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.