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Industry Spotlight > Broker Dealers

5 Signs You Need to Switch Broker-Dealers

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To avoid changing broker-dealers, advisors will tolerate a great deal of aggravation and frustration.

It’s easy to understand why. Changing broker-dealers is not a simple endeavor, and there’s no sugar coating the fact that it’s a disruptive process.

However, avoiding a broker-dealer switch that can offer your business clear advantages hinders your ability to reach your full potential. Still, many advisors procrastinate, deciding to stay with a broker-dealer that does not meet their needs.

Here are five areas where advisors suffer frustration and restrictions with broker-dealers that keep them from soaring to greater heights:

1. Poor Service

There are two trends in the area of service-quality decline that affect both smaller broker-dealers and larger broker-dealers with back-office consolidation.

First, over the past few years, smaller broker-dealers have spent about 30% more on compliance to satisfy FINRA requirements than in earlier years. One way to fund the additional staffing has been to lay off staff in the operations department, which adds to the service load of remaining employees.

For the advisor, this results in longer response times, a decline in the accuracy of information supplied and an overall diminished service experience.

For larger broker-dealer conglomerates that implement back-office consolidation (i.e., multiple broker-dealers tied to one parent), cost savings are their reward; but substantially lower staffing levels are a big downside for advisors, especially for their team members.

Often, advisors dealing with consolidated back-office services see the service they receive as something that is tolerated, not appreciated or even enjoyed.

It’s also worth noting that for advisors with staff, these trends cause much direct suffering — since it’s usually staff that must interact with the over-stretched back-office employees of broker-dealers;  advisors may be  somewhat insulated from the service decline.

Do advisors care that their staff has to tolerate sub-par service? They better, or the business — meaning clients — will suffer, too.

2. Unusually High Expenses

When it comes to excessive expenses, here are the most common areas that advisors complain about:

  • High advisory administration fees (20 basis points or more for non-wrap accounts);
  • Platform fees for assets with third-party managers not held directly by the BD;
  • Mark ups on third-party money-management fees; and
  • High E&O (errors and omissions insurance) rates along with high deductibles of $150,000 or more.

These costs can vary greatly from firm to firm, of course. As a rule, though, larger firms tend to charge platform fees and markups on third-party managers, which may be used to pay for large sign-on bonuses and costly services; small and mid-sized firms tend not to employ such practices.  

For advisor-managed assets, administration fees can be had for as little as $25 per account each year, which covers both billing and performance reporting.

As for high E&O rates and deductibles, these may be a reflection of a BD’s frequent entanglements with FINRA and other regulators, or can be related to a high volume of business tied to alternative investments and REITs, which are more expensive to insure.

3. Surviving Not Thriving

Some advisors are concerned that their broker-dealer is struggling financially, but these FAs stay with them in the hopes that things will work out.

But consider this: Broker-dealers in survival mode make little if any investments in technology improvements, staff expansion, the addition of services or the support of succession/continuation plans.

As your broker-dealer falls further and further behind, so does your ability to compete in the marketplace. Not keeping up with technology and industry trends puts advisors at risk of being commoditized.  

4. Lack of Services

Some industry veterans think mid-sized broker-dealers are more focused on service than other BDs, thus enabling affiliated advisors to have productive working relations with back-office staff.

Large firms can have a harder time delivering great service because of their size, though they often will showcase the depth and breadth of their services.

With the advent of outsourcing, some mid-sized broker dealers have been able to offer high-quality services without needing to build out their operations internally.

Services such as practice-management consulting can bring substantial improvements in advisors’ office operations, hiring, technology usage, marketing, staff training and business planning — all of which can domino into production increases of 30% or more within a year of implementation.

Advisors also rave about these other services: support in the recruitment of advisors and other team members; marketing on social media, including YouTube videos and Facebook implementation; and succession and continuation planning tied to both finding a successor and obtaining the associated financing for this business move.

Many broker-dealers could do much more in terms of services that let advisors add efficiencies to their businesses, grow their practices and better compete in the marketplace.

5. Broker-Dealer Mismatch

I consulted for one group with half of its results tied to institutional business, which is the growing portion of their book. They are at a bank broker-dealer, which makes them a fish out of water when it comes to the type of business the bank is accustomed to servicing.

The bank makes an exception for them, because they do a large amount of production.  But being an exception at your broker-dealer can be a lonely and dysfunctional situation.

Still, we frequently come across high-quality advisors who feel like red-headed stepchildren at their broker-dealers but do not make a move that would truly put them in the right wheelhouse for their marketing and business focus.

Why do they stay put? Simply because they put off the inconvenience of making a broker-dealer switch.

Other common mismatches include advisors with:

  • An advisory focus but affiliated with a transactional broker-dealer;
  • A desire to work with a hybrid, dual-clearing firm but now affiliated with a broker-dealer that supports neither;
  • A focus on alternative investments/REITs but with a firm that offers little to none of these products;
  • In growth mode but at a broker-dealer offering little to no services that help advisors grow;
  • Looking to grow aggressively but lacking BD support for recruiting;
  • Needing a succession/continuation plan but at a firm with little to no advisors in his/her geographic area and no other support for such plans; and
  • A clean compliance record but at a firm with plenty of compliance issues.

Regardless of the costs and headaches from high E&O rates and deductibles — not to mention extra layers of company policies and procedures — advisors frequently follow the path of least resistance and stay put.

What’s up? According to Denis Waitley, motivational speaker and author of the audio series “The Psychology of Winning” and books like “Seeds of Greatness” and “The Winner’s Edge: “Procrastination is the fear of success.”

“People procrastinate because they are afraid of the success that they know will result if they move ahead now. Because success is heavy, carries a responsibility with it, it is much easier to procrastinate and live on the ‘Someday I’ll’ philosophy,” Waitley writes.

Greater levels of success elude advisors described above primarily due to procrastination. Advisors who know they are no longer a fit for their firm, yet stay, hobble their own success.

Changing broker-dealer should be viewed as a strategic business move in which short-term pain is traded in for long-term gain.


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