Pershing has been delivering slices over the past year of its Broker-Dealer of the Future II research, which focused on six big transformations that independent BDs must embrace if they wish to succeed in the future. A follow-up to a 2008 study on broker-dealers, this study was based on research conducted by FA Insight in 2012 and on data from the Financial Services Institute’s “Broker-Dealer Financial Performance Studies.” FA Insight conducted telephone interviews with 50 registered reps of broker-dealers that included wirehouse, regional, bank and independent broker-dealers, supplemented by interviews with the leaders of a half-dozen broker-dealers. The clearing and custody firm began releasing the findings of its new study in December 2013.
The already-released first three “transformations” suggested that the Broker-Dealer of the Future would identify ways to avoid “commoditization,” foster organic growth of existing relationships and build a sound economic model.
The final three trends, released in early January 2015, urged forward-thinking broker-dealers to:
Avoid the winner’s curse of high-cost recruiting
Espouse advisory services
Demonstrate stability and longevity
On recruiting, the study reported that over the last five years, competition for top advisor talent has led to sharp increases in recruiting bonuses and higher payouts for recruits, but the “winners” in those highly competitive recruiting wars may in fact be losers over the longer term, since those incentives “may cause permanent damage to the economics of the winning broker-dealer.”
This “winner’s curse,” as economists call the condition, is borne out by FA Insight and FSI data showing that overall recruiting-related expenses for the average BD rose 14% in 2011 and 24% in 2012, matched by costs per recruit.
In addition, while rep departures from BDs stayed constant at 15% of the total rep force from 2008 to 2012, the rate of additions from recruiting has declined, and more of the most valuable reps—the bigger producers—are departing. Recruiting bonuses not only affect a BD’s bottom line, but also “seem to erode retention” of the existing rep force. So how to solve the problem? The study argued that “for recruiting to be profitable, it must be based on a sound economic model that focuses on value-added services and targets” reps whom the BD “believes it can best serve.”
The Trend Toward Fees, Focused
As for espousing and embracing advisory services, the study was blunt: “The true test for the competitive strength of a broker-dealer today is its ability to support financial advisors who prefer an advisory model to conduct their business.” That competitiveness is driven not just by the overwhelming trend within the investment industry toward fees, but also by research showing that BDs with above-average profitability had “a substantially higher level of advisory fees in their revenue mix.”