6 Critical Transformations BDs Must Make: Pershing

In the latest of a series of reports on what the world will look like in the future for advisors and the companies with which they partner, Pershing has released Broker-Dealer of the Future II, in which it delineates six “stunning transformations” that it says BDs must experience if they wish to be successful in the future.

The 2008 Broker-Dealer of the Future I study noted that “advisory fees are the number one source of revenue for broker-dealers,” and that in five years, “the proportion of revenue represented by fees may exceed 50% of a broker-dealer’s total revenue.”

The study warned, however, that “with the growth in fee-based business comes a perceived competitive threat,” pointing out that many successful BD reps “now practice as independent, fee-only advisors. Convergence is upon us. The worlds of broker-dealers and RIAs are no longer separate and distinct.” 

Many independent broker-dealers have responded to that perceived competitive threat by offering to its reps RIA custody platforms that serve both as retention tools for existing reps and as attraction tools for fee-minded advisors. In its latest report, Pershing goes deeper into what leads reps to join a broker-dealer, as well as what leads them to leave a BD.

The new report is based on research conducted by FA Insight on 50 advisors affiliated with a range of broker-dealers supplemented by in-depth interviews with the leaders of six BDs: Eric Schwartz of Cambridge; Valerie Brown of Cetera; Joel Marks of First Allied; Michael Miroballi of BMO Harris, Marshall Leeds of Summit Brokerage and Seth Miller of TransAmerica. The report also uses data from the first Broker-Dealer of the Future report released by Pershing in 2008 and from the Financial Services Institute’s Broker-Dealer Financial Performance Studies.

Those six transformations are recommendations for how broker-dealers can succeed in the future. They are:

1. Identify ways your firm can avoid “commoditization”
2. Foster organic growth of existing relationships
3. Establish a sound economic model
4. Avoid the winner’s curse of high-cost recruitment
5. Espouse advisory services
6. Demonstrate stability and longevity

The report then focuses in on the first transformation, on how to avoid commoditization (Pershing will release separate points on the other markers of success throughout 2014). 

In the 2012 survey, 87% of responding advisors said broker-dealers were “less than very effective at communicating the value of their offerings.” The report cites Eric Schwartz, founder and chairman of Cambridge Investment Research, who argues that to avoid commoditization, “you have to know what your niche is and what you are really good at and have it very concrete so all your staff know it and stay focused on it.”

So the successful Broker-Dealer of the Future is likely to provide to its affiliated reps nine distinct differentiators that are communicated by the home office and understood clearly by its reps:

1. Solutions to complexity
2. Scale
3. Marketplace presence and brand
4. Technology solutions and data integration
5. Centralized resources
6. Quality control, due diligence and risk management
7. Financial stability
8. A center of knowledge and learning
9. A sense of belonging and culture  

The report was based on a telephone survey of 50 advisors, reflecting a cross-section of BD affiliation types — including wirehouse, regional and independent BDs — and who had at least three years experience and $50,000 in gross revenue. That survey was conducted by FA Insight (which partners with Investment Advisor on an annual benchmarking study of advisors), which also conducted the more in-depth interviews of the leaders of the six broker-dealers. The study also included data from the Financial Services Institute’s Broker-Dealer Financial Performance Studies.

Five Ways to Keep and Attract Reps

The Broker-Dealer of the Future II study also reports the findings of an FA insight study of advisors to determine what leads reps to stay at a borker-dealer, and what influences them to depart. There are five key areas where the study says BDs can “best add value outside of solely competing on price” when it comes to rep retention and recruiting.