By Jim Nagengast
For small to mid-size broker/dealers, the economic calculus that led them to establish their own firms has shifted drastically over the past several years; the environment only continues to get more challenging.
Investor and advisor expectations for technology platforms continue to grow as advisor productivity becomes increasingly crucial. At the same time, regulatory burdens, the threat of litigation and the cutthroat war for advisor talent are putting increasing pressure on b/d margins.
Fortunately, the industry has evolved to provide many of these besieged firms a better option: They can shed their b/d operations and refocus their efforts as an office of supervisory jurisdiction (OSJ) or branch office under another independent advisory and brokerage (IAB) firm. At the same time, they keep their teams, brands and cultures intact.
This alternative potentially offers the best of all worlds, freeing IAB executives from many compliance and regulatory responsibilities, while preserving the valuable relationships they have built with their teams and advisors. For many, it enables them to return to what they originally loved about the business—helping advisors make a positive difference for clients.
This transition, however, can entail significant changes for clients, advisors and the IAB team itself. Here are the key questions executives should ask themselves to determine if this path is right for them:
1. What is the state of our technology platform—and, if we’re behind, what will it take to catch up? Most IAB executives know that keeping pace with changing technology is no longer optional in our industry. Developments in portfolio management, performance reporting and CRM software have increased advisor productivity for most of the larger competitors in the space. For smaller firms that lack the budget to keep up, underinvestment in technology can quickly lead to a downward spiral, creating obstacles for advisors trying to win new clients while b/d cash flow continues to dwindle. (Even firms that have deployed some of these systems can find themselves struggling if they lack the resources to properly integrate them into a cohesive platform.)
For IABs in this position, becoming an OSJ or branch office may be a better option than executing a full turnaround plan. Doing so can give their advisors immediate access to the productivity tools mentioned above, while providing the home office with cutting-edge compliance and supervision systems.
For firms that successfully implement this transition, the technology benefits and resulting gains in advisor productivity, recruiting, retention and cash flow can be substantial. In our experience, the shift can be such a game changer that some advisors who had been thinking about retirement instead decide to extend their careers by another five or even 10 years.
2. For owners: What is my current risk tolerance? From a financial planning standpoint, having a significant portion of an owner’s net worth tied up in a regional IAB has never been a riskier proposition. With margins so thin, these firms are never more than one large arbitration filing away from going out of business. And in the current litigious climate, such a filing could result from a single well-meaning but misguided advisor recommendation, to say nothing of outright misconduct.
Joining forces with a larger IAB as a branch office can enable owners to share these risks across a better-capitalized firm, while also reducing expenses by locking in more robust and affordable insurance coverage for errors and omissions and cybersecurity, among other benefits. Perhaps, most important, it can curtail risk by providing access to stronger back-office and supervision capabilities that can more effectively handle the business’ regulatory and operational requirements.
Many IAB owners are currently entering their retirement or preretirement years. For these entrepreneurs, there may be no time like the present to strengthen their financial planning positions by shifting business models and reducing risk.
3. What are the constraints on our recruiting efforts? Recruiting advisors is the bread-and-butter business of IAB firms. Unfortunately, the current recruiting environment has become intensely competitive, requiring two resources that are in short supply for many smaller firms: capital and time.
Incentive packages for in-demand advisors can be significant in today’s market, not only to encourage advisors to move their books but also to provide the white-glove transition assistance needed to bring clients to a new firm with minimal attrition. Helping advisors through the transition also requires an enormous amount of time, which, for smaller IAB executives, is often consumed by regulatory and operational duties.
Here again, a larger firm with greater resources may be an invaluable partner for smaller IAB owners, freeing up their time and supplementing it with robust recruiting resources and capabilities of its own.
The decision to transition away from operating as an IAB to an OSJ or branch-office model can be difficult and may involve some soul-searching for entrepreneurs who have poured years and countless sleepless nights into their businesses. In the current environment, however, it can also be exactly the right move for IAB executives seeking to restore growth, strengthen advisor productivity, deal more efficiently with regulatory and operating responsibilities, and bring back the excitement and joy that inspired them to start their firms in the first place.
Jim Nagengast is CEO and president of Securities America, a wholly owned subsidiary of Ladenburg Thalmann Financial Services.