As I was jetting home recently from my fifth broker/dealer due diligence meeting since January, with another five on tap before year-end, and ten years of the same under my belt, I realized that recruiting financial advisors for independent broker/dealers has been our bread and butter. This deep immersion has, I humbly submit, shaped a unique insider’s view on that world and the executives and representatives who inhabit it.
During this challenging time for the industry, I thought it might be helpful to define the three major B/D business models–value pricing; value added; and specialization–and suggest which models are best poised for success.
In retail sales, a “loss leader” means selling one product at a loss to sell others for a profit. Independent broker/dealers use a variation of that strategy that I call “value pricing.” Instead of selling anything at a loss, value-pricing firms reduce profitability to (or near) the breakeven point, and leave other profitable pricing alone.
Independent advisors often don’t know when they’re being overcharged or by how much. Traditional firms may be charging 15-25 basis points in administration fees for billing, statements, and recordkeeping on self-directed advisory platforms, for example, while value-pricing firms can lower those expenses to 0-5 basis points! If you have a book of business where a large portion of your assets are in self-directed advisory, lowering your administration fees can make a huge difference in what you ultimately net.
It’s disheartening to see some of the extremes that broker/dealers are reaching in devising new profit centers. Marking up errors and omission insurance a couple hundred dollars, haircutting VUL commissions from the 98% to 104% range down to 90%, or tacking 20 to 30 basis points onto the management fees of third-party managers is unfortunately becoming a growing practice. Advisors typically don’t have a clue as to what the profit centers are at broker/dealers and, frankly, the broker/dealers would like to keep it that way. Lack of transparency is just as big an issue between broker/dealers and advisors as is it is between advisor and client.
Most traditional independent broker/dealers process business, pay commissions, and monitor compliance; our second B/D category–value-added firms–bring much more to the table. Here’s what we’ve been seeing lately from these firms:
Marketing Support. This includes third-party and proprietary marketing programs with track records for increasing advisor production 35% to 50%. Stay tuned: even juicier marketing programs are coming online at even lower prices.
Lead Generation. This runs from data mining to elaborate target marketing programs for elite groups such as medical professionals, athletic directors, teachers, and union employees. The goal? A steady supply of highly lucrative 401(k) rollover business and new clients.
Practice Management. Broker/dealers know exactly how profitable practice management can be, but many advisors don’t realize the effect that saving time and boosting efficiency can have on their bottom lines. When they do, you can count on them to begin delegating such labor and resource intensive necessities as:
o Technology training
o Staff training
o Event planning
o Business planning
o Client surveys
o Succession planning and book acquisition assistance and financing
o Financial planning/advanced case design
o Hiring and staff management
Sophisticated practice management comes to brokerage houses with price tags, however, and the cost of extra staffing needed to offer those benefits is passed on to broker/dealers as a general expense. As an advisor, you need to be using these practice management tools and support; otherwise you will wind up paying for expensive platforms you never use. But if you’re self-sufficient and don’t need outside support, you’re better off finding a value-pricing firm.