I’ve been working in and around the financial services industry since the early 1970s. In my experience, the advisory practices that have been most successful are the ones that have a clearly defined strategy, that pay attention to management, and that effectively leverage other people and organizations.
Perhaps the most important strategic relationship that the majority of advisory firms have is with their custodian or broker/dealer. Ironically, far too many advisors take a very narrow view of this relationship. If you look closely at the firms that support independent advisors, you will find they each have a singular value proposition, a unique culture, and a specific attitude about how they support their advisors. That’s not to say that one is necessarily better than any other; they are just different. But in order to maximize the efficiency and the potential of your firm, the selection of a custodian or broker/dealer should always be made in the context of your strategy: you need to find the organization that best supports what are you trying to accomplish.
Affiliation Models: An Overview
One thing that I’ve noticed is that advisors often allow their backgrounds to dictate their affiliations, rather than making a conscious choice about what would be best for them and for their practice.
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Many advisors came into the business through the traditional securities brokerage or general agency system as salespeople. We refer to that platform as “Complete Control.” Brokerage firms such as Merrill Lynch and Morgan Stanley best represent this model, as do general agency systems such as Northwestern Mutual, and bank financial services networks as exemplified by those run by Wells Fargo or Wachovia.
There are a number of good examples of advisors who have built dynamic practices within this environment, leveraging the brand that these parent firms provide. The primary advantage of this approach is the cocoon it offers that enables advisors to focus on their clients, and defer most business issues to their parent firms. There usually is a high level of support and quality control, and the firms typically have a significant identity and presence in a local market. The downside that comes with this approach is usually a significant limitation on how these advisors run their business affairs, the available products, and sometimes even how advisors can interact with clients. Moreover, the portion of the revenues that the advisors get to keep is also often quite a bit less than they’d get under other affiliation models. Most importantly, under the complete control model, client relationships are “owned” by the parent firm and advisors have limited availability to build and realize value in their practices.
Of course, there’s a good number of advisors who have migrated to one of the next three levels of affiliation: regulated local autonomy (typical for insurance B/Ds); supervised independence (independent B/Ds); and total independence (the RIA model). There are pluses and minuses to each of these models. The payout is usually higher the farther you break away from a completely controlled environment; but advisors in these other platforms are also more responsible for their costs, their infrastructure, and their technical support. In other words, independence carries a cost.
A good example of this migration is the Minneapolis-based American Express Financial Advisors system. AmEx offers three affiliation platforms that mirror typical industry models: Platform I is “Complete Control,” under which the advisors become employees of the firm; Platform II is for the statutory employee who is now responsible for her or his own business expenses; and Platform III is for the independent contractors who no longer operate under the American Express name but who are still supervised by that firm.
Raymond James, based in St. Petersburg, Florida, is another example of a once-traditional broker/dealer that now crosses three of the possible platforms. In Raymond James’s case, the mix is slightly different, offering relationships with its captive brokerage firm, its independent broker/dealer, and its totally independent institutional services platform.
In the early 1990s, discount broker Charles Schwab in San Francisco changed the broker/dealer model with its then-revolutionary institutional services division. Many advisors discarded their broker/dealer affiliation, in some cases even relinquishing their NASD licenses, and set up custodial relationships with Schwab. Companies like Fidelity Registered Investment Advisor Group in Boston, T.D. Waterhouse Institutional in New York, and DATAlynx in Denver have also become significant players in this market. They offer their advisors total independence in product selection, business affairs, and client relationships, and (in most cases) 100% of the revenues those relationships generate.