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.
“More and more super OSJs are choosing to do more and more compliance and for that matter more operational support for their advisors,” Schwartz explained.
This is good news for BDs.
“OSJs in general and super OSJs specifically can take some of the compliance and operational support burden off the BD home office. When reps join an OSJ, they can leverage the scale of the OSJ for service, support and in some cases practice management and marketing.
“Some other broker-dealers that may have had regulatory or other compliance issues in the past could be wise to turn to or support super OSJs to share the burden of these responsibilities,” explained Schwartz.
Why are super OSJs helpful with compliance? “It means you have someone right there [working with or near the advisors,” he said. “You want a super OSJ who cares and thus is a good partner. With two sets of eyes – odds should go up in terms of success, compliance and the other ways that you take care of clients.”
“The super OSJ is basically today’s replacement of the small BD,” Schwartz said, “as more and more of the smaller BDs are going out of business.” While the largest 10 independent broker-dealers now have about 65% of business in the industry, the remaining BDs have 35%. These figures could go to 90% and 10%, respectively, he believes.
“As the industry matures, only the really big firms have the ability to deliver everything an advisor wants,” Schwartz explained.
The move toward super OSJs is “a major trend and one that has been growing for five to 10 years already. It seems to be accelerating,” he said.
For Cambridge, super OSJs are those with a minimum of 20 advisors working in multiple locations. Some manage their advisors’ compliance tasks, while others are more focused on marketing or recruiting.
According to Schwartz, Cambridge had five Super OSJs in 2006, which had about $20 million in revenue and represented roughly 10% of the BD’s total sales, which were some $200 million.
Now, it has 23 super OSJs, and they bring in about $200 million in revenue, accounting for 30% of total sales in 2016, which are expected to be about $700 million.
“The super OSJs have grown tenfold, while the BD overall has grown 3.5 times. But while this is the fastest-growing business for us, I do not see it continuing to grow that pace. It will grow faster than our other segments, but the differential will be less,” the Cambridge CEO said.
The firm is “equally supportive of solo practitioners, small ensembles or small OSJs, and super OSJs, but this segment is experiencing much faster growth,” he adds.
LPL Financial says it takes the same agnostic approach: “We support independent financial advisors in a range of affiliation models, from individual practices to large enterprises that support a network of advisors. Most importantly, we want to ensure advisors and firms can choose from the depth and breadth of tools, resources and expertise we have available so they can manage and grow their practice in ways that are best for their clients and their business,” it said in a statement. It declined to state the size of its super OSJ business.
Cambridge also is finding that some two-thirds of advisors “want to join us directly either alone or as part of a small- to midsize group of advisors who have already been working together. But the other third want to be part of a branch or super branch to help them grow their business. At Cambridge whichever model the rep wants — solo, ensemble, small group, large or super OSJ, that is the model we will help make happen for them,” Schwartz explained.
“In the old days, those with over $100,000 in revenue wouldn’t go to a branch. Now, we have $1 million producers joining a branch and some $3 million and larger groups joining super OSJs,” he added.
“This is because of the burden of issues like compliance. There is a lot happening these days, and advisors want to be part of something and not get lost in the shuffle,” Schwartz said. “This trend is accelerating, as smaller BDs are not able to keep up.”
— Check out FINRA Posts Loss for 2015 as Costs Rise, Fines Drop 30% on ThinkAdvisor.