After 20 years of recruiting, training, coaching, mentoring and building an agency, I have realized there are some things I take for granted that many advisors today may not have been exposed to or have knowledge of when trying to run their business. Today, not only do financial professionals need to make decisions on what products to use, whose products to use, who to market to, and how to brand themselves, but also which broker-dealer is right for them.
It is probably not an "a-ha moment" when I say, "not all broker-dealers are the same." In fact, some broker-dealers are not the same today as they were maybe just five or 10 years ago. Companies change, products change, your practice most likely has changed, and broker-dealers change.
By helping hundreds of financial professionals come into this business, decide which companies and products to offer, and also pick a broker-dealer that is right for them, I have come up with my A, B, C list of, "top things to consider" when faced with a the decision to change or not to change broker-dealers.
The "A" questions and concerns: Advisor questions to ask yourself and staff.
1. Are your clients loyal? What percentage of your clients would make a change with you if you decided to move to another broker-dealer? If you are like most, 8% of your gross income is generated by about 20%-30% of your top clients. Therefore, look at your top clients and decide how many of them are 100% committed to staying with you no matter what. If you can retain at least 80% of your top relationships, then you can consider a change. If not, what should you be doing so they would trust and follow you?
2. Is your staff committed and supportive to change? The process of changing to another broker-dealer will require, "all hands on deck." It will mean putting in extra effort, long hours and handling a lot of paperwork and possible problems along the way. Not many transitions go perfect, so you need to anticipate some obstacles along the way that will require problem resolution. It may require doing the same set of paperwork twice on some accounts, or tracking down lost forms, missing signatures, frequent home office follow-up calls, and you get the picture. Your staff must be prepared and committed to helping you and your clients make the change.
3. Can you budget the time for the transition? You must be willing to commit time; it will not happen on its own. You will need to be firsthand involved. However, in most transitions, I have found it actually provides additional opportunities to service client needs, review products and portfolios and can lead to increased sales and relationship-building. Time is something you must be willing to allocate to make a transition work.
4. Is your and your staff's credit and U-4 clean? Because of pressing financial times, it is not uncommon to find late payments on credit history reports, or even home foreclosures and credit card settlements. These items may prohibit you from making a change, but are somewhat easier to justify and fix than U-4 complaints, settlements or arbitrations. You need to know what your credit and U-4 look like. It is not only difficult to move if you have unresolved or recent U-4 items, but it can be embarrassing if the recruiting manager has to make you aware after they run the reports. Some broker-dealers are more accepting of justifiable credit issues or U-4 items than others, so know what they expect before you waste too much time only to be denied acceptance.
The "B" questions and concerns: What you should ask about the broker-dealer.
1. Payout/commissions. I do not think payout is the No. 1 concern or question you should ask to compare broker-dealers, but I am putting it first because it is what most financial professionals think about first. Payouts can be deceiving. High payouts by broker-dealers are not always good. You do not want them to run on too thin of a margin or they may not be there when you need them in the future.
a. High payouts do not necessarily mean you will make more income.
b. Compare your net, "take home after all expenses are paid" income, not gross income earned.
c. Some broker-dealers will pay more gross commission, but then mark up services, fees, ticket charges, have additional affiliation fees, or higher costs of doing business. Which could affect your bottom line net profit?
2. What is the cost of doing business? Compare the cost of doing business at your current broker-dealer with the one you are considering. Look at items like E&O insurance, ticket charges, technology and software fees, registration fees, branch office fees, marketing fees, material costs for sale brochures or product brochures, and the many additional fees that you spend every day just to do your job for your clients. Remember, these costs of doing business impact your bottom line profitability. Look for a broker-dealer with a "no mark-up" philosophy or a "not-for-profit/break even on services and technology" way of thinking. Yes, they do exist!
3. What are the production requirements? Most broker-dealers have minimum production requirements that need to be met to maintain good standing.
a. If you want to be your own OSJ, will they allow for that and what production requirement is needed to qualify?
b. Can you have other agents or representatives under you and build your own agency?
c. Know what you want so you can ask the right questions, and do not assume all broker-dealers are the same.
4. Does your business model fit that of the broker-dealer? There are broker-dealers who are more insurance-driven, investment-focused, full planning thinking, money management or fee-focused, and then there are captive career contract, independent contract, and some independent contract but non-compete or no-client-ownership broker-dealers. There are broker-dealers who believe they work for you and are representative-focused and those who believe you work for them and are only concerned about product distribution or asset growth. Make sure that your business plan fits with the business plan of the broker-dealer.
a. If what is important to you is also important to the broker-dealer, will it will be a good move over the next five to 10 years? Over that period of time, do they plan to grow fast, slow, sell, merge, be national, or stay regional?
