Broker-Dealers Go Courting
August 1, 2019
By Eric Rasmussen, Financial Advisor Magazine
The war for talent in the independent broker-dealer industry is real, say recruiters. Whether it’s giant firms like LPL cutting admin fees or midsize companies offering niche services like impact investing, the companies in this space are having to step up to offer better technology for their advisors, offer better back office help and better transition help. … And a nice payout isn’t bad either.
“We’re about to see recruiting wars in the independent space like we’ve never seen before,” says consultant Jeff Nash, CEO of BridgeMark Strategies. “We absolutely are seeing new dollars. … Looking at all the institutional money coming into the space, it had to then kick off a whole new wave of recruiting dollars. And it has.”
IBDs have been able to pay 90% to 95% of gross dealer concession back to advisors as part of their payout. But that’s because they are making their money off the advisors in other ways, often with high administrative fees, affiliation fees, platform fees and markups on funds (the terminology often differs depending on the firm).
When it comes to those fees, recruiter Barbara Herman of Diamond Consultants says advisors need to look at the business they are already doing if they want to move, then see what it’s going to look like on the new platform, and decide if it makes sense for them. Payout is only the beginning of the story. “There are a host of other expenses that reduce that top-line payout,” says Herman. “So there’s a lot of homework the advisor has to do so that they can compare apples to apples. There are some firms that might have 20 pages of calculations that take an advisor from the top-line payout to the net payout before the advisor’s personal business expenses. There are other firms that can do it in two pages.”
Sometimes, the 95% payout might not be on $100 in. There might be some haircut before the money enters the grid, and thus the advisor is getting 95% of $95, she says.
“Advisors really have to go through the exercise of doing a pro forma and understand what they are going to be paying for,” Herman says. When advisors have an issue, it’s often not the fees themselves but the nasty surprise that they’re paying it. There’s especially a shock for those coming into the broker-dealer world after working as employees, say at wirehouses.
To increase their appeal, some of the biggest broker-dealers have started knocking those fees down or negotiating them. The difference for things off the payout grid can have an enormous impact on an advisor’s overall pay.
Many of the largest IBDs like LPL, Raymond James and Commonwealth Financial Network are starting to look a lot more like national RIA firms. Moreover, the number of their reps that have dropped their Finra licenses and opted to go RIA-only is rising.
About 90% of all revenues are now recurring fees at Commonwealth Financial Network, and its CEO Wayne Bloom expects the number of reps going RIA-only to rise significantly in the next few years. This trend was underway even before the DOL rule was introduced in 2016.
Although consumer and investment advisor groups have criticized the SEC’s new Reg BI, which was designed to replace the DOL rule, “even Reg BI makes it harder to do commission business,” Bloom says. “Positioning yourself as a fiduciary” today can help drive business.
On the recruiting front, Commonwealth finds itself talking to larger firms than it has in the past. Most of the teams have five people or more and between $350 million and $650 million in assets under management. So far this year Commonwealth has recruited 53 reps generating almost $26 million in revenues.
Raymond James said in its SEC filings for the end of the first quarter of this year that it had added 258 advisors (139 employee advisors and 119 independent contractors) since the end of the first quarter of 2018, for a total financial advisor count of 7,862.
In May, LPL said it was cutting its transaction charges for certain ETFs by 45% from $9.00 to $4.95, a move designed for its hybrid and RIA reps that encompasses funds by State Street, Invesco and WisdomTree. Last year, the firm said it would charge a flat admin fee of 8 basis points to advisors with $25 million to $50 million on its Strategic Asset Management advisory platform. Competitors are charging around 10 to 15 basis points for the same things, says Jon Henschen, a recruiter with Henschen & Associates, and the firms are also charging markups on mutual funds that can be as high as 25 basis points, he says. Some firms are bashful about that. Others are brazen.
Scale is helping the bigger firms get bigger because they can more ably cut the fees they are charging advisors on the back end. “The bigger firms have continued to offer pretty attractive transition packages to move over,” says Jodie Papike, the president at recruiting firm Cross-Search. These typically include inducements beyond payouts such as forgivable loans, for five years perhaps, and transition assistance.
But firms are also getting creative to lure talent, offering RIA-only options for example. They are not “necessarily saying how they are going to structure that yet, but kind of introducing that as a potential platform option for [advisors],” Papike says. The concept is: “You want to be independent, but what form of independence makes the most sense for you?” she says.
Better Tech
Better technology is not the thing that makes an advisor switch firms, but it’s almost always toward the top of the list, Papike argues. The advisor’s satisfaction with the B-D tech offering often depends on what he or she wants from the software—a paperless office? An integrated platform? Better mobile technology or e-signatures?
And many independent B-Ds are not getting on the stick with these higher tech expectations, Papike says. She notes a huge gulf between the tech haves and have-nots. “It’s really staggering to see how far some firms have taken it,” she says.
Jim Nagengast, the CEO of Securities America, says that whereas 20 years ago, advisors wanted e-mail, today they all want client portals, cloud access and the ability to keep using their favorite software with the platform. All clients want to work electronically and have access to documents. Cybersecurity is another issue that advisors are struggling with and need help on.
