Should You Be a Big Fish in a Small or Large Pond?
June 20, 2023
By Jon Henschen, ThinkAdvisor
What You Need to Know
- Changing your broker-dealer is a situation where there is no perfect outcome but rather, a give-and-take of trade-offs.
- Small firms can mold to an advisor’s individual needs and provide them with greater flexibility and opportunities for recognition.
- Larger firms have the advantage of scale, not to mention depth and breadth of services
“There are no solutions, there are only trade-offs; and you try to get the best trade-off you can get, that’s all you can hope for,” wrote economist Thomas Sowell.
It is especially fitting to quote Sowell on this topic because changing your broker-dealer is clearly a situation where there is no perfect outcome but rather, a give-and-take of trade-offs.
The primary voices in our industry would lean toward the side of larger firms, noting their scale offers efficiencies and pricing advantages. Certainly, one area large firms bring advantages is in the large transition packages they provide, and for some advisors, that is enough to hook them.
Small Pond Advantages
Large independent broker-dealers and RIAs have their downside as increasing size forces them to morph into a cookie-cutter, “fit into our box” mentality.
Small firms can mold to an advisor’s individual needs in areas such as marketing, outside business activities, product maximum investment restrictions or age restrictions on investments.
Flexibility
We once experienced an outside business activity (OBA) conflict with a large broker-dealer when an advisor took a transition note amount they couldn’t turn down. Coming from a smaller firm, they had grown accustomed to a greater degree of flexibility and easier access to management.
The advisor found that in multiple compliance situations, they never seemed to get clear answers, and the lack of resolution became burdensome. The relationship with upper management at their prior firm, which they had taken for granted, was sorely missed, and the frustrations with their new firm grew to the point they had to pull the plug and leave after two years.
They ended up joining a midsize broker-dealer, which provided a level of communication and flexibility more akin to what they were accustomed to.
Recognition
Being a big fish in a smaller pond is also appealing when you have a high ranking in production.
In a recent discussion with a large producer, we went through a couple of firm options with one we felt certain would be compelling. The option was with a larger RIA that had unusually high average production per advisor.
Even though this RIA checked off much of the criteria the advisor sought, the larger size and high production average turned them off. At small and midsize firms, a large producer can command more attention and feel more significant.
Defined Identity
Easy access to upper management and ranking high in the top 50 advisors at a firm can be highly sought out. Smaller firms also have more defined identities as you can see clearer delineations as to their focus.
Larger firms struggle to have a defined identity, tending to be generalists to appeal to everyone.
Midsize broker-dealers that are generalists have been getting sold in recent years because they are competing on the same level as the large firms that have scale advantages.
Large Pond Advantages
Regarding the rejection of the advisor who wanted to be a bigger fish in a smaller pond, the RIA firm responded to me, saying, “Advisors don’t get better and attract larger clients with fewer resources; you don’t get better if you don’t have people around you that are better producers than you.”
This RIA takes a holistic approach to financial planning, offering numerous tools that appeal to large producers, including an in-house tax practice, insurance agency, 401(k) division, trust company, mergers and acquisitions support and employee benefits. Opportunities for growth abound.
Depth and breadth of services help large producers build efficiencies so they can grow their client base, have more time, and make clients stickier and a more reliable source of referrals.
Transition Notes
Larger firms’ scale allows them not only to provide many services but to offer advisors larger transition notes to join them.
When you are offered up to 100 basis points on your assets under management to join a firm, yes, you might use the transition money to buy a beach house or a new car, but many advisors use the proceeds to invest in the growth of their business.
Succession Planning
Beyond larger transition notes, larger firms also offer more succession/continuation opportunities and as a newer trend, direct purchases of books by larger broker-dealers.
While a smaller firm may only have a couple of other advisors in your state for potential succession opportunities, a large firm may have multiple candidates within a 20-minute drive of your office with younger advisors eager to be your succession plan.
FINRA Compliance
Large firms also give you increased assurances they will be able to survive the most difficult markets and the largest regulatory fines (substantial holders of junk-bond debt firms not included).
While many small firms have been brought down by fraudulent alternative investments and regulatory fines that became too much for them to handle, larger firms (those with $100 million or more in yearly revenue) are able to meet FINRA requirements and cover FINRA fines that come their way.
For smaller firms, especially those under $50 million of revenue, keeping up with FINRA requirements and compliance staffing needs while remaining profitable has become difficult.
Ponds vs. Rivers
When I fish for muskellunge (or muskie) in my home state of Minnesota, the type of body of water can determine the size of the muskie. Fish in lakes can be quite heavy, while river muskie tend to be thinner because they are fighting currents.
Financial advisors at IBDs are having to fight FINRA requirements, which often hurts the amount they earn.
Restricted ability to market themselves, more time spent on large volumes of paperwork to transact business and more convoluted policies and procedures act like currents on a fish, eating away at the ability to be more productive and over time dragging down production.
The RIA environment, free of FINRA, certainly puts you into a lake where you will have far fewer currents to swim against.
IBDs that have recently faced large FINRA fines may have requirements above and beyond what FINRA requires, so if considering this route, put a microscope up to compliance history, paperwork length, business flow procedures and company policies to gauge whether you will have currents to swim against.
The primary differences between the large and small ponds are the type of relationships, level of flexibility and the scale of services offered. Trade-offs need to bring what matters most to you in order to make the best match for long-term contentment.
