What Advisors Should Know When Their BD Gets Acquired

Papike has been a recruiter with the Papike family business, an IBD recruiting pioneer, from the time she was a college student and has placed thousands of advisors over the past 30 years.

In the interview, Papike explains three types of advisory-firm acquisitions, including those typically offering retention deals. She also weighs in on the significance of LPL Financial’s acquisition of Commonwealth Financial Network, a 46-year-old independent broker-dealer.

Here are highlights of our conversation:

THINKADVISOR: What does all the consolidation in the broker-dealer space mean to advisors who are changing firms?

JODIE PAPIKE: Advisors across the marketplace are feeling really uncertain about choosing a firm that won’t be sold. They’ve been affected by consolidation time and time again.

They just want to land with a firm where they’re ensured that they’ll have stability for their practice and not have to go through [their firm’s sale] another time.

So advisors are feeling less trusting about taking someone’s word that the firm isn’t going to be sold. That’s definitely a trend.

Why is LPL Financial’s acquisition of Commonwealth Financial Network significant?

Anytime a firm that’s been around [more than] 40 years and has so much history and legacy is acquired, it’s a big story.

A lot of Commonwealth’s advisors have been there for a very long time and are used to their unique service, back-office support and technology infrastructure, and they really like it.

Why would Commonwealth want to sell?

They have 12 managing principals, and some of them have been looking at options to exit the business.

If an advisor’s firm is acquired, should the advisor discuss retention deals?

They need to look at what type of acquisition it is. Some companies will come in and take over ownership but don’t change anything.

That doesn’t mean there may not be changes down the road. It’s just that it takes a little bit of time for them.

What’s another type of acquisition?

A firm is acquired by a company that eventually is going to roll the advisors over and use a different clearing platform and technology. So there’s much more change involved.

With that situation, there’s typically some sort of retention amount offered because of the change. With any change comes a level of disruption.

The retention money should be factored in, but it shouldn’t be the thing that moves the needle.

The most important thing for the advisor is to evaluate what their specific needs and wants are and whether or not the new firm can satisfy them.

What would be a third type of acquisition?

A new partner comes in and takes on a minority stake in the company just to stimulate an infusion of capital.

Because the ownership structure hasn’t changed, there’s very little disruption to advisors.

After their firm is acquired, why and how should an advisor consider selling their practice?

I don’t know that they should necessarily, unless they were already thinking about selling and were really focused on it.

I don’t think the sale of a firm should or typically does push someone to sell their business. That isn’t something that should be rushed.

What’s the status of the broker-dealer world vs. the RIA space?

There are fewer options in the traditional independent broker world. What’s happening as a result is that there are more RIAs with BDs available to advisors.

Many of them are realizing that there are fantastic RIA options out there that look and feel very similar to an independent BD or have a BD element to them.

So there are still plenty of very good quality options.

Is a “BD element” the same as a broker-dealer per se?

They’re the same. Let’s look at Commonwealth: They have an RIA for advisory business — anything fee-based. They also have a BD where advisors do commission business.

Commonwealth’s percentage of fee-based business is way higher than their BD business. So their structure is more like an RIA than a BD.

Then there are firms that started as an RIA front and center. So they attract a lot of fee-based advisors, but they also have a BD arm as well.

That’s really the same thing as Commonwealth has. It’s just branded differently.

With the number of broker-dealers shrinking, what’s the future of this channel?

The two biggest things are more consolidation and the continuing emergence of new RIAs with BDs.

As time goes on, the BDs will continue to evolve to look more and more like RIAs. That’s where the industry is going to continue to grow.

What about the advisor who still wants to do transactional business?

There will be BDs for that, for sure. I don’t see that ever going away fully.

But as time passes, more and more advisors are doing a much larger percentage of their business in advisory. That’s been the direction of the industry for a long time.

What about clients who have a high level of assets but not much activity in their investment account? Why should they pay an annual fee? 

A lot of advisors have come up with solutions for that: They’re charging a lower fee or not charging a fee at all in a lot of situations.

And if it’s just a buy-and-hold strategy, they can hold assets to the side.