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The Ins and Outs of Breakaways with Matt Sonnen

This post is part of the Expert Interview series, which showcases some of the smartest thinking in the financial services industry on issues that matter most to advisors. If you would like to suggest a speaker or topic, please email your ideas to:

Matt Sonnen is CEO of PFI Advisors, a leading operations and technology consulting firm. PFI Advisors provides white-glove transition support for billion-dollar breakaway teams. Sonnen previously worked at Merrill Lynch, Luminous Capital, and Focus Financial Partners. Recently, he sat down with Folio President Greg Vigrass for a wide-ranging conversation on breakaways (starting one, purchasing one, or selling one) and technology.

Vigrass: With all due apologies to The Clash, the first questions advisors should ask when considering breaking away are: should I stay or should I go?

Sonnen: I am very honest with advisors that not only is it a hassle to get an RIA started, but it's also a lot of work to run a firm. Once you've left your current employer, HR is your responsibility. Compliance is your responsibility. You have to figure out office technologies, phone systems, computer systems, etc. Start-up capital is needed. So, a lot of advisors say it's just easier to stay.

But obviously, there are a lot of reasons to go. The long-term economics do make sense. The compensation grid always seems to be moving against the advisors at large firms. If you're at one of these firms, you're at a fixed payout — call it 40%. Whether you have $100 million or $1 billion in AUM, you’re still at a fixed 40% payout. When you own a business, you will get more profitable as your business grows. Your expenses do not go up dollar-for-dollar, but your AUM does.

And even if the economics are equal, it's just cool to own your own firm.

Vigrass: And the other question is: If I go, how do I do it?

Sonnen: There's a slew of ways you can get into the independent space. You can leave the wirehouse world and join an existing RIA. You can be an advisor in that RIA and just plug into existing infrastructure. You can also open a branch office for a larger organization. Or you can just start a firm from scratch, which is what we specialize in. But remember: "With great power comes great responsibility."

Vigrass: How does technology play a role?

Sonnen: I believe the technologies available to RIAs are more nimble and more sophisticated than what's offered in the wirehouses. Even if the wirehouses claim to have “RIA technologies,” they’ve trimmed them down quite a bit. It's the same logo, but it's not the same product. So the technology gets better in the independent space. As an independent, you're going to have access to more products and services to offer clients and prospects.

Vigrass: Earlier this year Investment News ran an article you wrote about alternative investments. You dispelled a lot of the myths about offering alts if you're a breakaway. Can you tell us more?

Sonnen: Everybody is very nervous about the impact of robo advisors and what it’s going to do to human advisors and, more importantly, to advisor fees. I think a lot of it is fear mongering. But say you are an advisor in 2018 and you're still selling a 27-stock portfolio which you consider your value proposition. You're going to run into problems with robos because everyone can buy performance now relatively cheaply. You need to offer something besides just investment performance. Alternative investments are key. They’re not suitable for every client, but you need to present something non-traditional and hopefully offering a higher return. Clients are not always looking to run their portfolios through their iPhone: they're looking to their advisors to find them sophisticated solutions.

Vigrass: I've heard you say before that established advisory firms struggle with technology in three primary areas. Is there an area they struggle with the most? Why?

Sonnen: I’ve broken it down into three categories: Too little, too much, and just wrong technology. The biggest problem I see is too much technology. Advisors get sold on the next shiny object and keep adding technology. I like simplicity. Simplicity means lower costs and great efficiencies in client service.

Vigrass: Now we will be talking about buying and selling a breakaway. How should advisors market their RIA to prospective buyers? Is it necessary to upgrade your technology first?

Sonnen: I recommend that you keep your technology as is. It’s sort of like real estate: don’t bother to upgrade your kitchen when you are trying to sell your house. The new owner will just come in and rip it out and put in a new one.

Vigrass: On the flip side, what are the red flags for firms looking to make an acquisition?

Sonnen: From that perspective, the buyer needs to spend a lot of money on technology. The M&A space is competitive right now. You need to be a “pretty buyer.” And so you do need to make some technology investment if you want to get into the acquisition game. You need to be convincing as a buyer that you have infrastructure in place. In addition, your investment philosophies and geographies have to match up.

Want to hear more from Matt Sonnen? Listen to the full interview.


Neither Folio Institutional, its parent, FOLIOfn Inc., or sister companies have a contractual relationship with today's speaker or his firm. Folio has not compensated our speaker in any way for this interview.

Breakaways Expert Interview