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Why Partnerships Seem to Work So Well

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Remember the financial crisis? Remember the wirehouse research scandal? Remember the options-backdating scandal?

Critics of Dodd-Frank or Sarbanes-Oxley conveniently forget that bad actors have run rampant on Wall Street for a long time. That’s why we need regulation and legislation, neither of which is ever perfect. But an interesting analysis of why wrongdoing happens on Wall Street concerns the ownership model of the big firms.

Once upon a time (before 1970, when the NYSE no longer required members to be partnerships), the big brokerage firms cum investment banks were partnerships, where risk-taking was treated differently because the money in those big firms belonged to partners, not end clients. When the partnerships became public companies, the executives at those companies were removed from the concept that they were risking their own money.

I don’t remember where and from whom I first heard that partial explanation for the financial crisis of 2008-2009, though the report from the bipartisan Financial Crisis Inquiry Commission cited that ownership model change as one of the underlying causes of the crisis in its 2011 report. “The very nature of many Wall Street firms changed,” the report noted, “from relatively staid private partnerships to publicly traded corporations taking greater and more diverse kinds of risks.”

Along with the change in ownership came a big change in compensation for the machers of Wall Street. “When the investment banks went public in the 1980s and 1990s, the close relationship between bankers’ decisions and their compensation broke down. They were now trading with shareholders’ money.” (The report remains good reading; just Google GPO and FCIC to find it.)

Why this history lesson? Am I bashing public companies? No, not at all.

What I am saying is that a company’s ownership structure, and how it sets compensation, can make a big difference in the behavior of that company’s leadership and employees. It can also have a big impact on employee morale, for good or ill. It helps form the very culture of the company or the organization (nonprofits and other groups are not immune to these dynamics).

Over the years I’ve gotten to know the leaders and top executives of many independent broker-dealers, and I’ve come to admire and respect many of them. The leadership of Commonwealth Financial Network—the partners at Commonwealth—is unique. For one thing, they are often together in one place and time. Nobody hogs the spotlight when I interview them together, and there seems to be real affection among them, along with gentle jibes at each other’s foibles. The charismatic founder and chairman of Commonwealth, Joe Deitch, remains a formidable presence, though he—guess what!—has implemented a succession plan that’s working, judged by traditional metrics of success: top-line revenue growth, growth in production per rep and profitability. There are some non-traditional measures of success that are obvious to an observer like me: They tend to hold onto their leaders but also retain the key employees just below the leader-owners, who are often the folks that really make a business work.

And their advisors? I’ve never met one who wasn’t glad they switched to Commonwealth, and for all the years I’ve been at Investment Advisor, Commonwealth is always among the top three BDs who our surveyed reps in the annual Broker-Dealer of the Year voting say they’d affiliate with if they were unhappy with their current BD.

You think maybe it’s the ownership structure, the partnership, that makes Commonwealth different, and seemingly immune from the sturm und drang experienced by so many IBDs lately?