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When one broker-dealer is bought by another, advisors at the acquired firm hope for the best but wait for what will change. The acquiring broker-dealer will most always start off with a statement such as, “Everything will stay the same.” This may be the case for a month or two; over time, though, this statement often proves to be untrue.

The size of the firm being sold and the size of the acquiring firm can make a big difference in the retention of advisors over the first two years. Potential points of conflict tend to be service, compliance and culture misalignment.

Why BD Size Matters

Here are the main merger scenarios and their likely outcomes:

• Small BD being sold to another small BD: very favorable to advisors/high retention;
• Small BD being sold to a medium-size BD: favorable;
• Small BD being sold to a large BD: unfavorable/low retention;
• Medium-size BD being sold to another medium-size BD: favorable;
• Medium-size BD being sold to a large BD: less favorable; and
• Large BD being sold to another large BD: very favorable.

The Financial Industry Regulatory Authority defines small firms as those with up to 150 advisors. It’s less clear what constitutes midsize and large firms, so I’ve categorized them as having 150-2,500 advisors and more than 2,500, respectively.

At the 2,500 mark, broker-dealers start to adopt compliance that caters to the lowest denominator, greater restrictions in marketing and less personal service. It is also at 2,500 advisors that BD management often becomes more isolated from advisors, except when it comes to the highest producers or producer groups. These are generalities, of course; there are always exceptions, but these characterizations largely hold true.

What constitutes high or low retention largely depends on changes in the advisor experiences within the first two years after an acquisition. Advisors at small and midsize firms, often with up to 750 advisors, frequently have close relationships with management and staff.

Small and midsize firms are able to customize compliance and marketing needs to each advisor, while larger firms require advisors to fit into the compliance/marketing boxes they have created.

Going from a smaller firm to a large firm, the advisor is rarely able to speak directly with management, typically talks to different people via a phone tree or service team, and has longer wait times for service. Flexibility on outside business activities or marketing methods that include more than generic topics are much more rigid at larger firms.

This is because when a BD is large, it becomes impossible for it to track and supervise aspects that may differ from advisor to advisor. Thus, these BDs need to create compliance and marketing boundaries that all of their advisors must conform within.

If an advisor wants to create his own content for Facebook or YouTube, for instance, or write articles, compliance hurdles can be cumbersome at best at the larger firms, while smaller firms are more flexible and accommodating.

A good illustration of acquisition retention is the 2007 move of Pacific Life’s broker-dealers to LPL Financial. This group of BDs consisted of Mutual Securities Corp. (MSC) with 1,300 representatives, Waterstone Financial Group with 620 reps, and Associated Securities with 250 reps.

Two years after the sale, some former managers at Waterstone told me that they estimated the three BDs may have each lost between about 30% and up to roughly 60% of their reps. These firms had two waves of advisor outflows: after the purchase announcement and, two years later, when the three firms were merged into LPL.

We’ve seen retention differences repeat over the years as some larger firms purchased by even large BDs have higher retention, while smaller firms purchased by large firms experience lower retention.

One Example

More recently, a midsize firm of 350 advisors had their number of top 100 advisors go down to 52 advisors two years after the firm’s sale announcement. Their firm was merged into a larger-broker dealer, creating a period of chaos.

An advisor I had placed with the BD several years prior to the acquisition explained: “After [we] were merged in, the service was atrocious with half-hour waits for a call to be answered, only to get someone who could not answer the question. Call wait times have since improved, but the quality of service remains poor as many of the staff are new in training.”

In terms of firm culture, she said, “They are too big to have culture.” As for advisor expenses, the mantra of benefiting from the new firm’s large scale fell flat as the advisor was paying much more than she did at her prior firm.

“The way things are structured makes it hard to tell exactly how much me and my clients are being charged,” she said. “I believe it’s not transparent intentionally.”

On compliance matters, we have counseled a substantially large producer from this same midsize firm that joined a different large BD primarily because of the unusually high amount of transition money offered.

The advisor had some unusual outside business activities (OBAs) but was assured this would not be a problem. But after a year, there was pressure that these OBAs were likely problematic. Other aspects of the practice also started to get compliance pressure to the point that after two years, the exasperated advisor returned the note money and went back to a midsize firm that offered greater flexibility.

Balancing the Issues

Moving from a smaller firm to a larger firm has tradeoffs. The advisor may enjoy a larger firm’s improvement in technology or a vast array of services his or her prior firm didn’t offer.

If an advisor is largely self-sufficient with rare contact with the back office, he or she may not care that different people answer the help-desk calls. Larger producers are often insulated from service matters because it is their staff that deals with back-office service needs, although we’ve had advisors report higher turnover of staff as a result of frustration with dealing with a dysfunctional broker-dealer back office.

The culture misalignment happens when advisors have a strong relationship with management and staff, and a broker-dealer sale results in these relationship bonds disappearing. Another advisor whose BD was sold to a large firm felt that all the qualities that led him to initially pick a smaller firm were gone. It was like moving from a small town where you know everyone to being forced to live in a big city where you didn’t know a soul.

Jon Henschen is president of the recruiting firm Henschen & Associates, a firm that helps advisors find broker-dealer relationships.