While AssetMark and Aite Group argue in a recent paper that large offices of supervisory jurisdiction face challenges and may not be as nimble and supportive of advisors as their smaller counterparts, industry veterans beg to differ.
“I disagree with the premise,” said William Hamm, president and CEO of Independent Financial Partners, a hybrid RIA affiliated with LPL Financial that was named an office of supervisory jurisdiction (OSJ) on June 30.
“While the style of an OSJ is important in the advisor-centric business, size is equally so and is scale, since these factors highly determinate in the shaping of the OSJ’s future,” Hamm explained in an interview with ThinkAdvisor.
If an OSJ grows from about 50 advisors to 500, Hamm explains, it can afford to add several staff members to focus on marketing and branding work, along with employees to work on technology and customize platforms for its reps.
In IFP’s case, it recently added three compliance analysts in Tampa, where is supports its network of 450 advisors, and plans for more in IFP’s Phoenix office. By becoming a super OSJ, IFP has more leverage when it comes to negotiating expenses, he says.
“It can do more thanks to it scale and it can often give higher financial payouts. I would say that size is a significant contributor to how successful and effective an OSJ can be vs. a smaller one,” Hamm stated.
Aite Group’s research points to business-builder OSJs, which provide services to advisors on a turnkey or customized basis and are very selective and aggressive when recruiting, as having the highest-producing reps. It also finds that among the business builders identified in its study, small firms are “equally equipped to deliver a consulting model to advisors as their ‘supersized’ peers.”
Cambridge Investment Research CEO Eric Schwartz says that size can both help and hurt OSJs.
One the one hand, “Just like clients expect more from reps, and reps look for broker-dealers to do more than they used to, reps look for more from OSJs as well,” Schwartz explained in an interview. This hurts smaller BDs “and can hurt smaller, less-sophisticated OSJs who do not offer as much value.”
Still, he argues, it is easier for smaller OSJs “to have a competitive offering than for smaller BDs … [since] the investment is not as large. But small OSJs have another challenge, which is payout. The biggest OSJs have the highest payouts and thus have more room to offer more services and higher payouts to reps.”
Broker-dealers — who face growing costs — offer payouts of around 70 to 92% to advisors, based on their size and business models, according to Schwartz, while BDs offer super OSJs payouts of 92 to 95%. But Matt Matrisian, senior vice president of strategic initiatives at AssetMark, argues that these high payouts work as a double-edged sword.
The larger OSJs have more resources over all to do more, but that have to critically evaluate their spending versus keeping a bigger slice of the pie for themselves, Matrisian says. “It depends on the attitude of the OSJ,” he explained in an interview. “Do they put [resources] into their own pocket or do something [with the resources] that makes sense for everyone?”
Schwartz believes it’s not worth splitting hairs.
“If an advisor is interested in getting some mentoring and other support, it’s true that a five-person OSJ can bring a lot of value to the advisor. But let’s face it, all OSJs have started out small and gotten bigger. And if they are bringing value to the advisors, they grow like BDs grow,” he said.
In addition, “All OSJs have to offer their advisors a compelling business model. They are like BDs within BDs. It’s not enough to send out commission checks and payouts and to handle compliance. You have to be more valuable,” Schwartz added.
Of the 23 Super OSJs working with Cambridge, “They all have their own business model, and some focus on niche markets, like that for 401(k) plans. Many do business coaching,” he said.
“While advisors may join an OSJ for compliance support, they are all looking for other value-added services, such as marketing. All OSJs have to do more today.”
These OSJ issues are being hashed out in the wider world of a broker-dealer field that is facing greater regulatory burdens and going through consolidation. These trends, Schwartz says, make super OSJs the place to be.
“The extra complexities brought on by new regulation, particularly the new DOL rules, will likely push more advisors to move to more sophisticated OSJs and BDs who have the bandwidth to help them overcome the new hurdles,” he said.