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Industry Spotlight > Broker Dealers

Evaluating Broker-Dealer Service

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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.

[Read more about broker-dealer service ratios.]

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.

Back Office Employees with an Active Book of Business—We’ve heard firms boast that many of their back office people also have a book of business. This situation is not only insane, it is a conflict. What happens when there is a major market correction? Is that back office employee you’re calling for service going to be thinking about how to service you, or are their thoughts going to be focused on their need to service their clients? This scenario is bad enough for a firm without fast growth. For a firm that is growing quickly, it will only compound service problems.

Assessing a Firm’s Service Level: Get the Right Reference
To avoid unnecessary trouble, it’s smart to know what you’re getting yourself into. Indeed, references from advisors can be a great way of uncovering a firm’s service problems. When making reference requests, confirm that advisors have more than half their assets in brokerage accounts. Why? Most reps who do direct business have fewer reasons to use back office support. Also, request that references have production of $200,000 GDC range or higher to help ensure that you’re talking to someone who utilizes the back office frequently.
While it pays to ask, it also pays to be selective. For instance, we’ve learned to steer our reference requests to these three sources:

1. Advisors who came on board within the past six months are a great resource for transition support feedback.
2. Advisors who joined the firm within two to three years are good for feedback on day-to-day service issues.
3. Five-year-plus advisors can usually give valuable input on how a firm’s culture and management has evolved over time.

Managers Manage Tasks. Leaders Lead People.
A broker-dealer’s upper management style can shed light on the nature and direction of a firm’s service level. The key here is how the firm views management versus leadership. Management and leadership are necessary components of any organization. The difference? Managers manage tasks. Leaders lead people. Case in point: The head chef at one of my favorite restaurants in St. Paul, Minn., was interviewed in the local newspaper. Here’s what he had to say about management versus leadership:

“There is a difference between being respected and being feared. A real leader earns the respect of those who follow him or her. Leading by intimidation can only get you so far. If you lead that way, people will undermine, at their first opportunity, everything you are trying to do.”

That holds true for any business model: restaurant or broker-dealer. We’ve heard numerous horror stories about broker-dealer presidents belittling, intimidating and berating back office personnel. One story that stands out is of a broker-dealer president who held quarterly meetings with all department heads. They’d sit around in a circle while the president assigned letter grades to each department head. Rarely would anyone get a B; most received a C or D or lower. Worse, people on the sales service desk were told they were overpaid and could forget about any sort of raise going forward.

Ironically, the head of that firm soon left only to be replaced by a new president who prided himself in never firing anyone. He preferred wearing people down until they quit. The likely outcome of such management style is that employees will leave at the first opportunity. If the back office staff is unhappy or understaffed, chances are you’ll be unhappy, too.

High Turnover Equals Big Headaches
This scenario can be one of the most frustrating for advisors. When a broker-dealer’s back office people don’t stick around very long, advisors’ calls are answered by new staff members who are early on the learning curve so they can’t be of much help. At firms that successfully retain staff, the back office people you call already have everything figured out and rarely get questions that they can’t answer. Who would you rather speak with?

High turnover is not only due to how back office people are treated but can also have demographic and social causes, as discussed by Fred Reichheld in his book, The Loyalty Effect. For instance, employees in the Midwest and in rural areas tended to be very loyal, while Northeasterners and city-dwellers were much more likely to switch. Married people exhibited higher loyalty than singles and renters were not nearly as loyal as homeowners. Examples of the benefits of low turnover are numerous in this book, such as the example of Edward Jones, which had a turnover rate that was half the industry average, while at the same time experiencing a return on equity that was twice the industry average. This example of lowest turnover coupled with highest profitability is no fluke. The Loyalty Effect offers examples in a broad range of businesses where this applies—from State Farm Insurance and USAA to Chick-fil-A. When talking to broker-dealer references, make sure to find out if staff is turning over quickly. This is a huge red flag that there are problems with the firm, which may translate into problems for you.

[Read more about what drives high turnover.]

Talented people work hardest when they’re proud of what they do, when their jobs are interesting and meaningful, and when they and their team members are recognized for their contribution and share in the benefits. Those firms that recognize this will have low turnover and all the rewards that come with that.

Try Your Own Due Diligence
Is evaluating how a broker-dealer approaches backroom service really worth your time and effort? You bet it is. In fact, not doing so can soon lead you right from the frying pan into the fire.

Ironically, in a world where all broker-dealers claim to offer quality back room service, more and more independent reps are actually leaving firms over poor service. So before signing on with any broker-dealer, do your homework. The time you invest in gauging a firm’s approach to back room service—and to leadership—will help you reap future returns.    

Jonathan Henschen, CFS, is president of Henschen & Associates. He specializes in placing advisors with independent broker-dealers. With more than 20 years of experience, Jon is widely sought after for his expertise on independent broker-dealer topics. His articles have appeared in the major industry publications, including Broker Dealer Journal, Producers Web, Investment Advisor and Broker World. Jon is frequently quoted in Investment News, On Wall Street, Investment Advisor, Broker Dealer Journal, Bloomberg News, Wall Street Journal, Boomer and the New York Post. Visit his website, or contact him at (888) 820-8107, (651)774-4161, or e-mail at [email protected].


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