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Navigating the Broker-Dealer Landscape
Wednesday, December 19, 2012

I recently flew from Columbus to Hartford with my usual connection in Baltimore.  As I was enjoying some down time on the leg to Hartford it was obvious that winter is here; the ground is lightly snow covered, mixed with clouds and it was hard to figure out where I was at any given moment.  Of course I am not a pilot, but I consider myself fairly competent in geography. Certainly I was flying over urban, rural and suburban areas, I just could not differentiate them from that first look. 

All three are great spots to land in but not all are right for me; they won’t all help me get to my final destination.  Boston and the Big Apple would be my first two choices but for my purpose on this trip, Hartford best met my need.

It reminds me of the independent broker-dealer universe.  With over 1,000 to choose from, how does an advisor navigate the choices, know where to go, and know where to be looking in the first place? 

Many advisors seeking a new firm will choose based on: a call from the first recruiter without evaluating other firms; open an industry periodical and see which firm currently ranks number one in a given metric such as number of advisors, payout or firm revenue.  

Even worse, they may choose based on who is handing out (I mean locking you up) with the largest financial incentive.  More often that not, reality hits advisors after 12 months and they realize they affiliated with a firm whose culture, strategic direction or business mix does not align with their own. 

This scenario is most common with breakaway advisors, but we have certainly seen it several times with advisors who are currently independent.  It is advantageous to your client relationships to not have to switch firms within 36 months of a change.

So, from a very high level all firms may look the same; they service financial advisors who in turn service the financial well being of their clients.  However, once you begin to peel away the layers of the proverbial onion, pros and cons quickly rise to the surface.  You are not going to pull out the driver for a chip shot, right?  Don’t approach a firm change with less enthusiasm.  Some firms excel at providing marketing resources, business development for growth, trust services, retirement plan expertise, or in-house advanced planning personnel.  Some firms provide home-office compliance supervision at no extra cost while some require advisors to be supervised by another advisor in the field; that is okay for some but not for others. 

Many broker-dealers consistently attract breakaway wirehouse teams while others stick with recruiting current independent advisors.  Equity ownership exists in some, while others excel in consistently delivering innovative technology.  Some firms provide resources to their advisors who want to recruit others.

Advisors who’s business mix of 90% fee-based/10% commissions should not affiliate with firm A who has a “handful” of advisor who do that type of business.  On the flip side, if you need access to a trading desk to accommodate your institutional business, identify several firms that have experience there.  If you have or want to have your own RIA, you should know if your firm pays you more to use their own clearing relationship.

Some independent broker/dealers should be avoided purely based on their regulatory record, pending litigation and/or lack of financial resources.  However, most firms are very sound and warrant your due diligence, but I encourage advisors to evaluate several firms that match up with the advisor’s own needs and most importantly those of their clients.  Prospective clients may not know if there is any difference between Advisor A and B, however you the advisor understand how you rise above the competition.  There are key differences between what you provide your clients and the advisors down the hall or street.  Please understand this is the same for broker/dealers.  Do your homework and choose what is most suitable for you and your clients.

Ned Van Riper is Managing Director with Finetooth Consulting and Co-founder of Join A Firm.  He has 13 years of industry experience split between the wirehouse and Independent channels.

(2) Comments
First and foremost ... it needs to be clear and in writing as to who will have professional "ownership" over the client accounts that a Rep brings in. If the B/D is to claim ownership, then that Rep is not really an Independent Contractor, but actually an Employee and therefore should be reimbursed for all out of pocket work related expenses and likewise entitled to all employee benefits (ie Health Insurance, Paid time off, Workers Comp, and etc) as mandated by state and federal labor law. Simply becuase a rep is paid via 1099 and labeled as being an Independent Contractor does not always make them such under the eyes of the law. Don't beleive me? Then talk to a Labor Attorney. If the Rep is truly being an Independent Contractor (separate business owner) then he/she should be able to "sell" those accounts and receive a cash payment for the value of his/her Book of Business at any time, or be able to transfer that entire Book of Business "en masse" to another B/D firm with minimal effort if things just do not work out. Some B/D firms participate in a program called Protocol which still allows for Block Transfers. Find out before signing up if the new B/D is in fact a Protocol participant. And lastly, be prepared to file a lawsuit against that B/D if your Book of Business is ever "stolen" or if your rights under Labor Law are ever violated.
Posted by Ralph M | Monday, December 31 2012 at 1:37PM ET
Ralph, Thanks for your comments, they are very interesting. I would like to address them and will begin to do so, working backwards. The "protocol" has nothing to do with block transfers and a firm being a protocol member will not provide access to block transfers to the Advisor. In fact, very few if any firms allow them. These two topics are two completely different discussions. Please let me know if you would like me to clarify what the protocol is. Regarding w-2, 1099 Advisors, and ownership of client relationships, you are correct but I am not sure why you are stating these facts. Ask any wirehouse and they will provide documentation that they own the Advisors' client relationships. Ask any IBD and they will provide documentation that the Advisor owns the client relationships. It IS clear. In a 1099 setting, the Advisor is free to sell his/her practice for a cash payment for the value of the book. ...not trying to split atoms here, but the cash payment will be minimal compared to the overall structure of the sale. One of your comments that I do disagree with: Most employers don't reimburse their employees for all out of pocket expenses, especially wirehouses in this business; I like your train of thought though!!
Posted by Ned V | Thursday, January 17 2013 at 2:14PM ET
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