Independent channel executives love to cheer their space — and no wonder. It continues to grab market share. It exudes a strong client-first mindset. And, according to Fidelity Investments’ new Broker and Advisor Sentiment Index, RIAs and the independent broker-dealer channel generate the highest levels of advisor satisfaction. These folks are happy.
But in corner offices, top leaders are grappling with a key question: As it faces revenue-building inhibitors and other challenges, what must the independent channel do to create sustainable success?
As Bill Dwyer, president of national sales and marketing for LPL Financial, frames it: “The cost of autonomy has gone up.”
For two decades, advisors were able to grow their businesses nicely as a result of market appreciation. No longer.
“From our perspective, it’s about getting to scale, to critical mass,” Dwyer adds. “It’s about adding more relationships to grow your business as opposed to watching your assets grow. And that drives your costs up.”
Moreover, the very nature of the independent business model is changing as first-generation advisors build out teams and infrastructure.
“In order to be sustainable, many advisory firms need to grow beyond themselves and in order to do that we need to invest in other people. For a lot of people, that means owners have to be willing to forgo personal compensation to invest in their team,” observes Rebecca Pomering, CEO of Moss Adams Wealth Advisors. “For 15 years, I’ve heard owners say: ‘When I was 30, no one did that for me.’ Well, get over it. People need to realize the model really has changed.”
And what makes an advisor independent? The definition itself is being rethought. Is an RIA today really all that different from an advisor affiliated with an independent broker-dealer? Is LPL all that different from Schwab or Fidelity or TD Ameritrade? Perhaps not.
“These are independent advisors. What’s the difference between an LPL offering and a TD Ameritrade offering? It’s subtle,” according to Chip Roame, managing principal of Tiburon Strategic Advisors. “They are all independent advisors at the end of the day.”
To the point, Tiburon plans in the next year or two to collapse its RIA research reports into its independent broker-dealer reports.
Other trends in the independent space that bear watching:
- A rise in hybrid practices: The models, allowing advisors to combine traditional brokerage and fee-based advisory businesses, provide a soft landing for brokers transitioning to the advisory space. Notably, more than half the advisors who went independent with Schwab in 2009 and 2010 established a hybrid model. In particular, the dually registered advisor segment represents the fastest-growing sector in the independent channel, according to a Cerulli report. “It makes sense, that’s why it’s doing so well,” notes Sanjiv Mirchandani, president of National Financial, a unit of Fidelity Investments. “The church and state separation between commissions and fees is long gone.”
- The absence of younger advisors: Fidelity’s 2011 Sentiment Index across all industry channels puts the average age of an advisor at 49 with nearly one-half over 50. Yet 40 percent haven’t thought out a succession strategy. “It’s definitely an issue,” says Mirchandani, especially when Generation Y, future clients roughly defined today as 16 to 33, number 77 million, the same size as baby boomers. “The good news is that it’s a great career for someone,” adds Mark Tibergien, CEO of Pershing Advisor Solutions. “The bad news is the industry seems to lack the mechanism to harvest the opportunity. The reality is we’re not doing much to change the equation.”
- A flight to safety: The implosion of stalwart Securities America, the most highly publicized example of independent broker-dealers felled by private placements, gave many independent advisors pause. “Any organization, even those with sterling reputations, can have a major misstep. The bigger issue that an event like this creates is that advisors in demand put a lot more emphasis on examining the culture of safety within the firms [with which] they affiliate,” Tibergien says. “What it does is give them another box to tick in their due diligence.” As for the industry, he adds: “If you haven’t taken a look at your processes and protocols around prudent selection, the behavior of your advisors and whether you act with alacrity when you see a problem, you might want to do that.”
- A new premium on culture: Raymond James Financial Services (“a sharing culture”) and Commonwealth Financial Network with its small but selective boutique framework are longtime standouts when it comes to community and culture. Imagine: When Commonwealth started 32 years ago with four employees, founder Joe Deitch brought in a bag of bagels for everyone on Fridays. Today, with 500 employees at two home offices on both coasts, Fridays are still bagel day. “How you get it right is not easy,” says Commonwealth’s Andrew Daniels, managing director of field development. “We work at it every single day.”
Other broker-dealers and custodians, as well, would be wise to follow suit. Race For Talent II: Ideas Without Limits, a Pershing Advisor Solutions white paper, suggests that a shared culture across a broker-dealer’s organization creates a sense of ownership, belonging, family and community — and that it greatly influences retention and recruitment. “As advisors get more focused on job satisfaction, we hear them saying loud and clear they want to work with like-minded people. It can be lonely to be a broker,” adds Mirchandani. “They need that sense of community and they need to feel their firm is a good fit. If you’re an independent broker-dealer, you need to be thinking about this.”
Looking across the landscape, Pomering says there are individual advisory shops that are stepping up their performance. But, she says, “As an industry, I would put us at 3.5 or 4. Growing pains? Yes. I don’t think we’re very high on the evolution scale. There are no 10s on the board yet.”
The notion of sustainability is front and center today, whether you’re a Schwab or an LPL advisor. As Cerulli director Bing Waldert puts it: “The idea of creating sustainable growth is endemic across the industry right now.”
LPL, the largest independent broker-dealer with 12,500 advisors, offers a good example of how the back office has assumed a far more critical role in helping advisors achieve their best results.