Daniel Schwamb, vice president of business development at Kestra, says e-signatures came up at one of his meetings recently. “It’s an advisor from a large bank’s independent channel and they feel like their e-signature experience is very poor. So that’s one that’s top of mind. It’s not if you have e-signature but the breadth for which it’s deployed that’s the big thing.” He says Kestra uses e-signatures for all the transactions it can, though firms in the insurance space, for example, often won’t accept them.
Beyond tech, firms now want help in acquiring other advisories, Nagengast says. And he adds that platform flexibility is important, which is why his firm recently rolled out an RIA-IAR platform for those advisors who want to work exclusively in that vein.
“We rolled out in February what we call our investment-advisors-only platform, our RIA platform, essentially where someone does not have to have a Series 7 or Series 6 to be affiliated with us.” In June, the firm also rolled out a new transition dashboard for those advisors making the leap so that they can get transparency and speed on those assets moving to Securities America’s platform.
One firm having success with that flexible platform, says Papike, is Vanderbilt Financial Group in Woodbury, N.Y. Joe Trifiletti, Vanderbilt’s COO, says that three years ago his firm added 45 offices, that it added 24 the year after that, and this year the firm added 10 new advisors. He also says that one of the firm’s attractions is its focus on impact investing.
“Advisors who have this as a niche really gravitate towards us,” he says. “In addition to that, we have a lot of flexibility, open architecture. … In this environment, we’ve been finding that firms are getting more strict, and if you can maintain that flexibility, obviously in a compliant manner, it’s really something that’s attracting other advisors. It’s really been catching fire as far as word of mouth for us.”
Kestra’s Schwamb says the financial inducement in terms of transition assistance has definitely escalated in the last 12 months. “Where we have had a lot of traction with advisors … is helping them with the business of running their business,” he says. Many advisors stay with their current firms, even if they are unhappy, simply because of inertia—it’s a pain to change. What sends them over the edge, says Schwamb, is when something happens at their old firm that has damaged a client relationship. No. 2 is losing a prospect to another advisor who might have had more access to resources.
There’s a perception that more staff at a broker-dealer means the advisor gets better service, says Schwamb, and potential recruits often ask what the staff-to-advisor ratio is. But he says: “I’m not so sure that’s necessarily an indicator of great service. That could be an indicator of very poor internal controls and processes.” In theory, firms with better tech and internal process should be able to operate with fewer people, he says.
Higher Producers
According to Henschen, there’s also a service divide as some firms lavish quality service on higher-producing reps. “High-end reps are intolerant of poor service and some firms have a special services department for their higher producers, and that’s usually an indicator of poor service overall,” he says. “To keep their better producers from leaving, they have to add this additional layer of two-step service for their better producers. But if you look at their staff-to-rep ratio, the firms that have those special service departments, it’s usually quite poor.”
And service is a big reason people leave their firms. “I think advisors have a high level of expectation of calling the home office on the phone and having somebody answer within several rings,” says [Henschen]. “And that they are talking to somebody qualified, competent and interested.”
Amy Webber, the president and CEO of Cambridge Investment Research, says that for three years her firm saw its highest volume of recruiting levels in its history, but that’s slowed in 2019. “We attribute the slower pace earlier this year to some firms in the industry, which are paying front money to all prospective advisors at high levels regardless of the quality of the advisor,” she said in an e-mail. “We have also seen a trend where certain advisors prefer to join a local enterprise branch (super OSJ) of ours. … Advisors on the move can choose to join us direct or explore the unique niche offerings found in many of the enterprise firms with Cambridge.”
She adds that advisors who want to move are also taking longer to decide. “This seems to be for a variety of reasons, including basic economic and market dynamics that affect an advisor’s inclination to make a change, but interestingly it also seems to be that it is a much more complicated process to sort through the variation of the deals being made.” She adds that many firms are shrinking their offerings and “an advisor has to be very careful about making sure that they understand what they are signing up for to obtain the highest levels of comp and up-front that are being offered.”
Meanwhile, Webber says, a subscription fee model is already being used in several advisor offices at Cambridge to serve younger clients.Rich Steinmeier, the head of business development at LPL, says certain advisors value higher transition assistance moving over because they may suffer more “breakage” (losing money on accounts not moving during the transition). “We have increased our flexibility to either extend the duration of [transition loan] notes or, for the term of the notes, take payouts slightly down to see a higher transition assistance package.” LPL’s size as the largest B-D (with 16,000 reps) offers it a bigger sample size of what advisors are looking for, he notes. “We have probably seen more transitions than any other firm,” he says. He says that LPL’s basing of transition assistance on AUM is not because the broker-dealer world is trying to look more like the custodial world. “It’s the right way we think of an advisor’s practice. The revenue composition of a practice can evolve over time. And we think the truest underlying gauge of the existing practice and future potential of that practice is actually the assets under management. And so we think it’s a fairer representation.”
