Broker-Dealers Fight For Advisors, Scale
by Mike Byrnes
January 31, 2012 Financial Advisor
The Financial Services Institute (FSI) hosted its most widely attended OneVoice conference ever this week in San Diego. A common theme in many sessions was the future of the broker-dealer industry and how it was going to impact the B-D executives in attendance.
A Few Recruiters’ Perspectives
A panel of recruiters shared their thoughts on the industry, from their unique perspective dealing in broker-dealer negotiations with advisors.
Jodie Papike, an executive vice president at Cross-Search, says that service is important to advisors and one of the things that gets them to move to a broker-dealer. “A lot of advisors get frustrated with the service,” she said.
Ryan Shanks, the founder and CEO of Finetooth Consulting, said the advisors ask themselves, “Am I really tapping in to all the things I really wanted?” If not, they can be lured away with compensation. If this happens, he said, “Bigger firms win, as they can get creative with transition money. It could be cost sharing. It could be getting involved in the recruiting.”Jon Henschen, the president of Henschen & Associates, said compensation packages are encouraging advisors to make moves. When asked, “What is being offered?” he said, “Everything and anything.” He explained that it used to be that great service was all that broker-dealers needed to provide, but that is not the case anymore. He gave examples of broker-dealers offering funding so an advisor can buy a practice. These companies are also offering equity and setting up practice management departments to help the advisors’ businesses. “It’s more about partnerships — it’s not just about service. It is not enough to just process business and supervise it,” said Henschen.
When it comes to retaining business, Shanks said, “You can’t sit back and assume advisors want to stay with you, even though they have been with you for 15 years.” He spoke to the attendees about the hybrid RIA model and asked, “How are you going to stay ahead of this? If they won’t address this, we’re seeing B-Ds cut themselves out of the equations (even if they have great relationships with their advisors.)” He followed up with the question, “If advisors want to buy a practice, how are you going to support them?”
Papike explained that the broker-dealers have a problem with compliance. “We are in a different world with regulators.” She said advisors do not understand how much broker-dealers have to deal with compliance issues; they think so much of what is coming down on them is from the B-Ds, not the regulators. She also explained that the advisors need to understand that broker-dealers need to make money too.
Joe Russo, the panel moderator and the chairman and CEO of Advantage Financial Group Inc., said that when advisors negotiate payouts and fees, they must consider what the B-Ds are going through as they lobby for higher payouts. He likened it to what would happen if an advisor’s clients always asked for lower fees.
Papike said, “Advisors are more greedy than ever. It is not good for the industry. It is very difficult for the small and midsized B-Ds to deal with. Advisors expect more than ever before. They want more up-front money.”
Shanks added that advisors need to understand that if the broker-dealers do not benefit, than the advisor will not be able to benefit.Henschen spoke about 40% bonuses being offered to advisors. He wondered if this made sense, asking, “When do they make money? In seven to eight years?” He cautioned advisors to not accept these offers blindly though, as these broker-dealers often pad expenses. “They play a lot of games,” said Henschen.
Papike recommended advisors ask for a one-pager for all the broker-dealers’ expenses.
Russo spoke about another option advisors should consider — working under a super OSJ model. “More and more of the advisors don’t see a downside risk with a super OSJ.”Henschen added that negative comments online are becoming a real issue for some broker-dealers. Because advisors’ clients and prospects are now very comfortable doing searches online, advisors cannot risk associating themselves with broker-dealers with bad online reputations.
A Flaw The Industry Needs To Address
A show of hands in the recruiters’ panel session suggested that almost no broker-dealers want to take on junior advisors with little or no business.
Tom Endersbe, of Endersbe, Herron and Associates, gave a presentation about the graying of the advisory business. He challenged the attendees, saying, “There is enough change in the industry that you have to take a bold move.”
He explained that since advisors are stuck in their day-to-day duties, they must count on broker-dealers to have a vision for the future, since the B-Ds see things from a much different angle.
“Seventy-one percent of the assets under management will have a new leader in the next 14 years,” he said. “It is a goldmine or a huge risk. It can be an opportunity or be scary.”
Endersbe said that 59% of advisors in the independent channel plan to fully exit the business in the next 10 years, but almost half of advisors have no formal succession or continuity plan. Thus, the industry needs to focus on what lies ahead and needs to start developing the next generation of advisors.
He said advisors become less productive if they simply try to hold on in the business rather than grow their business. Just one more reason broker-dealers should be getting the advisors to take on the next level of talent. He pointed out another risk: “A drop in advisor count results in loss of economies of scale.”
By not taking on the next generation of advisors, the next generation of clients will be lost. “They will go to Schwab, TD Ameritrade, etc.,” warned Endersbe.
A Look At The Future
Philip Palaveev, CEO of the Ensemble Practice LLC, told attendees, “Size matters. With more people, there are more resources, and organizations are more profitable.” He said the industry is running out of large firms.
He drew a parallel to the United States’ 100,000 accounting firms and half a million CPAs, explaining that it is a fairly mature industry. That is where that financial advice business is going, he said. It will become a zero-sum industry. “If you win an account, someone loses an account,” said Palaveev.
Speaking about the larger number of solo practitioners in the industry, he said, “What is really important with bringing on successors is leverage. As an industry, we have an army of doctors without nurses. They do everything on their own. That is not particularly productive.”
Palaveev also pointed out that most broker-dealers are going to have a problem. He pointed out that LPL, Raymond James and Commonwealth have solid economies of scale, but at other firms, the scale is lacking.
If advisors can learn from these lessons, growing in size, they will grow faster. One issue he sees holding back this generation of older advisors is that they have an “eat what you kill mentality.” Because they want the next generation to experience the same thing, they are not as successful at growing the next generation of advisors.
A Positive Outlook
In a private conversation, Dale Brown, the president and CEO of the Financial Services Institute, said, “Clearly, the industry has a challenge; they need to figure it out. I have faith in the innovation that exists. Succession is a challenge for the future of our business. I am not sure there will be a big macro solution or it will be the little solutions. I am very confident the industry will grow future advisors.”