From the October 2011 issue of Investment Advisor • Subscribe!

Top 5 Reasons Advisors Change Broker-Dealers

Culture shock is the top reason advisors look for a new BD

Several years ago I wrote about what motivates advisors to change their broker-dealer. Much has changed since then, so it’s time for an update. This time, rather than basing the reasons solely on our own recruiting experiences, we sought out the feedback of various broker-dealers for greater objectivity. Also, this review focuses on the perspective of advisors who are already at an independent broker-dealer and looking for a new one. We didn’t bring wirehouse advisors into the mix, as their criteria for change are somewhat more static and narrowly focused.

The Top Five Reasons Advisors Make a Move: Then

  1. Unhappiness with their current relationship
  2. Seeking better business support services
  3. Looking for better technology
  4. Need better product offerings
  5. Desire for higher/lower payouts

The Top Five Reasons Advisors Make a Move: Now

  1. Discontent with culture change
  2. Worn down by heavy-handed compliance
  3. Desire to net more
  4. Looking for greater service
  5. Wanting financial stability, no baggage

As we look at the current situation, the first thing to note is that technology has fallen off the list. Five years ago, reps chased after consolidated client statements. Two years ago, reps sought out firms that had paperless, centralized, web-based technology platforms. Today, most broker-dealers have both of these, so with no new “hot thing” in technology, it’s not the differentiator it was.

Product offerings have also become more similar from firm to firm, to the point where today we rarely see it as a motivator to move. Business support services such as practice management and marketing are outstanding ways to grow a business. However, we simply don’t see reps leave firms with the motive of seeking out those services. Business support services are looked at more as the icing on the cake—something that advisors may or may not use, but not a primary motivator for change. Marketing lead-generation programs would be the exception to this. As reps look to grow their book, few firms currently have quality marketing lead-generation programs. We see this as the next evolution for broker-dealers, as this service is highly sought after, benefits everyone and builds loyalty to the firms that provide such services.

Reason No. 1: Culture Change

Historically, dissatisfaction with culture has been concentrated with larger broker-dealers having more than 1,500 reps, and insurance-owned broker-dealers. Problematic culture revolves most frequently around communication layers between reps and management, and the flexibility of the firm to accommodate the advisor’s individual needs. What was once a platform that met the needs of an advisor can change as the practice evolves. Some firms have a set platform that the advisor needs to operate within—if any special needs come up that are outside of their box, a firm’s flexibility is tested. It’s at that point that reps start looking at alternatives.

Fast broker-dealer growth and firm acquisition are the largest contributors to negative culture change. Advisor feedback on how management was once approachable but now only the highest producers get any attention is increasingly common. As firms grow, the ability to maintain quality relationships between advisors and management becomes more difficult.

Reason No. 2: Heavy-Handed Compliance

As FINRA has become increasingly heavy-handed with broker dealers, it seems to trickle down, with broker-dealers’ compliance departments being increasingly heavy-handed with the reps. Annual audits of reps’ offices have become unusually obtrusive, going as far as prying into a spouse’s checkbook. Audits are frequently performed by compliance staff who have only a few years of industry experience and are dictating down to reps who have been in the business for 20–30 years.

Paperwork audits have also taken a strange twist. Six months or more after an audit takes place, an advisor may be notified of paperwork improprieties and then told to either find a new home or be terminated, depending on the gravity of the transgression. The tone and intolerance levels have become more hostile than we’ve seen before.

Another motivator for movement is when the compliance department becomes the sales hindrance department. This environment can provoke advisors to look for firms that are marketing-friendly. Granted, we have seen a greater influx of regulations that have been imposed on broker-dealers. However, regulations are rarely black and white, and there is often some room for interpretation. The unfortunate outcomes are when broker-dealers choose to dictate to the darker side of grey.

Reason No. 3: Net More

Payout isn’t the motivator it once was because 85% to 90% is the norm. Advisors have caught on to some of the profit center tactics at broker-dealers, so they look to diminish profit centers as a way to net more. Advisory administration fees have become a primary focus with high-end reps. Paying in the neighborhood of 25 basis points on advisory assets at their current firm and being able to drop those fees down to as low as zero basis points is extremely attractive to producers with substantial advisory assets. Numerous larger firms have their own profit center in third-party money manager’s fees, so a move to a mid-sized firm that doesn’t make outside managers a profit center can save the advisor’s clients 5–15 basis points on their assets.

Ticket charges that cost the broker-dealer in the $8–$12 range are marked up to $20 or more. However, some firms choose to make this a minimal or even no profit center. More common is the ability to go with a broker-dealer that is willing to negotiate lower ticket charges if the rep has substantial brokerage activity and production. For large producers, the ability to negotiate from $20 down to $15 on equity trades is realistic.

Reason No. 4: Better Service

When we interview advisors as to their reason for leaving, service is usually part of the reason, but rarely the sole reason. “Hostile compliance/poor service” or “wanting to net more/get better service” are prime examples of pairings that become tipping points for broker-dealer change. Poor service is a long-standing theme, with high back-office turnover, employees with little experience in the industry, lack of timely response and inadequate operational checks and balances all contributing to problems. Many operations departments are overly concerned with measuring activity when they need to focus more on results. A recent survey on why high-end clients change to a different broker showed that it is because of a lack of timely response. The same goes for high-end brokers in our industry—when they leave a voice mail message requesting assistance, they expect to be reached that day, not later in the week.

Reason No. 5: Financially Solid/No Baggage

The fallout from the 2008–2009 market collapse has had lasting effects on advisors, as has the recent alternative investment frauds that have caused broker-dealers to close. Press legacy is of huge concern to advisors today. With the advent of Google and the like, it has become simple for clients to check out a broker-dealer’s press legacy. A recent prospect did a Google search on a broker-dealer, which resulted in an article on one of their reps who was arrested for embezzling more than $1 million from clients. Any advisor with clients who are social-media savvy can’t afford to team with a broker-dealer that had such a scathing press legacy.

Fraudulent alternative investments have brought broker-dealers’ financial strength under the microscope. Larger firms have used these circumstances as a reason to join them, but ultimately it’s a firm’s risk management that matters more than size. Proper due diligence has kept many firms out of hot water. Being large won’t protect you from a meltdown. Case in point, the sale of Securities America is underway due to their parent company’s disgust at the Provident Royalty-Medical Capital liability they incurred from a subsidiary that accounts for so little of their overall profits.

Reps have been more proactive at checking broker-dealer compliance histories on the FINRA website, with the realization that a firm that has had a lot of recent arbitrations is a firm that will likely have compliance that caters to the lowest common denominator. Publicly traded broker-dealers have transparency in their financials that some advisors seek out. Private firms will almost always disclose excess net capital levels and profitability history to better appease any financial concerns.

Unfortunately, our new Top Five list reflects the fact that rep movement has been motivated more by negative experiences than in the prior assessment. As Washington moves on to new concerns, hopefully we’ll see the pendulum of our industry swing to a more balanced, less hostile environment. Then, the triggers that motivate broker-dealer change will be more in sync with what we’ve seen in the past.  

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