an automated process that I enjoy, and I get positive feedback from all my clients. Cost: Approximately $15-$20 per month
As a CERTIFIED FINANCIAL PLANNER™ professional, I also have my dues that I have to pay. Total Cost: $325 every 2 years
I’m also a member of the Financial Planning Association. FPA is the largest membership organization for personal financial planning experts in the U.S. and includes professionals from all backgrounds and business models. Total Cost is $395 per year.
Lastly, I have kept my insurance license open and that costs me roughly $180 every 2 years.
As you can see, it’s not cheap to start your own financial planning firm, but I can say that’s it definitely worth it. I’m exactly where I needed to be to grow my practice and my blog on my terms.
The one cost I haven’t mentioned yet is hiring an employee which I just did October of last year. That has brought on a whole new set up challenges, but once again has been worth it. I’ll have to share those details in another post. 🙂
Are you considering starting your own business? Are you just looking to make some more great short term investments and start up a business in the near future!? Share your comments below.