Career Effects of Securities America’s Legal Woes, Uncertain Regulation

FA Insight’s Eliza DePardo suggests perceived lower risk of a BD rather than RIA model will be 'increasingly open to debate'

FA Insight conducts research and provides consulting services across the advisor communities, assessing the trends of what makes an advisory firm stand out from the crowd in terms of revenue and profitability, and the best practices of how advisory firms are attracting employees to their firms through compensation and career path building. (See the latest article from Investment Advisor on the 2010 FA Insight Study of Advisory Firms: Growth by Design.)

One of its recent studies, conducted for Pershing LLC—The Race for Top Talent II—explored what FA Insight’s principals, Dan Inveen and Eliza DePardo, discovered about the human capital problems facing independent broker-dealers, where the average age of BD reps is rising while attrition from those ranks increases as well.  (FA Insight is a continuing partner of Investment Advisor and AdvisorOne in conducting research among advisory firms: the 2011 Study is now fielding, and readers are invited to participate.)

In light of the legal troubles facing BD Securities America, and reports that many Securities America advisors are considering jumping ship—at least according to several recruiters—and the continuing uncertainty on how the fiduciary issue will play out in Washington, we thought it timely to speak with the researchers to gain their insights.

Eliza DePardo (left), who oversees FA Insight’s consulting services, took time out from her vacation to explore those possible ramifications in an e-mail interview.

These problems with Securities America—will they have a chilling effect on younger, newer people coming into the advisor field?

DePardo:  Younger advisors will certainly be paying increased attention to the various career alternatives that are available to them. The Securities America private placement problems will likely be yet another catalyst for increased scrutiny of the benefits of joining a national BD. Affiliation with a national brand, the opportunity for structured professional development and the common perceived lower risk of joining a BD relative to joining an RIA will no doubt be increasingly open to debate among new entrants into the industry.

Will all the uncertainty regarding regulation, especially the prospects of an SRO for advisors and extending the fiduciary standard to brokers as well as RIAs, cause potential advisor recruits from coming into the business?

DePardo: The current uncertainty regarding regulation (including a SRO for RIAs) is to be expected as the industry continues to mature. This evolution, while uncomfortable at times, will ideally continue to build confidence among the communities that the industry serves. In my view, while some potential entrants may be discouraged under these uncertain circumstances, this will likely be limited. For younger advisors or new entrants into the business who have a genuine passion for delivering advice, serving client needs and a desire for a long term professional advisory career, this will likely have little impact.

Will the industry ever figure out how lower-net-worth people will be able to get good advice about retirement and financial planning in general? Is there a place for lower-level advisors, perhaps paraplanner types, who could provide workplace education for retirement planning? What are the economics?

DePardo: Lower-net-worth clients have become an increasingly underserved market. These smaller clients are typically delegated to a junior/support planner within a firm in an effort to reduce the cost of managing these relationships. Despite this, these relationships are often unprofitable.

Can the industry afford to serve lower-net -worth clients? With the appropriate business structure, this is certainly possible. Delivering advice to lower-net-worth clients requires a low cost, high volume operating model combined with more innovative means of delivering services to clients. A firm would need to implement a narrowly defined offering with discipline, particularly as it relates to the product mix, service offering, advice offering and pricing structure.

In addition, this would require that a firm delivers these services to a clearly defined group of clients that share similar characteristics and advice needs, avoiding client exceptions that will impact on productivity.

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