It’s no secret: One of the main reasons reps leave firms is lousy back room service.
Sure, all broker-dealers claim to offer terrific service. However, when selecting a firm, it is often tough for reps to gauge the true quality of that service, and the various factors that can influence that quality, or lack of it.
If you’ve already been burned by a broker-dealer’s approach to service, you know what I mean and likely want to avoid reliving it. If you’re new to all this, trust me: you’ll want to avoid the experience in the first place.
From many years of conversations with advisors as well as broker-dealers, we’ve learned that there are four primary factors affecting quality service: 1) broker-dealer service ratios; 2) “practice management” versus “standard” independent broker-dealers; 3) the broker-dealer’s approach to management and leadership; and 4) high back office turnover.
Why Such a Big Difference, and What Does It Mean to You?
With improved technology over the years, broker-dealers should have been able to trim staff while at the same time improving the quality of their service to advisors. In fact, the new credo for independent broker-dealers could easily read: Be automated and run lean! By running a lean back office, broker-dealers can offer higher payouts and lower expenses to advisors while bringing in greater profits to the firm.
A good example of this is a large Midwest broker-dealer we know that once employed about a dozen people in its payroll department, and did much of the work manually. Shortly after its payroll system was automated, the department’s staffing dropped to two while the accuracy of the firm’s payments to advisors increased dramatically.
On the other side of the coin, however, are firms that have implemented cutting-edge technology as a substitute for service. This assumption that technology will eliminate direct contact with the reps is a mistake. Bottom line: No matter how streamlined the technology, reps still need timely, quality service from the back office.
Added Value: “Practice Management” Versus “Standard” Independent Broker-Dealers
The original intent of “independent” broker-dealers was to process your business and provide supervision, and not much more. With the growth of practice management or “value-added” firms such as the Commonwealth Financial Network and Securities America, broker-dealers do a lot more than just process and supervise.
You can look at practice management as service on steroids. The intent of practice management is to enable the rep to delegate more tasks to the broker-dealer’s back office. This dramatically frees up advisor time, which results in greatly increasing productivity. What kind of back office services can be delegated? Examples include hiring and managing staff, learning and implementing technology, conducting client surveys, business planning, seminar and event planning. These additional services require higher staffing levels, which are evident at both Commonwealth with a 3:1 rep-to-staff ratio and Securities America at 5:1.
Value-added firms such as the two mentioned above are good fits for advisors who derive benefit from those additional services and, in effect, profit from being interdependent on their broker-dealer. However, if you’re a self-sufficient advisor running your business without all those bells and whistles, you still have access to broker-dealer platforms with quality service, but with low overall expenses.
The Dangers of a Service Ratio Reaching 10:1
As a recruiting firm, we get concerned when broker-dealer service ratios get up to around 10:1 or higher. Over the years, we’ve identified three factors that negatively impact service at firms with service ratios at that level:
Fast Recruiting Growth—Bringing on more than an additional 15–20% reps in a given year can be detrimental to everyone at the firm. Staff ratios of 10:1 or higher not only overload the transition department’s ability to do an efficient job for new reps, but also lower service quality for existing advisors. We’ve seen a few broker-dealers who can buck that trend, but they’re the exceptions, not the rule. Be aware that many firms add reps who won’t show up in their head count because smaller producers are being let go at the same time. So when contacting firms, be specific.
Ask how many reps have been added over the past year and how many have been let go. While you’re at it, check retention statistics. Better firms have retention rates of 95% or higher.
Too Many Small Producers—In the late 1990s, we saw firms such as SunAmerica Securities with such a high percentage of small producers that the company’s phone lines were always tied up. Whenever experienced producers called for help, they’d be on hold for 10 minutes or more. To counter this, SunAmerica implemented a special phone line for the larger producers. Still, wait times were longer than most advisors liked. What’s more, firms with a lot of smaller producers also have compliance departments catering to the lowest common denominator, so compliance policies tend to be heavy handed and paperwork is over the top. The best solution? Avoid firms with high concentrations of small producers.