Going Independent as a Financial Advisor: Steps to Success

Leaving a larger firm to start an independent financial advisory practice is a significant decision that brings both opportunities and challenges. While independence offers greater control over client relationships, business decisions, and revenue, it also requires careful planning and execution to ensure success.

Several key steps contribute to a smooth transition. From legal and regulatory requirements to client retention and marketing, each factor plays a role in building a sustainable practice.

Registration Processes

One of the first steps in establishing an independent advisory firm is navigating regulatory requirements. Advisors must determine whether to register with the Securities and Exchange Commission (SEC) or a state regulatory authority, depending on assets under management (AUM). Firms managing $100 million or more in AUM must register with the SEC, while those below this threshold typically register with state securities regulators. Some states also require SEC-registered firms to file additional notice filings.

Compliance with the Investment Advisers Act of 1940 is essential, covering fiduciary responsibilities, advertising rules, and disclosure requirements. A key filing is Form ADV, submitted through the Investment Adviser Registration Depository (IARD). This document consists of two parts: Part 1, which provides regulatory details, and Part 2, which outlines the firm’s services, fees, and conflicts of interest. Inaccurate or outdated filings can result in fines or enforcement actions.

Advisors offering brokerage services or commission-based products may need a Financial Industry Regulatory Authority (FINRA) license, such as the Series 7 or Series 65, depending on their business model. Those transitioning from a broker-dealer must file Form U5 to terminate prior registrations and submit a new Form U4 under the new firm. Firms must also comply with anti-money laundering (AML) regulations under the Bank Secrecy Act, implementing policies for client due diligence and suspicious activity reporting.

Choosing a Business Entity

Selecting the right legal structure impacts taxation, liability protection, and operational flexibility. Common options include sole proprietorships, limited liability companies (LLCs), S corporations (S-corps), and C corporations (C-corps).

A sole proprietorship is the simplest structure but offers no liability protection, meaning personal assets could be at risk in legal claims or business debts. This option is generally less favorable for financial advisors due to fiduciary responsibilities.

LLCs provide liability protection while allowing pass-through taxation, meaning profits and losses flow directly to the owner’s personal tax return, avoiding corporate-level taxation. Advisors anticipating business growth or planning to bring on partners often choose this structure due to its flexibility.

S-corps also offer liability protection and tax benefits. Owners can classify themselves as employees, drawing a reasonable salary while taking remaining profits as distributions, which are not subject to self-employment taxes. However, S-corps have restrictions, including a 100-shareholder limit and a requirement that all shareholders be U.S. individuals.

C-corps are less common for independent advisors due to double taxation—profits are taxed at the corporate level (21% as of 2024) and again when distributed as dividends. However, they may be suitable for firms planning to reinvest earnings or attract institutional investors.

Setting Up Operational Infrastructure

A well-structured operational foundation ensures efficiency, compliance, and scalability. One of the first considerations is selecting a portfolio management and reporting system. Platforms such as Orion, Black Diamond, and Tamarac offer performance tracking, billing automation, and client reporting. The right system depends on integration capabilities with custodians, cost structures, and user experience.

A reliable custodian is essential for holding client assets. Custodian selection affects trade execution efficiency and client service. Major custodians like Charles Schwab, Fidelity Institutional, and Pershing provide independent advisors with trading platforms, compliance support, and investment research. Fee structures vary, with some custodians charging asset-based fees while others generate revenue through order flow or lending practices. Conducting due diligence on service levels, technology offerings, and hidden costs is necessary.

Cybersecurity and data protection must be prioritized, particularly given the SEC’s increased scrutiny under Regulation S-P and Regulation S-ID. Implementing multi-factor authentication, encrypted client communication channels, and secure document storage solutions mitigates data breach risks. A written information security policy (WISP) ensures compliance with federal and state regulations.

A client relationship management (CRM) system is another key component. Platforms such as Redtail, Wealthbox, and Salesforce Financial Services Cloud help advisors track client interactions, automate workflows, and manage compliance documentation. Integration with financial planning software like eMoney Advisor or MoneyGuidePro enhances client service by aligning investment strategies with long-term financial goals.

Transferring Clients and Accounts

Retaining clients during the transition requires careful communication, legal awareness, and strategic execution. Client relationships are often governed by agreements with the advisor’s former firm, which may include non-solicitation or non-compete clauses. These restrictions vary depending on the employment contract and whether the advisor operated under the Protocol for Broker Recruiting. If the former firm is a Protocol member, advisors can take basic client contact information. If the firm is non-Protocol, even informing clients of the move could lead to legal action. Reviewing employment agreements with a securities attorney before contacting clients is necessary.

Once legal considerations are addressed, a structured client outreach plan ensures a smooth transition. Personalized communication explaining the benefits of the move, such as increased flexibility in investment choices and reduced conflicts of interest, can help ease client concerns. Transparency about account transfer logistics, potential fees, and any changes in service models builds trust. Most client assets are moved through an Automated Customer Account Transfer Service (ACATS) request, which typically takes six to ten business days. Some assets, such as annuities or proprietary funds, may require additional processing time.

Structuring Compensation

Determining how to structure compensation influences revenue stability, client perception, and regulatory compliance. The two primary models are fee-based and commission-based compensation, with some advisors opting for a hybrid approach.

Fee-based compensation typically involves charging clients a percentage of assets under management (AUM), a flat fee, or an hourly rate. The AUM model is the most common, with fees generally ranging from 0.50% to 1.50% annually, depending on account size and service complexity. This structure aligns the advisor’s incentives with the client’s financial growth. Alternatively, flat fees and hourly rates provide transparency and appeal to clients with lower investable assets. Advisors must ensure fees are reasonable and clearly disclosed in Form ADV Part 2A.

Commission-based compensation involves earning revenue from product sales, such as mutual funds, annuities, or insurance policies. While this model allows for immediate income generation, it introduces potential conflicts of interest, requiring strict adherence to Regulation Best Interest (Reg BI) for broker-dealers or fiduciary standards for registered investment advisors (RIAs). Hybrid models, where advisors charge both fees and commissions, provide flexibility but require careful disclosure to avoid regulatory scrutiny. Advisors must also consider operational costs, such as technology expenses, compliance fees, and custodian charges, to ensure profitability while maintaining competitive pricing.

Marketing and Brand Building

Establishing a strong brand presence is necessary for attracting and retaining clients. Independent advisors must differentiate themselves by defining a clear value proposition, targeting a specific client niche, and leveraging digital and traditional marketing strategies.

A professional website serves as the foundation of an advisor’s brand, providing essential information about services, fees, and investment philosophy. Search engine optimization (SEO) strategies, such as publishing educational blog content and optimizing for relevant keywords, enhance online visibility. Social media platforms like LinkedIn and Twitter allow advisors to engage with prospects, share industry insights, and establish thought leadership. Compliance with SEC marketing rules, particularly regarding testimonials and performance advertising under the 2021 Investment Adviser Marketing Rule, is necessary.

Networking and referral programs remain powerful client acquisition tools. Building relationships with attorneys, CPAs, and other professionals can generate high-quality referrals, while client appreciation events foster loyalty. Public speaking engagements, podcast appearances, and media contributions further enhance credibility. Advisors should also track marketing return on investment (ROI) using metrics such as client acquisition cost (CAC) and lifetime value (LTV) to refine strategies and allocate resources effectively.