Top Questions to Ask When Considering a New IBD Partner

Top Questions to Ask When Considering a New IBD Partner

The secret to finding a good IBD partner comes down to this: Think about how your clients feel about you.

In recent years, a popular theme across the independent financial services industry has been the supposed movement towards broker-dealer consolidation. Undoubtedly, there has been a fair amount of consolidation activity, but the fact is that nothing about today’s landscape is unique. For decades, consolidation – as well as deconsolidation, as mergers fail or sub-groups split off -- has always been the reality, and going forward it will continue to be so. It’s simply the nature of the business.

In fact, most independent brokers-dealers (IBDs) today are on the smaller end of the spectrum, having fewer than 300 advisors and $10 billion in assets under administration.  It’s important to note that many of these small to mid-sized firms have intentionally chosen to remain as such – not because they are unable to grow or attract new recruits, but rather, they are deeply committed to their business model and feel strongly about the distinct value proposition they offer advisors.

Obviously, there are advisors who will find comfort in the hefty scale and seeming stability of the large, mega-IBDs. The same can be said for some investors, who prefer to be associated with a bigger brand name. Increasingly, however, many of these large firms tend to offer solutions and services that take a one-size-fits-all approach. Moreover, other important advisor considerations, such as effective back-office support, compliance expertise, and robust technology, as well as financial stability, are readily available at smaller firms as well.

But no one firm can be all things to all advisors. This means that finding the right ‘fit’ takes on greater importance. Specifically, then, what should advisors be looking for when trying to find a new IBD partner?  

Clearly, it’s crucial that any partner have a well-established track record in the industry. Equally important are stable and experienced management teams, who not only have successfully navigated multiple market cycles but also possess a specialized expertise of the independent space. But beyond that, there are other factors to think about. The following are three of the most important questions that every advisor should ask when looking for a new IBD:

 

Do they offer true choice and flexibility? 

A lot has been made of the term “flexibility,” but what it really refers to is whether a broker-dealer has the ability to adapt to and meet the needs of the advisors on its platform. In one sense, this means helping advisors determine what business model or combination of business models best suit their practices – whether it’s commission or fee-based, whether they have their own RIA or whether they will operate under the IBD’s corporate IAR.

But it also means being able to offer advisors – and by extension their clients – a range of targeted and specialty products that meet specific and unique wealth management needs. Though the product platforms of many large IBDs may appear expansive on the surface, in many cases they are comprised almost exclusively of standard, run-of-the-mill mass offerings. Very little focus exists.

Clients, though, often have portfolio-engineering needs that can best be satisfied by focused products, like alternatives. Smaller IBDs are often better positioned to deliver such offerings, since they are typically more nimble and able to work with providers to customize specialty products, and they can try out new products that are still being rolled out in a limited fashion. Many of these products may not be large enough to make it onto the distribution platforms of the mega-BDs but could be just right for many advisors seeking particular solutions for their end clients.

 

Are members of the senior management accessible?

At many large IBDs, advisors have very few opportunities to interact with members of senior management. It might happen once during the recruitment process and then perhaps again on an annual basis at company-sponsored conferences. This is not surprising, given that C-suite level officers at big firms are often consumed with satisfying shareholder concerns, as well as dealing with a range of other stakeholder agendas that commonly exist at the top of a large parent company.

At smaller firms, however, the focus is different. The advisor comes first, and the lines of communication with senior management tend to be more free and open. Without this level of interaction, the end client is likely only to have access to product selections and services they can get almost anywhere else.

When looking for a new firm, one should ask how much time management spends in the field talking to advisors. From there, ask for examples of customized tools and products that have been added to the platform to benefit advisors and the clients they serve. If you can’t get reasonable answers to these two questions, it may not be the right IBD for you.

 

Does the broker-dealer have in place a true community of like-minded advisors, along with an in-network succession planning solution that places your best interests and your clients' best interests first and foremost?

Though aligning with an IBD that can best deliver the practice management, business model and product solutions you need is crucial, succession planning concerns are just as important. Chances are if you are an advisor who is considering a small IBD, your clients have very particular needs or share a particular profile. As such, a distinct advantage of aligning with a smaller IBD, as many advisors have learned, is that there is a very clear community of like-minded advisors who tend to have clients with similar needs and characteristics. This, in turn, means that joining forces with a smaller IBD could potentially maximize your chances of finding a suitable succession plan partner whenever you are ready for a planned exit from the business.

At smaller IBDs, the succession planning focus tends to be on facilitating seller succession pairings that truly focus on positive, long-term transaction outcomes. The emphasis at smaller firms generally isn't on facilitating seller succession transactions in network to drive scale-driven asset retention goals, but rather, on empowering succession arrangements that involve teaming exiting advisors with partners who are capable of sustaining client relationships long term, where the clients will receive the same quality of care and attention they have come to expect.

 

For years, industry observers have been forecasting the demise of small and mid-sized IBDs, saying that due to technological evolution and ever-expanding regulatory burdens, such firms would soon become obsolete. But through it all, many not only have survived but have thrived, by remaining faithful to their unique, individual value proposition.

Ultimately, for advisors the secret to finding a good IBD partner comes down to this: Think about how your clients feel about you. When you find an IBD with which you can have a similar relationship, you know you are that much closer to unlocking a match. Just as advisors care about their clients and have a vested, personal interest in their success, there should be parallel relationship between the IBD and the advisor. If that’s not the case, your search must go on.

 

Clive Slovin is the President and CEO of The Strategic Financial Alliance (www.thesfa.net), a privately owned independent broker-dealer and registered investment adviser based in Atlanta, GA, with financial advisors in many parts of the United States. 

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