Investment Advisor surveyed over 70 presidents and heads of broker-dealers big and small. We asked about the regulatory environment, compliance, recruiting, and the long- and short-term challenges they face. Not content with the answers as they were, we asked broker-dealer recruiting expert Jon Henschen, president of Henschen & Associates, an advisor placement firm, for his “color commentary” on what the responses mean for the larger industry as a whole, and what advisors should be looking for from the broker-dealers with which they choose to partner. True to form, Henschen, a well-known writer and speaker known for his sometimes brutal honesty, didn’t hold back on his frank analysis of the state of the industry, what it means for reps and—more importantly—what it means for clients.
Click through the following slides to see what issues broker-dealers and reps are facing in the coming months and years.
1. What issue do you feel is the most challenging to your firm business-wise in the short term (next 18 months)?
With its numerous dictates over the last several years, FINRA has become as popular as ObamaCare, with the efficiency of the postal service and the compassion of the IRS. This has been evident on the broker-dealer level, and I also noticed it at the TD Ameritrade conference—FINRA potentially regulating RIAs brought a feeling of doom to those attending. Current regulatory unknowns that have the attention of compliance departments as well as advisors are: 1) what will happen with 12b-1 fees, 2) how RIAs will be regulated, and 3) how new suitability/know-your-customer rules will shake out.
Regulatory uncertainty is a short-term issue. The longer term issue is that attracting advisors and keeping them happy will become increasingly difficult as the competition for high-quality reps shifts into high gear. Not only do firms have to seek out reps with little to no compliance baggage, they need to weed out credit problems, job hopping histories and potentially problematic alternative investment legacies on their books.
Firms are fearful of bringing on reps with multiple marks on their records because of the potential of getting on the regulator’s radar screen. There have always been issues with reps that had a bankruptcy. Now, a credit score under 600 can make a rep toxic in the marketplace.
A newer development in the marketplace is alternative investment aversion. To reps with substantial production, clean compliance and credit histories, and exposure to a minimal amount of conservative alternative investments, the world is your oyster and a world of broker-dealers awaits.
2. What issues do you feel are the most challenging to your firm business-wise in the long term (next three to five years and beyond)?
Margin squeeze gets the lion’s share percentage on the survey as the most challenging issue and that is spot on. Firms can get between a rock and a hard place on this issue as they realize reps don’t want to get under a 90% payout so they are left with raising fees to cover expenses. The current hot topic on expenses is whether to charge the huge increases in SIPC and FINRA assessment fees to the rep or absorb them, with more firms than not passing the assessment fees onto the rep. Improved markets with higher rep production have brought much needed relief to margins. Traditionally, money market accounts have been a few percentage points of broker-dealer profits. However, that evaporated when money market rates plunged, so any uptick in rates would bring a welcomed increase to profit margins. A common misconception we are hearing touted is that “economies of scale are everything.” Much of our industry’s problems over the last year had more to do with risk management than broker-dealer size, as Securities America reps will testify.
3. What issues do you feel ar the most challenging to individual reps in the short term (next 18 months)?
Here again the survey is right on the money, with building stronger businesses and finding new clients sitting at the top of the challenging issues list. On a broker-dealer level, this equates to practice management and marketing programs. Numerous broker-dealers are starting to implement practice management programs through third-party sources. However, surprisingly few firms have done much to help reps get new clients outside of commonplace platforms such as Peter Montoya’s. Besides First Allied with their Greenbook Marketing Program for gathering doctors as clients, large producer groups are another marketing source where reps can get a steady flow of new client assets through full turnkey marketing programs. Some of these producer group programs are networked in with as many as 60 corporations around the country offering clients in industries that are in layoff cycles, giving advisors substantial 401(k) rollover opportunities.