From the January 2004 issue of Investment Advisor • Subscribe!

Switching Success

When switching broker/dealers--by choice or necessity--there are some steps reps should take and questions they should ask. Someone who's been there shares her experience

If you've switched broker/dealers, you know the meaning of frustration. But there's no way to avoid it, right? Wrong. There are steps you should take, and questions you must ask, that will ease the pain. Moreover, those steps and questions will pay other dividends, particularly in gaining a better understanding of your practice and helping to forge a personal definition of success. We've all heard horror stories from reps who did not know the right questions to ask before making a switch and went from the frying pan of a bad B/D match to the fire. But there are also success stories out there. The suggestions that follow are based on the experience our firm had in switching B/Ds twice in as many years.

We quickly left the first due to a change in corporate structure. We thought we had asked all of the right questions before joining the second B/D, but soon found ourselves subject to higher costs, poor service, and a bad fit. While frustrating, it was a valuable learning experience that we used in making a final switch that's led to a mutually satisfying business relationship.

Most independent broker/dealer representatives will face this challenge, often more than once, during their careers. For example, your firm may be looking for a new B/D that better complements the business being generated by the reps in your branches. You might be an independent rep contemplating a switch to gain access to more of the product bells and whistles you believe you need to offer clients to remain competitive. You could be a rep who is swept along involuntarily to a new B/D through a merger. Whatever the reason, the following steps should help you make an informed decision.

Step One: Determine the Business You're In

Your main concern must be how best to take care of your clients and your business. To determine that, first consider your personal sources of revenue and that of the entire branch, if applicable. How much of your revenue comes from managed accounts? How much of your clients' assets are in retirement accounts? How much are from direct accounts? Then break down those figures to determine how much of your overall client assets are in stocks, bonds, mutual funds, annuities, insurance, REITs, or limited partnerships.

Once you know those percentages, narrow your initial search to broker/dealers that can accommodate the size and scope of your practice. Obviously, the bigger the asset base that you manage, the more room you have to negotiate a deal. Most B/Ds impose firm-level minimums based on the prior year's gross production or total assets under management. Your prospective B/D will want to see evidence of steady increases in both. Some might give you a monetary incentive to join them. Some might try to entice you with advanced technology or producer conferences in sunny locations. But beware: these are red herrings that have nothing to do with meeting your clients' needs, or your own.

After all, your broker/dealer can make or break your business. You want a B/D that acts as a partner in helping you grow your business, not one that's an impediment to that growth. How do you determine before you switch that a specific B/D will be that partner? At a minimum, you need knowledgeable and responsible support from the home office; a dedicated transition team to get you going; and clear signals that the B/D will provide a structure under which you and your clients will be treated fairly.

Step Two: Start Asking Questions

Based on the answers to those questions in step one, narrow down the B/Ds you are considering to a manageable list of about five, using references from other reps, directories of B/Ds from magazines like this one, CPAs, attorneys, and third-party pension administrators. Good suggestions came from mutual fund wholesalers, too, and we used information gathered at various investment seminars and continuing education functions. Clearly, if you're a stock jockey or like hedge funds, you may not want to join a B/D that handles very little of that business. If having a personal relationship with home-office staff is essential to you, you may not want to join a very large B/D that has thousands of reps. Check those firms' Web sites, ask them to send general information to your office, and schedule one of their recruiters to stop by. What you're looking for in this step are answers to the following questions:

- What year was the B/D founded?

- Are the founders still running the firm? Is there a parent company?

- Is the B/D financially stable?

- How many lawsuits are pending against the firm?

- Is there a pattern to the suits?

- Has the firm been fined by NASD or the SEC, and why?

- How many affiliates exist?

- How many reps are registered within those offices?

- What clearing firm does the B/D use, and is there a dedicated contact person for reps at that firm?

Step Three: Get Specific

Next, draw up a comprehensive listing of questions that are specific to your firm, based on the data gathered in steps one and two. Use the following bullet points as a guideline. Pass on these questions to the prospective B/D candidates and ask each for a formal response.

Of the five B/Ds that our firm chose to consider, one did not reply to our questions, three sent personalized folders with all our questions answered, and one sent a fact-filled binder along with an invitation to its annual top-producers gathering. Here are the issues to discuss:

- First and foremost, if you transfer your business to the new firm, what can you realistically expect from the new B/D? Better service? Lower fees? Marketing assistance?

- How will the initial transfer be made? What paperwork will be needed? Direct accounts at fund companies can be taken care of by a block transfer form, which your "old" B/D must approve. That brings up a related point: Always have a good contact at your old B/D, and never burn any bridges. If your old B/D wants to be difficult and hold up paperwork, it can. That can mean holding up trails and commissions.

- Will you keep the same clearing firm? If so, there is a chance that a tape-to-tape transfer of account data to your new B/D can be accomplished. You will more than likely have to have new account forms and ACAT forms executed by each and every one of your clients. Find out from each candidate exactly what paperwork you will need to complete for each type of account. Are there specific requirements for the Patriot Act? Are there any deadlines for completion of the paperwork? Legally, what is the earliest date you can have someone execute a new account form? Will new IRA adoption agreements need to be signed (updating beneficiary information)? Are W9s incorporated into the new account form? Does all of this data have to be entered online to broker/dealer-specific software?

