In part one of this two-part exploration of how size affects the prospects of independent broker-dealers (Which Broker-Dealers Will Survive? Lessons From Malcolm Gladwell), we wrote how in educational settings, Malcolm Gladwell found the ideal classroom size, reflected in what he calls the Inverted U-Curve Principle.
In this, the second and final part of our series, we return to the lessons for broker-dealers of journalist, author and speaker Gladwell.
The Rule of 150
For larger broker-dealers, I am going to refer to Malcolm Gladwell again, this time referencing his book, “The Tipping Point.” Gladwell talks about the “Rule of 150,” where the size of any grouping of people is a subtle contextual factor that can make a big difference to that group’s behavior.
Gladwell illustrated the Rule of 150 using the company Gore Associates, a privately held, multimillion-dollar high tech firm that is best known as the manufacturer of Gore-Tex fabric. At Gore, there are no titles and all employees wear nametags. Under their names on those tags is the title “Associate,” regardless of how much money they make or the level of responsibility they have. The atmosphere is one of “us” rather than “management and us.”
Gore is a large, established company attempting to behave like a small entrepreneurial startup. It has a rate of employee turnover that is about one-third the industry average, and has been profitable for 35 consecutive years with an innovative, high-profit product line that is the envy of the industry.
Gore discovered on its own that the way to achieve this is to adhere to the Rule of 150, though the company stumbled onto the principle through trial and error.
Gore’s late founder, Bill Gore, once told a reporter, “We found again and again that things get clumsy at 150, so 150 employees per plant became the company goal.” When asked about long-term planning, the company’s response is simple. “That’s easy, we put 150 parking spaces in the lot, and when people start parking on the grass, we know it’s time to build a new plant.” Today, Gore has 15 plants within a 12-mile radius in Delaware and Maryland. Each plant only has to be distinct enough to allow for an individual culture in each.
BD Back Offices and the Rule of 150
While broker-dealers are different than manufacturers, the Rule of 150 applies to the back office contact points where advisors regularly interact with their BD. These include but are not limited to business processing, answering the phones, trading, cashiering, service desks, new accounts and direct business. (Back office departments such as accounting, legal and compliance do not need to be included in the Rule of 150 since they are not contacted by advisors on a regular basis, if at all.)
One broker-dealer with 1,400 advisors that consistently ranks in the Top 10 on satisfaction surveys had 80 staffers in the departments above, well under the Rule of 150. Another firm we surveyed has consistently ranked in the Top 10 as well, but its growth is nearing the 3,000 advisor mark, with over 190 people in operations. Over the last year, we’ve been hearing rumblings from this broker-dealer’s advisors about the decline of overall service.
We may well see future surveys reflecting growing dissatisfaction and lower survey scores. With the operations area over the 150 threshold, the ability to maintain top-notch service will become increasingly difficult.
Broker-dealers on the large end of the midsized category—with 1,000 to 2,500 reps—enjoy a sweet spot of both service and services provided. Firms in this range that have high-quality service levels also have the added benefits of scale. This affords them the ability to provide comprehensive services that can help advisors get to the next level, which can include practice management, greater breadth of technology and integration, marketing programs and services specialties in 401(k), 403(b), insurance or endowment models.
The melding combination of quality services with quality service makes for a compelling combination that high-end producers find very attractive.
Us Versus Them (Management)
If you recall the Gore Associates story, there was little distinction between staff and management but rather an atmosphere of “us.” This is in direct opposition to the “us vs. management” style, which is an interoffice battle larger broker-dealers frequently encounter, with the byproduct being a negative effect on employee retention.