Wirehouse advisors who kick the tires at independent firms soon discover that most independent firms offer payouts of 90% or pretty close to it. Even independent advisors producing at modest levels pocket at least 80% of their commissions.
While the payouts of prospective independent firms may appear almost identical, there can be a wide income disparity between advisors at two firms with roughly equivalent payouts.
In one case I’m aware of, for instance, an advisor’s annual charges at a major indie firm were 220% higher than he would have paid at a smaller boutique group — a difference of more than $8,000 per year. Unlike grid payouts at wirehouse and regional firms, there are three components to advisor payouts at independent broker-dealers.
First, there’s the official firm payout — in most cases around 90%. Independent advisors also pay ticket charges on trades and/or fees to custody assets. They also are charged monthly fees for items like compliance and technology.
It’s only after an advisor has carefully scrutinized all these charges and deducted them from the firm’s official payout that he can get a true sense of his actual payout at an independent firm. This can become a basis of comparison among prospective firms.
Advisors, of course, should choose firms based on “big picture” criteria like platform and technology capabilities, financial strength and strategic direction. Nonetheless, like all businessmen, advisors who are exploring independence need to understand their costs.
Costs & More Costs
Let’s review some of the expenses for which independent advisors are responsible.
1. Ticket Charges. Advisors are charged a fee each time they do transactional business. This includes trades of stocks, bonds, mutual funds, alternatives and other products. These charges can vary widely among firms.
One firm can charge a flat $20 fee for stock trades, while another may add in cents per share. Yet another firm charges $28 per trade.
Some firms reduce their payouts on transactional business to 75% or 80%. Charges on fixed income trades can differ as well.
2. Custody fees. Custodians charge fees based on the amount of assets that advisors hold with them. RIA custodians can offer advisors a choice of pay-as-you-go ticket charges on portfolios that they manage or ongoing assets-under-management (AUM) pricing.
3. Monthly Fees. Independent broker-dealers charge advisors fees for a host of services that they provide. These include errors-and-omissions (or E&O) liability insurance, technology and compliance.
Fees for services may be specifically delineated by some firms, while others group them under a general category like “association fees.” This is the area in which the charges of broker-dealers may differ the most.
Cheaper isn’t necessarily better, and advisors need to assess what they are getting for these monthly charges. It’s helpful for advisors to ask a prospective firm to provide them with an itemized list of monthly charges.
Superior technology, for example, may be well worth the added costs. Plus, advisors may prefer to have their compliance handled by the home office as opposed to engaging an OSJ practice within the new firm. Each firm has its own business models and cost structure.
Advisors who want to get a handle on their costs at both their existing and prospective broker-dealer should do careful analysis of the figures. Focusing solely on the firm’s official payout doesn’t provide them with sufficient information.
FAs need to thoroughly review ticket charges and custody fees. Also, garnering specific information on monthly charges and the exactly what services are provided by broker-dealers in return is critical.
— Check out Don’t Play Hard to Get When Switching Firms, Says Recruiter on ThinkAdvisor.