What You Need to Know
- About half of 624,500 registered reps are with with broker-dealers only, while others are dually registered.
- The most important driving factors in advisor movement are freedom, flexibility and control.
- There’s never been more competition for the industry’s elite talent.
It’s not easy to keep up with the rapidly changing panorama of financial services firms. As larger entities gobble up smaller ones, which are grappling with numerous challenges, the total number of broker-dealers registered with the Financial Industry Regulatory Authority continues to drop. It now stands at about 3,500 and is declining by about 100 per year.
The total number of registered representatives stands at about 624,500. About half of these professionals are registered with broker-dealers only, while others are dually registered (as registered reps and investment advisor representatives).
Many advisors are choosing to work under the umbrella of a registered investment advisor, and the number of RIAs is on the rise. It’s now at 13,500 and has been growing by about 400–500 firms a year, according to the Investment Adviser Association and National Regulatory Services.
To make sense of these significant industry trends and what they mean for financial advisors, we spoke with Louis and Mindy Diamond of Diamond Consultants.
Mindy founded the recruiting firm Diamond Consultants in 1998 and serves as its CEO. Louis, her son, was tapped as its president earlier this year and has been with the firm since 2016, after working in financial services for seven years. (One of their colleagues is Chief Operating Officer and General Counsel Howard Diamond, Mindy’s husband and Louis’ father.)
ThinkAdvisor: What are the biggest trends affecting broker-dealers today?
Louis Diamond: One trend we’ve seen is that firms with multiple affiliation models have become incredibly appealing to advisors.
This is because as advisors’ practices evolve in size and complexity, either as generations retire out or someone wants more control and freedom, they have the ability to go independent or change the amount of support they’re getting without having to transition away from their organization.
Mindy Diamond: Also what’s really changed in the industry is that the advisor mindset has shifted, meaning what advisors value today is very different than what it once was.
When I started the business almost 25 years ago, the top questions on most advisors’ minds at a broker-dealer were: What are the deals? What kind of deal is being offered by another firm or another model to advisors who join them?
Everyone wants to understand the economics, since the economics of a transition need to make sense. But the most important driving factor in advisor movement today is advisors wanting freedom, flexibility and control. Also, this is driving the way the industry has evolved — and newer models are being born.
The big firms are losing a lot of advisors, who can’t get what they want where they are. People are moving to the right side of the industry continuum, where newer models have been born to solve for exactly what advisors want — models that give advisors more freedom, flexibility and control.
What other thoughts do you have about the new models?
Louis: We look at our data and find that when wirehouse advisors move these days, many are moving to alternative models rather than to another wirehouse. We’re still seeing a decent amount of movement from wirehouse to wirehouse, and it’s picking back up from a low point of a couple of years ago.
But increasingly advisors are finding success and that they really resonate at boutique firms like Rockefeller Capital Management, First Republic Bank and even JPMorgan. Some of the “super-regionals,” like Raymond James or RBC, those types of firms seem to be resonating, too — ones that are smaller and more advisor friendly. They have cultures that advisors really like, and that gives advisors a sense of freedom and control that maybe they didn’t have at their old firm.
Mindy: We’re talking about the models that advisors view as the best of both worlds. On the one hand, they can go independent and build their own firm with maximum freedom and control there. But they also have to go through the headache of building a firm.
While plenty of advisors are entrepreneurial and want to do just that, there’s a large swath of the advisor population that wants more independence, more control and more freedom than they have at Merrill Lynch, Morgan Stanley or UBS, but going independent is a bridge too far.
The models of the firms that Louis just mentioned — the Rockefellers, the First Republics, the super-regional firms, boutique firms, etc. — provide them with the best of both worlds, a turnkey firm all under one roof with fully built infrastructure along with the additional freedom and control they could get if they were completely independent.
Do these trends surprise you or were there signs they were coming?
Louis: The pivot point we saw — in what advisors valued and how they were expressing these values by the firms they chose — was right after the financial crisis [of 2007–2008]. Before the crisis, our recruiting data showed that a quality wirehouse team would — 70% of the time — stay in that channel.
Post crisis, as advisors saw that these brands could work to their detriment, advisors overall just wanted more freedom and control over their businesses. We saw the pivot point for the opening of these regional firms to pick up market share.
The boutique space used to have Deutsche Bank, Credit Suisse, Lehman and Bear Stearns, and all those firms either went out of business or were sold to larger companies. The boutique space was kind of missing some really exciting higher-end options.
Fast forward to around 2017-2018, First Republic becomes a really viable home for top teams. Rockefeller also came along and has been doing this for a few years.
The financial crisis was the pivot point for when advisors gave themselves permission on behalf of their clients to consider going to either lesser-known firms or striking out on their own and building their own brand. Ultimately, they realized the clients’ relationship was with them and not with the organization or the name on the business card.
Mindy: Looking back, Hightower Advisors was a maverick in this space. When it was first born, it was a very different model than it is today. Today, Hightower is an established RIA business. At first, its target was disenfranchised wirehouse advisors who wanted a model of supported, quasi-independence with a partnership.
Before Elliot Weissbluth launched Hightower, he came to our office to pitch the model. I remember saying to him, “That is never going to fly. No wirehouse advisor is going to go to a firm they’ve never heard of.”
But he proved me wrong. This was the first firm, despite the lack of brand name recognition, to show that if advisors could get what they wanted — more freedom, flexibility, control and the ability to monetize the business — they’d be very happy to go and vote with their feet.
Even though Hightower represents a different model today, the model itself is probably one of the most popular models there is due to the notion of supported independence.
Also, in terms of the coronavirus pandemic’s effect, there is no question that the work-from-home initiative absolutely was a large factor in driving advisor movement. We’ve seen more movement of top teams in 2020, into 2021 and going forward, driven by a lot of disenfranchisement.
Again, people want more freedom and control, and don’t like the amount of bureaucracy they’ve been dealing with or don’t trust their leadership, etc. But [working from] home has given them the time and privacy to self-reflect and to do their due diligence in a way that they didn’t before.
It’s also driven home the notion that “I am not nearly as reliant on my branch manager or the infrastructure and support of my branch as I thought I was. Maybe I’m more likely to go independent. I need the big brand name or the big behemoth firm less than I thought I did.” All of those things are driving advisor movement.
What’s a more recent issue or trend affecting recruiting and advisor movement?
Louis: Deals are at a high point, especially for top teams. There’s never been more competition for the industry’s elite talent. The headline numbers that we’ve seen include the 300%-plus deals that have been in place for the last five or six years.
But a big difference today is that firms are now putting more of that deal [money] upfront than ever. Many are reimbursing an advisor for all or a portion of their unvested deferred compensation, which is really important to them. They’re making the goals in the deals a bit easier to hit.
Overall, it’s a really good time to be a seller or to be an advisor, because there’s more competition for their business than ever before. Firms that are serious about recruiting have really had to step up, both in terms of the deals on a percentage basis and with their structure in the value proposition.
Mindy: As advisors look past the wirehouses or the traditional broker-dealer options and look at options like Rockefeller, Sanctuary Wealth Partners or other models of quasi-independence, what’s on the table a lot of the time is equity.
We’ve got an advisor [client] now that is with a wirehouse and is looking at a quasi-independent boutique firm. Fifty percent of the deal is being paid in cash, but the other 50% is equity. Now that’s what’s really changed.