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Gauging Broker-Dealer Service: How You Can, Why You Should

Gauging Broker-Dealer Service: How You Can, Why You Should

00:00 01 July in Articles Written by Jon Henschen

by Jonathan Henschen, CFS and featured in
July, 2010:

It’s no secret: one of the main reasons reps leave firms is lousy back-room service.

Sure, all broker dealers claim to offer terrific service, but the toughest thing for reps to gauge when selecting a firm is the quality of that service, and the various factors that can influence that quality, or lack of it.

If you’ve already been burned by a broker dealer’s approach to service you know what I mean, and should want to avoid reliving it. If you’re new to all this, trust me: you’ll want to avoid the experience. Either way, stick around, you’ll all profit from what you’re about to read.

I might as well begin by explaining that from my 20 years in this business, I’ve learned that the factors affecting quality service include:

* Broker dealer staffing ratios
* “Practice Management/Marketing” versus “Processing Business/Supervision , and
* How broker dealers approach management and leadership.

Broker/Dealer Service Ratios

I’ve learned one reliable way of checking quality service is a firm’s rep-to-staff ratio. In fact, that’s one of the things about firms that too many advisors overlook.

With improved technology over the years, broker dealers should have been able to cut back on staffing while improving the quality of their service to advisors. In fact, the new credo for independent broker dealers could easily read: Be automated and win. That is, by running a lean back office you can offer higher payouts and lower expenses to advisors while bringing in even greater profits to the firm.

A good example of that is a large Midwest broker dealer I know that once had about a dozen people in its payroll department, and did much of the work manually. Shortly after its payroll was automated, the payroll department’s staffing dropped to two and the accuracy of the firm’s payments to advisors increased dramatically.

On the other side of the coin, however, are firms that have apparently implemented cutting-edge technology as a substitute for service. It’s as if with so much technology out there, advisors no longer need to call them.

Bottom Line: No matter how good your technology, the rep still needs timely, quality service from the back office.

“Practice Management/Marketing” Versus “Business Processing/Supervision” Broker Dealers

The original intent of “independent” broker dealers was processing your business and providing supervision, and not much more. But with the growth of practice management (or “value-added”) firms, such as the Commonwealth Financial Network, some broker dealers do a lot more than just process business and supervise.

Commonwealth is one of the original practice management firms, and has about 60 staff people in that department alone. Besides practice management, however, they also staff for estate planning, insurance services, financial planning, marketing, alternative investments and advisory services, and we’re not talking about a one-person staffs for each of those, but dedicated departments.

Value-added firms like that are a good fit for advisors who derive benefit from those additional services and, in effect, profit from being interdependent on their broker dealer. However, if you’re a self-sufficient advisor running your business without all those bells and whistles, you can still get broker dealer platforms with quality service, but with fewer expenses and less staff.

Indeed, as a recruiting firm, we start getting concerned when broker dealer service ratios get up to around 10:1. And over the years, we’ve identified two factors that negatively impact service at firms with service ratios at that level:

1). Fast Recruiting Growth

– Adding more than about 10-15% more reps in a given year can be detrimental to everyone at the firm. Staff ratios of 10:1 or higher not only overload the transition department’s ability to do an efficient job for new reps, but also lower service quality for existing advisors. We’ve seen a few broker dealers who can buck that trend, but they’re the exceptions, not the rule. Be aware that many firms add reps that won’t show up in their head count because smaller producers are being let go at the same time. So when contacting firms, be specific. Ask how many reps have been added over the past year and how many have been let go? While you’re at it, check retention statistics. Better firms have retention rates of 95% or higher.

2). Too Many Small Producers

– In the late 1990’s, we saw firms like SunAmerica Securities that had such a high percentage of small producers the company’s phone lines phone lines were always tied up. Whenever experienced producers called for help, they’d be on hold for 10 minutes or more. To counter this, SunAmerica implemented a special phone line for the larger producers; but even then, wait times were still longer than most advisors liked. What’s more, firms with a lot of smaller producers also have Compliance departments catering to the lowest common denominator, so supervision tends to be too heavy handed. The best solution? Avoid firms with high concentrations of small producers.

Assessing a Firm’s Service Level

To avoid unnecessary trouble, it’s smart to know what you’re getting yourself into. Indeed, references from advisors can be a great way of uncovering a firm’s service problems. But while it pays to ask, it also pays to be selective. Over the years, for instance, we’ve learned to steer our reference requests to these three sources:

1) Advisors who came on board within the past 6 months
2) Advisors who joined the firm within two to three years
3) Advisors who joined the firm over five years ago

Also, when making reference requests, confirm that advisors have over half their assets in brokerage accounts. Why? Most reps who do direct business have fewer reasons to use back office support. And ask that references have a production level in the $200,000 GDC range, or higher. Typically, for example, reps who’ve been at a firm for 6 months or less are a great resource for transition support feedback; while reps who’ve been at a firm two years or more are good for feedback on day-to-day service issues, and five-year-plus advisors can usually give valuable input on a firm’s change of culture and management.

How Broker Dealers View Management and Leadership

A broker dealer’s upper management-style can shed light on the make-up and direction of a firm’s service level. The key here is often how the firm views management versus leadership.

Management and leadership are necessary components of any organization, and are not mutually exclusive. But as Peter Drucker put it: Management is doing things right; leadership is doing the right things.

The difference? Managers manage tasks. Leaders lead people. There’s more to that than a distinction without a difference. Case in point: The head chef at one of our favorite restaurants, Heartland, in St. Paul, MN was interviewed in our local newspaper. Here’s what he had to say about management versus leadership:

There is a difference between being respected and being feared. A real leader earns the respect of those who follow him or her. Leading by intimidation can only get you so far. If you lead that way, people will undermine at their first opportunity, everything you are trying to do.

That holds true for any business model: restaurant or broker dealer. Our firm has heard numerous horror stories about broker dealer presidents belittling, intimidating and berating back office personnel.

One story that stands out in my mind was of a broker dealer president who held quarterly meetings with all Department heads. They’d all sit around in a circle while the president assigned letter grades to each Department head. Rarely would anyone get a “B”; most received “C’s and “D’s,” or lower. Even worse, people on the sales service desk were routinely told they were overpaid and could forget about any sort of raise going forward.

Ironically, the head of that firm left only to be replaced by a new president who prided himself in never firing anyone. He preferred wearing people down until they quit.

Try Your Own Due Diligence

Is gauging how a broker dealer approaches backroom service really worth your time and effort? You bet it is. In fact, not doing so can soon lead you from the frying pan to the fire.

A good way of doing your own due diligence is through confidential phone conversations with random staff people; but product wholesalers can also provide valuable information on a firm’s basic make up and intent.

Ironically, in a world where all broker dealers claim to offer quality back room service, more and more independent reps are actually leaving firms over poor service. So before signing on with any broker dealer, it will pay you to spend time gauging a firm’s approach to back room service–and to leadership–as often and in as many ways as you can.