From the July 2007 issue of Boomer Market Advisor • Subscribe!

Is it time to re-evaluate your broker/dealer relationship?

An increasing number of broker/dealer options means more choice for some, and more confusion for others. When is it time to re-evaluate your broker/dealer partnership, and what factors contribute to the decision to change?

Advisors cultivate relationships in every aspect of their practice. They need solid referral sources, money managers, fund managers, stockbrokers, clients and, perhaps most importantly, their broker/dealer. The broker/dealer-advisor relationship is an affiliation that affects advisors' day-to-day business. It affects how they operate, how they market to new clients, how they serve current clients. Some advisors make it a point to evaluate the relationship regularly, even if they aren't looking to make a change. For some, looking at other outifts reaffirms their commitment to their current broker/dealer. For others, seeing what competing firms are doing sparks new ideas about how to improve their current broker/dealer. No matter what aspect of the broker/dealer-advisor relationship is driving the desire to re-evaluate -- compliance, compensation, operations, selling agreements, culture clash -- Terrence Herr says one thing must be present.

"To make a broker/dealer change, your level of pain should be really high," says Herr, the managing partner of Herr Capital Management in Chicago. "Ask yourself, 'Is it going to be worth it?'"

That answer is going to vary from advisor to advisor, but compliance is one obvious factor that comes up in almost any conversation about broker/dealer strengths and weaknesses.


Compliance is a big part of any advisor's pain, as Herr describes it. Is the broker/dealer overly conservative on the compliance front? Does the compliance department rubber stamp everything, putting advisors and the firm at risk? Neither is good. Herr, with FSC Securities Corp., says he knew the time had come to change when "a lot of things that used to get approved no longer got approved."

Of particular frustration is a compliance department that informs a rep that a marketing piece or seminar script must be changed but then offers no advice on how is should be done. Mary Sterk considers that a roadblock.

"Compliance can be looked at as a roadblock or as guardrails," says Sterk, CFP, president of Sterk Financial Services in Sioux City, Iowa. "I choose to look at compliance as guardrails."

Sterk, who's been with Woodbury Financial Services Inc. for 10 years, says that compliance officers ask her "What if?" questions that help her get materials compliance ready; they act as her guardrails. Steve Iversen has had the same experience with NEXT Financial Group, where he acts as a division manager. NEXT's compliance department recently worked with Iversen to help him change a workshop script, rather than simply telling him it needed to be changed.

"We're blessed that a lot of our compliance people have experience in the industry," says Albuquerque-based Iversen. "They have to understand what the rules are for." It's one of the factors that helped solidify his decision to switch to NEXT in late 2005.

For Rhonda Ferguson, the founder and owner of Financial Concepts in Columbus, Miss., the compliance equation is simple: She wants to get to know the compliance people at her broker/dealer, Gerard Securities, personally.

"When they tell me something is OK or not, I want to know why," says Ferguson, who switched firms because her old broker/dealer was sold to one that was much larger. "I don't mind filling out forms as long as I know why."

But compliance, while a big reason for advisor pain, is not the only reason advisors look to make a change.

Culture, compensation

Ferguson had been with her old firm for 15 years when it was sold to an insurance company. She says that for the first few years, little changed. But then the insurance company resold the broker/dealer, and she instantly went from a 200-rep firm to one that was much larger. She got a call from a marketing rep at the new firm asking her to stay. It was easy to leave, she claims, when she was told she would be a small fish in a big pond. In an age of mergers and buyouts, it's a rep story that's more common than ever, and another reason advisors re-evaluate their broker/dealer relationships. Iversen experienced a similar situation.

"I was looking for a company that's client friendly," he says. "As [B/Ds] get larger, they lose focus of who brought them to the table. We are here to protect our clients. Broker/dealers are there to help us take care of clients. We need the utmost support in our ability to assist clients."

Once an advisor feels that client focus has suffered at the expense of growth, he often begins evaluating other firms. But growth and a client focus don't have to be mutually exclusive. Sterk's broker/dealer has grown since she joined, and so has her practice, so it's a good fit. But it is something she keeps a close eye on.

"Any time a broker/dealer grows by leaps and bounds, it risks outgrowing its field reps," Sterk says. "[Woodbury] is working hard to keep the same culture while growing."

As important as the right culture may be, individual advisors still need to make a living. "Payout is another reason people change broker/dealers," Herr says. But it isn't always the absolute highest compensation that drives advisors' actions. Sterk sees a fine line between payout and the connection she has with the people at her B/D.

"I would rather have a relationship with the people at the broker/dealer than get one or two more points on compensation to move," she says. "If relationships are solid, that means more than a slight increase in compensation."

Herr adds that the advisor's method of compensation -- commission vs. fee -- can have a lot to do with the B/D he chooses.

"For advisors who are fee based, different firms will have administrative fees associated with it," he says. "Another firm won't."

Fee-based advisors may want to look for a broker/dealer that specializes in this type of business model, as opposed to staying with a firm that is simply making fee-based accommodations while the bulk of their reps remain commission based.

Advisor input

Quite simply, advisors want a voice in the manner in which their broker/dealers operate. The field is where mandates are implemented, and broker/dealers that consider rep input rate well with advisors.

"I feel like [Gerard] is open to suggestions from the field," Ferguson says. "When I switched, I told them about a service I used at a different broker/dealer. They enrolled before I came on with them."

Herr says FSC is open, as well. "I've seen changes implemented based on suggestions from the field."

Sterk points to Woodbury's field advisory council as evidence of the B/D's openness to advisor input. "They're receptive to ideas from the field. They ask us for input, and there has been a lot of change because of the advisory council. They do listen, but the company has the final say."

Advisor pain comes in all shapes and sizes. When they feel compliance has become a burden, when they feel the broker/dealer has forgotten about them, when they feel the compensation structure is out of line, or when they feel their input is no longer valued, they evaluate their situation and look to new opportunities. Is a move worth it?

"Whatever year you change is going to be a bad year," Herr says. "Ask [yourself], 'Will the new advantages offset the pain?'"

Advisors instinctively know what relationships they need and what they need out of them. Evaluate, re-evaluate, and decide.

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