Kitces & Carl Ep 61: Taking The Leap To Launch When You Don’t Have The Capital To Finance It

Kitces & Carl Ep 61: Taking The Leap To Launch When You Don’t Have The Capital To Finance It

Up until the last twenty years or so, it was relatively uncommon for financial advisors to strike out and launch their own practice without the support of a larger advisor platform (e.g., a broker-dealer or insurance company). However, technological advances, a shift towards holistic financial planning (versus the more traditional transactional model to which broker-dealers and insurance companies were historically attached), and evolving fee models, have come together to make it exponentially easier for advisors to become entrepreneurs (particularly under the independent RIA model). However, one thing that hasn’t changed is that, even for advisors who are starting from zero, there is still a need to be sufficiently capitalized, not only to actually open shop, but to survive the first few years with little-to-no income as the advisory business ramps up. Which means that insufficient starting capital remains a common blocking point for advisors who may otherwise be ready to launch their own practice.

In our 61st episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss why a lack of capital may not always be the root cause for an advisor’s reluctance to start their own business, a key mindset shift advisors can make to get a little more comfortable with the risks associated with being an entrepreneur, and some practical tips for sourcing the necessary funds to launch.

As a first step, it’s important to consider that, for advisors who have never done it before, the thought of starting a business can be scary. As while a lack of capital may actually be a blocking point, sometimes the real reason advisors are reluctant to begin the process of starting their own practice is simply that they’re scared that they’ll fail. Which, of course, is perfectly normal. Being ultimately responsible for every aspect of running a business is daunting for many, and it’s important to understand that there’s more than one way to have a successful and fulfilling career as a financial advisor that doesn’t involve starting a business from scratch.

However, advisors who are ready to take the entrepreneurial fork in the road, but are still concerned about not succeeding, can always take a moment to consider what the worst-case scenario really would be. After all, advisors who are ready to “go solo” should already have the technical and interpersonal skills to both bring in new business and provide great service to clients. Which means that, at the very worst, if the business proves to be unsuccessful, then the next logical step is to simply go find a job as an experienced advisor at an established firm (for which there is only a growing demand for hiring and a shortage of talent to fill the roles), and earn a healthy salary to get back on financial track!

And when it’s time to solve the “not enough capital” puzzle, there are a few options. As a first step, advisors can leverage their skills (and natural proclivities) to plan for their goal of saving and/or raising the necessary capital. And if time is of the essence, then they can follow in the footsteps of other successful advisors who have either taken out a loan, found someone to partner with, or taken on equity partners.

Ultimately, the key point is that the reason that advisors hesitate when launching their own firm is often less about not having enough capital, and more about being worried about things not working out. But, by acknowledging that it’s perfectly normal to be anxious about starting a business, and considering the worst-case scenario (and how there’s often still a very strong fallback choice!), advisors can make a more informed decision about whether or not they truly want to hang their own shingle. And if they do, there are several ways to source the necessary capital for those who conclude that they really do want to scratch that entrepreneurial itch.

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