- What about "linked" accounts? Make a list of all systematic deposits and withdrawals you have for your clients. You may need to get a newly signed ACH form and voided check (original, not a copy) in order to provide continuity in transactions. Which clients have check-writing privileges? A nice little trick is to start the new check numbers at '2003' (the year of the switch), because you will have one or two clients that don't throw the old checks away and will call you and ask which checks are the good ones. Will you need copies of trust documents, powers of attorney, corporate resolutions?

- Who at the new B/D will help you and your fellow reps through the transition? Is there a designated team, with a specified contact person? Is that person available by telephone or by e-mail, and during which business hours? Get references and check them out thoroughly for both the firm itself and your transition contact person.

- What is the standard money market account that will be used? Some have different minimum check amounts (write a check under $500, for example, and the client will be charged). In some cases, a money market fund can require an initial deposit of $500 in order to trigger a sweep for the account.

- Can there be a transition of cost basis data on accounts? Most B/Ds will say yes, but the switch then doesn't happen and you are stuck with hours of data entry. Some might say yes, then refer you to a very expensive service that will convert your data for you. Get a clear answer.

- How are check or wire requests from accounts handled: telephone, fax, or uploaded via firm-specific software? What are the fees for those requests? How are distributions processed? Are there strict cutoff times for requests? Are you and the home office in the same time zone? Are all checks mailed from the same location? These questions bring up the next important step in the decision-making process: what the new B/D's services will cost you and your clients.

Step Four: Figure Out the Costs

You wouldn't put your client into a mutual fund without checking its expense ratio, so before switching B/Ds be sure to get a complete schedule of all transaction charges imposed on the client as well as charges to the representative. Fees can differ greatly for everything from mutual fund purchases, sales, and exchanges, to stock trading commissions, account termination fees, inactivity fees, systematic deposit/withdrawal charges, and so forth. Your current clients might get hit with account transfer fees because you are switching B/Ds. If so, will your new B/D pick up these charges, or will you be responsible for them?

Don't forget how you get paid, of course. Ask how commissions are calculated. What happens if annual branch production rises above or falls below a certain level? Are there different payout levels? Can you periodically view commission statements online? How often are commission checks paid? Is the payout based on group production or individual production? Ask to peruse a sample commission report.

Step Five: What's on the Platform?

Remember that you're in this for your clients, and you'll want to have the freedom to offer a range of products and services for those clients. So find out what investment vehicles live on the B/D's approved list. Ask for a list of the mutual fund companies with which the B/D has selling agreements. What are the highest-volume mutual fund families within the B/D? Are there any "focus" or "strategic partner" funds? These funds have negotiated lower fees with the B/D to process orders above a certain dollar amount without ticket charges being passed on to the rep.

Don't forget the firm's trading capabilities. Find out the size of the trading department and the experience level of the traders. Will you always have a specific contact person on the trading desk, and is there a fixed-income desk? Then ask these other questions:

Are there separate insurance servicing and processing centers?

Does the firm provide access to quotes, comparisons, and guidance on life, disability, and long-term care insurance?

What is the approximate cost of E&O insurance?

Are there any corporate discounts for travel, computer equipment, or overnight package delivery?

What are the costs the B/D charges for continuing education?

Is there a firm-element CE requirement, and what does that cost?

Does the firm contract with any Web-based providers to have convenient access to CE credits?

Operationally, it is important to know the processes and flow of paperwork as it goes through the broker/dealer. Obtain a current contact list with telephone numbers and e-mail addresses.

Don't overlook technology, which is becoming an ever-more-important component of our business. You will want to ensure that you will have an adequate level of access to your accounts. Some B/Ds will show off some very slick software only to turn around and tell you it will cost $200 and up a month for its use. Will you be provided with assistance in developing a compliance-approved Web site, and what will it cost to do so? Does the firm provide clients with Web-based access to their accounts, and will the rep have to pay for that service? How is e-mail correspondence monitored for compliance purposes, and, again, who pays for that monitoring?

Then take a look at client statements, and make sure that not only are they easy to read and understand, but that the rep can alter the format, inserting his own name or logo onto the statement.

And while we're on the subject of compliance, find out the speed with which the compliance department reviews material. Remember that your new business cards and letterhead will need to be run through compliance as well.

When all these questions have been answered, you can prepare an apples-to-apples comparison of your semifinalist B/Ds. If necessary, visit the company's home office and see how their operation--and their people--perform in real life.

Step Six: Timing Is Everything

Once your decision is made, the most vital element of the broker/dealer switch arises: determining exactly when the letter of termination should be sent to the B/D you are leaving. The experienced rep knows that a clock starts ticking as soon as that envelope is opened. Depending on your contract, there might be a period of time that commissions and trails will continue to be paid to you before they revert to the old B/D; in some cases this can be as short as 30 days. Be prepared for a lag in commissions and trails as ACATs are processed, block transfers take place, and insurance appointments are completed. Until these actions occur, you will not have access to your client's accounts and will not be generating any income.

It is crucial to take the time to coordinate your B/D resignation with the activation of your new affiliation. An experienced transition specialist at the new broker/dealer can analyze your business to tell you how to minimize down time and lost compensation during this period.

Remember, if you want to make a B/D switch with confidence, take your time, do your own research, demand answers to your questions, and still be prepared for a few unexpected challenges. But doing it right will ease the short-term pain of making a switch while providing the basis for long-term pleasure.

Jessica J. Teel is a registered representative with Hanover Capital Management, Inc., in Hanover, Pennsylvania. She can be reached at jteel@hancapmgmt.com.

Reprints Discuss this story
This is where the comments go.