Broker-Dealer consolidations are the new normal in today’s investment news headlines. Eight to ten years ago, a broker-dealer merger would make headline news, and advisors would exit as quickly as possible to a new B/D. However, today’s marketplace is much different, and broker-dealer selection is somewhat limited. Instead of jumping ship, many advisors conform to the times and stay in their seats.
Waiting may be the right decision for the short term, but not so much for the long run.
Private equity firms have saturated the independent broker-dealer market, with many having the same intention. Buy low, sell high- and repeat. Many independent broker-dealers are owned by PE firms who promise little to no disruption of daily tasks when bought and sold, but that’s only partially true. Financial advisors live in a world of disclosures, legacy manuals, and corporate hierarchy, which will eventually roll onto the desk of every advisor and admin owned by a PE-owned broker-dealer.
No broker-dealer can avoid any of these issues with FINRA and the Department of Labor around every corner.
Your firm being bought out may not affect your client interactions in the first year. Still, eventually, over time, you’ll experience the ever-changing regulation and corporate ideologies that come with each new change of ownership, but that may be the same anywhere else, including privately owned broker-dealers.
Privately owned broker-dealers seem like the safest choice in our current environment, and that may be true for now. Many broker-dealers who have been privately owned promised never to sell and have had to backtrack all their previous statements. With that said, there is still a handful of quality and privately held firms to look at, but keep this in mind…
In American capitalism, any business is bought for the right price.
There are other options to choose from, such as self-clearing firms to consider, but many are beginning to resemble a new and upcoming trend of an “independent employee channel .” This new trend includes payouts that cap out, limited product selection, and fees that almost double the industry norm. Even with the attraction of upfront bonuses paying as high as 75%- 100% upfront based on assets under management, it is still the most expensive option to choose from in the long run. To top that off, expenses at self-clearing firms are the least of an advisor’s frustration because a higher rep count follows tighter internal compliance rules. Most self-clearing firms become business prevention units because of the number of reps they oversee, and all the upfront money “given” is spent on taxes and transition fees.
Rep count and gross dealer commissions no longer provide safety in our industry.
Many advisors have now embraced the independent registered advisory movement, either as hybrids with broker-dealers or as independent advisors. Even so, the wave of consolidation has flooded that industry with the announcement of Schwab and TD Ameritrade. It may seem that no area of our industry is safe from the merger and acquisition wave, but it should not keep any advisor from indecision to change firms for the benefit of their clients.
Independent advisors may have limited choices but still hold all the cards. Here are five things to consider if you plan to move in 2023.
- Your client relationships are the most valuable asset in your business. It’s not about your skill or good looks, it’s how you treat and service your clients. The market has a mind of its own- so does your client. Keep them informed and keep a high level of communication with them weekly, monthly, quarterly, and yearly. There will be no question of your client moving their account to any broker-dealer that you ask of them if they like you, know you, and trust you. Be honest, open, and present.
- Keep your client’s best interest first and foremost, and then focus on keeping your book of business as portable as possible. Stay away from proprietary products and proprietary advisory models. If you must make a B/D change, you want to avoid leaving any business behind or triggering a taxable event, let alone an arbitration from a preventable loss. Third-party money managers are a great choice to keep your advisory assets portable if you have no other options. Staying away from brokerage accounts will reduce your fees as you transition to a new custodian. Moving to a new broker-dealer that utilizes your current custodian is ideal. Ex. Pershing to Pershing or National Financial to National Financial. Usually, your transfer fees are waived, and you will keep more transition dollars and avoid time wasted acclimating to a new technology platform.
- Take caution if someone offers to sell their book to you in 3-5 years as an approach to changing firms. This approach has been a recent distasteful tactic by many big-name firms in the industry. Make sure you have a written agreement and work on moving the new book to your platform before uprooting your entire client base to another firm. Most firms have dedicated business acquisition departments. Always start within your firm if you’re interested in buying a book of business. You’ll appreciate the ease of an easy rep change code within your broker-dealer.
- Don’t follow the big check. More money upfront usually means a lower payout, higher fees, less control over your business, and less revenue for you in the coming years. The big check may cover some bills and provide some marketing dollars initially, but you’ll hate your move sooner or later, and it may be too late to fix your mistake after you fully transition to a “sugar daddy broker-dealer .”Move for a higher payout of 10% or more. Move for a significant reduction in fees or an increase in revenue through marketing. Move for a better culture but never for a potential book of business, especially when it sounds too good to be true.
- You don’t know what you don’t know! A good friend told me many years ago, “Sometimes the best move is not making a move at all,” and it has become a focal point of conversation at RepRecruit. You may think you know about individual firms, but just like your clients don’t learn your business the way you do, you don’t see the industry as well as someone who studies and works in it daily. You must reach out to a quality recruiting firm specializing in your type of business before deciding and signing any agreement. Not all recruiters are the same. Some know the wire-house world, others the banking business, and others specialize in the independent broker-dealer industry.
Making a broker-dealer change takes much work. Moving firms is usually a necessary decision and not one to make lightly. It will cost you time, money, resources, and sometimes relationships. The burden on your staff and you will be substantial but know that you are not alone. Most broker-dealers have mastered the art of transition, and you have consultants like us at RepRecruit.
Call us at any time. We are here for you!