Deciding to switch firms can be one of the most rewarding choices an advisor can make in his or her career. However, the decision comes with a lot of responsibility. Transitioning an existing client book of business is a substantial undertaking. It requires vigilance, time, and patience. Any number of things can derail the process.
As a transition consultant who networks with individuals in the financial services industry daily, people often like to tell me their transition horror stories, and they don’t often disappoint. I once had an advisor tell me that his new RIA operations team accidentally sent ALL his client onboarding packets to his biggest client’s house. Stacks of boxes with other people’s sensitive financial information dropped on the front porch.
Things can go wrong. Some issues are unavoidable: human error, technology mishaps, contra firm resistance. However, many major issues can be prevented with proper preparation. My motto has always been “prepare for the worst and hope for the best”.
I’ve broken down the five most common pitfalls I see during transitions and provided tips on how to avoid them.
Pitfall #1 – Skipping the Legal Advice
It is extremely important to seek legal guidance in ANY transition. You may think you have the right to solicit your clients, but the truth is, it depends on the contract you signed when you joined your current firm. Having an attorney review that contract and break down the specifics will help you avoid legal pitfalls, which are the most difficult issues to overcome (and the most expensive).
I once had an advisor tell me that his clients were 100% his to solicit and there were no legal barriers for his transition. After asking a few more questions, I discovered that his assumptions were based on an unwritten agreement he had with his manager. In reality, his signed contract stated that the portion of his book that was “gifted” to him upon inception was covered by a strict non-solicitation clause. Those clients represented 50% of his revenue.
Because the financial services industry has been slowly shifting more towards the RIA model in recent years, big name firms are losing top talent. Litigation is being used to discourage advisors from jumping ship. Having deep pockets means being able to take legal action even when the odds are not in your favor. The distraction alone can be detrimental to an advisor’s transition process. At the very least, a nuisance.
Pitfall #2 – Making Assumptions
You know what they say about making assumptions. The warning applies to transitions as well. Don’t assume you know everything, even if you’ve been through a transition before, or know someone who has recently. No transition is ever the same as the next, and there are hundreds of factors to consider when making a move. I learn something new during every transition I assist with. I once had a client assume that his current “boss” was going to be happy for him when he announced that he was starting his own RIA. He claimed that they’d been friends for years and their personal relationship was stronger than their professional one. I tried to warn him that the announcement might not go down the way he anticipated. I was right. His employer freaked out on him and started making threats, in a public place. Then, he and his team sent ill-worded solicitation letters (wrought with typos) to every client, directly violating the terms of their contract. In the end, those actions worked against him, and clients gladly joined the advisor at his new firm. However, it made the process more stressful for the advisor and more confusing for the clients.
Pitfall #3 – Inadequately Staffing Your Team
It’s important to understand that you are the only person who can control the overall result of the process. You may get support from multiple sources: your custodian’s transition support team, the operations team of the firm you’re joining, your attorney, and/or a compliance consultant. However, they each have their own agenda and are only going to provide support and guidance for the portion of the process they specialize in. It’s your responsibility to bring those pieces together and execute them individually as part of a whole. Especially, if you’re starting your own RIA.
Executing a transition on your own is a tough task. The most successful transitions I’ve experienced are those that have multiple team members working together towards a common goal. In a typical transition, the following parts need to be played:
- The Explainer
- The Gatherer
- The Processor
- The Resolutionist
- The Tracker
The Explainer is the person who is going to be client-facing. The one calling clients and explaining the situation, answering questions, setting expectations, and managing relationships. Typically, this is the servicing advisor for each household.
The Gatherer is the person collecting client information. Depending on the situation, you and your team are most likely going to need information from clients. Data points you weren’t allowed to bring with you. At the very least, confirmation of existing information.
The Processor is the person doing data input, paperwork generation, and packet delivery. These tasks are mostly administrative and operational and can be done by support staff, or outsourced.
The Resolutionist is the person handling issues. Someone who can focus on reconciliation and follow up.
The Tracker is the person focused on the overall picture. Someone who can keep track of everything that’s been done and everything that needs to be done.
I’m not suggesting that all these parts be played by different individuals. There will naturally be some overlap, depending on the depth of your team’s bench and the size of your book of business. Consider the tasks at hand and staff your team appropriately.
Pitfall #4 – Failing to Ask the Right Questions
This is the most common pitfall I see in transitions. As I mentioned earlier, no two transitions are created equal. I’ve been doing this for almost 15 years, and I learn something new every time. Having multiple information sources with various agendas makes it difficult to know what to expect overall. Asking the right questions is the only way to get the answers you need to make informed decisions and put together a successful game plan. Start with basic questions. The answers you get will help you think of more specific questions. The more, the better. If you need a place to start, check out my other blog post “The Key to a Successful Transition is Asking the Right Questions.”
Pitfall #5 – Neglecting to Track Progress
Tracking progress during a transition is arguably the most important thing you will need to do. It’s why I suggested having someone be The Tracker. It’s easy to think that you can just start with your biggest clients and work your way down the list, sending paperwork for signatures and processing forms as they are completed. Unfortunately, it’s not that simple.
The more complex your book of business, the more complicated the transition process. Some account types require a different account opening process. Securities-backed loans, for example.
The data collection process can slow things down as well. If you’re utilizing a custodian that requires contra firm statements for account transfers, you might be relying on clients to send you copies of their statements. It’s easy to manage a process when you’re waiting on two or three clients to send you something. It’s a different story when you have 100 clients sending you requested documents all at the same time. Having a “master spreadsheet” that you can update as you go along is crucial to managing the success of the process.
The Takeaway
A transition is a project. One with many moving parts, numerous parties, multiple agendas, and tons of stress. Understanding what can go wrong is an important step in the preparation process. By recognizing some of the common pitfalls, you can actively work to avoid them. Thus, giving yourself and your team a higher likelihood of success.
