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When Your Broker-Dealer Relationship Goes Bad

When Your Broker-Dealer Relationship Goes Bad

00:00 01 November in Articles Written by Jon Henschen

by Jonathan Henschen, CFS and featured in Broker World Magazine
November, 2005:

As part of a high school science experiment, a teacher dropped a frog into a pot of hot water. It jumped right out. Then the frog was put into a pot of room-temperature water on the stove and the teacher slowly turned up the heat. The frog swam around normally–until it suddenly died.

Advisors are often like that frog, swimming around in ill-suited broker/dealer relationships until they reach a breaking point. This is especially true during acquisitions, where a new B/D takes over and makes lots of small operational changes. Because those changes are gradually phased in, the reps don’t notice them as much, whereas if the B/D had come in making wholesale changes all at once, the reps would have jumped ship, just like that frog.

Because all B/Ds operate in roughly the same ways, advisors need to be continually evaluating what they need to support their business models at different phases of their careers. Most important, they have to determine whether their current B/D relationship is giving it to them, or whether its time to move on.

A financial advisor’s relationship with a broker/dealer is a two-way street, with traffic moving in both directions. Situations become complex, and law, style, policy and other things can complicate issues. To work smoothly for both parties it takes commitment, integrity, mutual respect, attention to detail and open communication—just like any suitable relationship. That‘s why choosing a B/D is too important for the decision to be based only on financials.

Advisors look for three primary services from their broker/dealers: execution, technology and compliance. Those factors can make or break a relationship a lot more often than commission rates, fees and payouts. While B/Ds and advisors both must live up to their ends of their agreement, when a broker/dealer relationship turns sour, it may be time to go.

Confusing Choices

These ideas are based on years of feedback from the financial advisors we’ve consulted with matching brokers with broker/dealers. Some advisors we consult with are not necessarily unhappy with their B/D relationship, but feel they’ve outgrown their firm for a variety of reasons. But most are frustrated over poor service, dated technology or compliance that is sucking the life out of their marketing efforts.

It’s typical for advisors to be faced with often confusing choices between large firms offering a breadth of services and technology, and smaller firms that can provide more personal service and the ability to mold the relationship to their specific needs.  We’ve learned that with so many options available to advisors, there is no universally correct choice, just a “best fit” for individual advisors with different goals at different points in their careers.

A broker/dealer should be accessible. For instance, the president of a broker/dealer should never be seen as avoiding meetings with newly signed or prospective advisors, or spending time with million-dollar producers to the exclusion of the rest. This trait may be more common among larger B/Ds, but can also be a problem among smaller ones. Similarly, staffers may give the impression that meetings and office routines take priority over returning advisor calls.

The brokerage industry is subject to a huge array of rules and regulations from a variety of regulatory agencies, so compliance is an essential service that broker/dealers provide financial advisors. This includes providing training on the regulatory requirements of the securities business and maintaining approved order-handling, supervisory and “Chinese Wall” procedures.

Balance and proportion should be the hallmarks of a B/D’s compliance efforts, but that isn’t always the case. For example some B/Ds let their compliance departments become heavy-handed, creating unnecessarily burdensome policies, procedures and paperwork to protect the firm when the real object is protecting the consumer. I could never understand what is so reassuring about asking clients to sign a stack of disclosure forms!

Ideally, when it comes to compliance, B/Ds should do what the regulators require: no more, no less. Oddly enough, many of the most onerous (read: counterproductive) policies and procedures are dreamed up by the B/Ds issuing them, rather than the NASD or other regulatory bodies. For some of the more heavy-handed firms, 60% of what reps are required to do is company policy and just 40% is what regulators require.

Communication is another aspect of compliance in which some B/Ds fall short. Instead of keeping open lines of communication, some firms assume their reps will hear about compliance changes through the industry grapevine. The results are often predictable: they don’t.

Similarly, B/Ds often seem to do all they can to protect the firm from their own advisors. When reps receive a customer complaint, for example, some B/Ds will assume the rep is guilty, and give the producer 30 days to find a new firm. Advisors are better served by B/Ds that stand behind their reps, seeing them through complaints.

B/Ds and advisors need to listen when clients ask: “What should I do or buy?” Everything the financial services industry does flows from that question. Some maintain that broker/dealers put advisors at a disadvantage when pressure is applied to push the B/D’s packaged products or those of a parent company. Indeed, the negative image of proprietary products has been underscored by New York State Attorney General Eliot Spitzer’s intense focus on products that are best and cheapest for clients. As long as a B/D’s products compete on their merits, many reps will be only too happy offering them to their clients. But financial advisors need to determine if their firm’s product line compromises either the advisor’s independence or meeting the client’s needs, and act accordingly.

Being competitive takes state-of-the-art technology, top-notch broker/dealer products and services, and excellent backroom support. However, broker/dealers often limit what they offer advisors, in order to lower risks to the firm. For instance, they avoid reps who do substantial stock volume, or who sell REITs, Limited Partnerships, Hedge Funds and Futures Funds, despite the fact that wealthy clients like those kinds of investments. Advisors must decide if they and their clients can live with restrictions like those, or find suitable ways to work around them.

Sometimes corporate culture can be a problem, especially when B/Ds adopt an overbearing top-down management style. The message: upper management knows what’s best for clients; advisor opinions run a distant second. Similarly disconcerting are back-office consolidations that move B/D staffers around or bring in a lot of new employees. Customer service inevitably suffers in an atmosphere like that, with advisors and clients often coming in second.

B/Ds also often seem bent on developing new profit centers by doing things such as charging technology, administration or compliance fees, or by maintaining mutual fund trails, imposing high admin fees in advisory accounts or marking up rep’s E&O Insurance. At the same time, many B/Ds establish business models that grow their firms so fast that the back offices soon have a hard time servicing the advisors.  These problems are aggravated when firms devise elaborate phone messaging systems that reps and clients alike must wade through.

Another Story…

Observing a Dutch river boat captain maneuvering his barge through an intricate series of locks and channels, a passenger was amazed at the man’s calm precision. He commented admiringly: “Captain, you must know every rock, obstacle and wrong turn in these waters!” The captain thought a moment then answered: “No, sir, I never worry about the wrong ways to go, I just know the right way, and that’s what I focus on.”

The point of that story is this: A lot of advisors are so distracted by the many annoying things their broker/dealers do that the advisors are miserable, and no longer able to do their best. Business—and life–can be a lot easier for advisors who, like that Captain, are able to concentrate on what works and what’s right in their broker/dealer relationships, rather then being sidetracked by all the counterproductive things that can and do go on.

In other words, why wait until the water boils before getting out of the pot!