5. How does the contract read? Ask to see a sample of the contract you will be signing with the broker-dealer. Is it representative-friendly? What I mean by that is:
a. Does it have a non-compete clause? These can be painful if you want out.
b. Who owns the client? Although most clients do business with you, not the company you represent, some broker-dealers contractually own your clients.
c. Will they pay you or a spouse trail income at death or incapacity? Ongoing trail income is significant, not only for you but for your survivors. Some firms do allow your trails to be paid to a spouse or heir.
d. Can you have your own RIA? As fee-based money management continues to be a growing way to conduct business, ask if the broker-dealer will allow you to have your own RIA. If not, will they allow you to be part of the broker-dealer RIA and the DBA using your own marketing name? There are broker-dealers who allow you to be part of their RIA so that you can minimize your operations cost, have their supervision and legal team behind you, and still use your own personal marketing name to brand yourself with your clients.
6. E&O Coverage. What does the E&O coverage cost, what are the deductibles and limits, and how do you pay for it? Through annual monthly commission deduction? What activities will it cover? Does it cover your non-broker-dealer-related activities, such as life insurance not placed through the broker-dealer?
7. Ratings and financial strength. You need to know how long the broker-dealer has been in the broker-dealer business.
a. Is the broker-dealer a start-up or privately held firm?
b. Is it a combination of broker-dealers that were merged together?
c. Are they national or only licensed in a few regional states?
d. How long has the senior management been part of the broker-dealer?
e. What is the compliance history of the broker-dealer?
f. Today many "new named" broker-dealers are also a combination of older broker-dealers that have been merged together.
The C Questions: The questions that will help you grow your business and serve your clients.
1. What is the culture and character of the broker-dealer? I believe that both culture and character are important. It is easy for any broker-dealer to roll out the red carpet and be impressive when they are trying to recruit you and things are going well. But what is their character after they have you contracted or things are not going well? Ask for a home office due diligence meeting, so that you can observe the internal culture and try to judge their true character the best that you can. Asking for references from others who are already with the firm is also wise, but keep in mind they most likely will not give you a unhappy representative as a reference. The best way to judge is to research the growth and lost rate of producers over the past several years. If more advisors are joining and few are leaving, then it may be one to consider.
2. What technology platforms can they support and provide?
a. Is consolidated statements reporting available?
b. What does the Web site and representative access to information look like?
c. What systems are in place for trade placement, research, illustration generation, client service and communication with the home office staff?
d. Do they offer discounted software programs that you may want for your business?
e. Is it an open platform, or are you limited to using only their selected vendors and programs?
3. Compliance oversight. This is an area that you need to make sure you like. The better the compliance, the better protected you and your clients will be. The compliance department should be your ally -- your team of professionals that help keep you out of litigation and protect your clients from making the wrong investment or product decision. Know what they expect, what they permit and how their system works. What is the ad approval rate, turn-around time frame, product approval rate, and do they offer support to help you edit, craft or get it through the system?
Also you may want to know how often they audit your office, and who will be doing the audits -- local staff, home office staff, or a third-party consulting firm? Do they provide guidance and file structure, or is it up to you to find out as needed?
4. Business development, coaching, mentoring and marketing support. Succession planning, business planning and marketing are key items to consider. It is not always about the money, as the right business development support can increase your bottom line more than a commission contract increase.
a. Do they have training, Webinars, local or regional meetings to help you learn about products, running your business or new technology platforms?
b. Do they have a marketing department that can assist you in ad design, marketing materials, or any form of local or regional marketing support?
c. Will they help you evaluate your business if you desire to retire or sell your business?
d. Will they help finance a transaction to buy a practice or if you want to sell your practice?
5. Contact management systems. It is important for not only transition purposes but also ease of doing business to know if the contact management system that you currently use will integrate with the broker-dealer system. Will the data electronically transfer? Can you use your own contact program or only one provided by the broker-dealer? Do they have a paperless capability system or will things need to be inputted manually and stored as paper files? Is the data backed up and can it be accessed remotely?
6. Products and services. Many broker-dealers are simply the conduit to allow you to gain access to the products and services that you want for your clients.
a. What vendors do they have selling agreements with?
b. What third-party money management firms do they allow on their platforms?
c. How many conference meetings do they provide?
d. What about product training meetings or business development meetings?
e. What is the home office employee support ratio to number of representatives in the firm?
f. What is the average production of the current representatives?
Changing broker-dealers can be one of the most stressful things you ever do, but it does not need to be. With proper planning and coordination, it can be quite rewarding. If the transition is properly executed, then it is quite possible that you could gain a deeper relationship with your current clients, review their current needs, and even increase money under management or pick up additional sales or clients. The goal is not to just move your current clients to a new broker-dealer, but to look for ways to grow your business in the process.
To change or not to change is the question you must ask. But before you answer, gather the data you need and ask questions. After all, is that not what we do every day for our clients?
Shane Westhoelter, AEP, CLU, LUTCF, is President of Dublin, Calif.-based Gateway Financial Advisors, Inc., a Registered Representative, and a Registered Investment Advisor Representative of Cambridge Investment Research, Inc. He is a frequent speaker and lecturer on a variety of topics in the areas of financial and retirement planning. He also consults as a business performance coach and is recognized as a national speaker for both the general public and the financial services industry. He can be reached at Shane@GFAinvestments.com.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Gateway Financial Advisors, Inc., and Cambridge Investment Research, Inc. are not affiliated.
