From the June 2009 issue of Investment Advisor • Subscribe!

B/D Briefing: Keys to B/D Success

New survey finds that more automation and fewer products lead to greater profitability

A new study published by Moss Adams and Pershing affiliate iNautix--The Art of Efficiency: A Holistic Approach to Operations--reveals what most suspect but perhaps won't acknowledge: that a broker/dealer's growth can be stunted, the investor experience harmed, and the firm's brand jeopardized by the lack of an efficient operational platform.

Sustained levels of high profitability can only be achieved through efficient operations, but some broker/dealers still have gaps in efficiency as well as in prioritizing such hallmarks of efficiency as ease of doing business and technology, the study concluded.

These findings are critical to explore at a time when profit margins, in the low single digits in better times, are being squeezed by the current financial tsunami. "The rug has been pulled out from under them in terms of revenue," notes Mike Nesspor, a managing director of iNautix (USA). "Expenses are probably far outstripping revenue at this point."

The study first investigated the characteristics of the top tier of survey participants to figure out why they were the most profitable. It found that these firms have simplified processes, integrated systems, greater productivity, and a staffing model that had a smaller proportion of operations staff to employees. The top quarter of the profitable firms studied, for example, take 50% less time to process an account transfer and 20% less time to process a new brokerage account. They also generate 42% more revenue and support more than four times the number of advisors per home office staff.

iNautix points to four key components that need to be integrated for a firm to perform well. They are: process; people; technology; and product strategy, says Nesspor. An example of such integration is allowing advisors to initiate more transactions. Efficiency often means a broker/dealer that isn't top-heavy, according to the study, and instead a culture that supports operational initiatives and streamlined business procedures.

The broker/dealer has the same set level of fixed costs and operations effort for each advisor, whether his production is high or low, as the study points out. Perhaps, speculates Nesspor, top B/D performers have advisors that produce more because they are part of an efficient operation. But efficiency and profitability produced "a very strong correlation," he reminded. "Regardless of how we sliced the data, the most efficient firms were also the most profitable as well."

Meeting New Challenges

What are the top challenges broker/dealers face? They identified a few themselves, noting paper-intensive processes, a lack of automation, increased regulatory requirements, and disturbingly high not-in-good-order (NIGO) rates.

Nesspor pointed out that the NIGO rates among respondents were "much higher than what we have heard when we have been out with customers. The rates reported were much closer to what Pershing sees."

As for the lack of automation, it is at the crux of the multiple challenges broker/dealers see themselves facing, according to the survey results. Technology can be in place but its implementation is what is at the heart of operational efficiency.

"The survey respondents told us that over 90% had document imaging systems in place but only 30% of them leverage work flow in conjunction with the systems," Nesspor reports. This huge discrepancy may have come about because the imaging systems were only put in place because the parent companies mandated it. The B/D firms many have not put in the time to implement them, Nesspor surmises.

"Typically, there is too much emphasis on home office and compliance staff adoption and not enough on field adoption--where the greatest potential for efficiency exists," the survey states. Firms with the lowest NIGO rates tended to initiate more process in the field, the survey found, underscoring the theme that top-heavy firms were likely less efficient.

This redirection to the field office from the home office is one of a couple of changes that can have a dramatic change on the bottom line, according to Nesspor. "That change is very, very easy to do from a system perspective," he says. "Imaging and workflow pay off very quickly," he adds.

He recommends there should be a "sit-down between the field and the home office," as there appears to be a disconnect on where the rep and the home office should be focusing their efforts.

A recent study by Case Management Consultants found that advisors ranked technology and ease of doing business as second and third, respectively, among factors that influenced whether those advisors would remain with their current broker/dealer. However, broker/dealers themselves ranked ease of doing business fourth and technology fell to fifth in their rating of factors that help them stand out in the marketplace, the Case study found.

Nesspor has promoted the field-initiation model which he says allows representatives to receive and enter any required information accurately and quickly in the presence of their client, while monitoring the status of the transaction from beginning to end.

By underestimating the importance of operations in building a loyal advisor base, broker/dealers may be jeopardizing their long-term growth through the recruitment and retention of advisors, the Moss Adams study concludes.

Survey respondents had to answer about 120 detailed questions online and included full-service brokerages as well as insurance, bank or credit union, and independent broker/dealers.


Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at elizabeth.d.festa@comcast.net.
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