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Practice Management > Compensation and Fees

Switching BDs? Beware of Hidden Costs

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What You Need to Know

  • Upfront recruiting checks may be tempting, but changes to technology and service can hamper long-term profitability.
  • Clients must be part of the consideration when making a business transition, especially if there are hidden fees.
  • Long-term lockups can be a particular headache for advisors.

As the recruiting wars have intensified, advisors across the industry have begun to appreciate the ins and outs of transition packages. Indeed, while upfront recruiting checks continue to be a huge carrot, more advisors today are considering other factors just as much, including how technology and service will impact long-term profitability.

Even so, calculating the actual cost of a transition remains an inexact science.

The only way to gauge whether a move is a “win” for an advisor and their clients is to measure the practice’s growth and profitability both on its current and would-be broker-dealer platform over, for example, a 10-year period and then compare the difference.

Of course, an advisor can only be on one platform at a time, so this is essentially an impossible exercise. In lieu of that, however, there are several questions advisors can ask themselves — and their prospective BD partners — to assess the potential hidden costs of a transition and gauge whether such a move will end up looking as good in reality as it does on paper:

1. How much will your business change?

In my experience, every advisor who has achieved long-term success in this industry has done so by customizing their practice into a fine-tuned machine for meeting the needs of the particular clients they serve. This means marshaling precisely the right people, technology, processes products and expertise to meet and exceed the expectations of their target audiences.

To the extent a transition process causes an advisor to change any of the above features of their business, it has to be viewed as coming with a hidden price tag.

What this means is that choosing between three or four different pre-set service configurations on a new BD’s platform — and hoping that the new model is “close enough” to their own fine-tuned client service machine — may not be enough.

The best way to minimize the hidden costs of changes to an advisor’s business model is to reduce those changes in the first place. Where possible, advisors should seek to work with firm partners willing to enhance their platforms to accommodate the advisor’s existing business, whether that means onboarding new technology platforms, new product offerings or other features.

2. What’s the long-term economic impact for clients?

Advisors can’t honestly say they place their clients’ best interests at the heart of everything they do if they don’t consider the economic impact on clients as part of their transition decision-making process. For a move to be a long-term win for the advisor, it also needs to be a win for their clients.

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Advisors can ensure that clients benefit from a transition by carefully examining the cost structure they will face at the new firm before making a move. Does the new firm offer less expensive share classes of the same mutual funds or other products in which clients are already invested?

Will clients face new “nickel and dime” charges for services they’re accustomed to receiving gratis? If the advisor’s cost structure increases, will they be forced to pass those expenses to their clients?

The discussion on transition economics is never just a two-way dialogue between the advisor and the new firm. Naturally, clients also are interested in these discussions, so advisors would be well-served to conduct their diligence accordingly.

3. If a long-term lockup is involved, are there small areas of ambiguity that could turn into major headaches down the road?

No matter how large the upfront check is, a long-term lockup period will diminish an advisor’s leverage over time in their relationship with a new BD or wealth management firm.

When expectations are not clearly delineated from the start, many advisors who are subject to five-, seven- or even nine-year lockups often find that their new firm partner isn’t satisfied with the inch they’re willing to give — rather, they want multiple miles, and fast.

These escalating requirements may take the form of growing pressure to sell proprietary products, to move clients to more expensive platforms or to deploy more costly technology systems within the advisor’s practice. Any or all of these demands can gradually weaken the relationship between advisor and firm until it’s no longer workable.

With this in mind, advisors can put themselves in the best position to succeed by ferreting out and resolving areas of ambiguity in their agreements with new BDs or wealth management firms as early as possible, especially when multi-year lockups are involved.

As well-versed as advisors have become in deciphering the economics of transition agreements, there are still significant hidden costs they should bear in mind. By working with the new firm to customize their service offerings; thinking about the economic impacts of a move for clients; and clarifying expectations as early as possible, advisors can minimize these unexpected costs — and keep themselves on the path to profitable growth.


Mark Contey is Chief Business Development Officer for LaSalle St., a family of firms comprising an independent broker-dealer and an SEC-registered investment advisor.