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How to Handle an Imploding Broker/Dealer

How to Handle an Imploding Broker/Dealer

Securities America is just the latest broker/dealer to face financial distress. With so many firms falling into financial or legal hot water lately, financial advisors need to be prepared for the worst. Here's a checklist for your Plan B.

Securities America, the independent broker/dealer division of Ameriprise with around 2,000 advisors, recently found itself in legal and financial peril due to failed private placements. As this magazine went to print, whether parent Ameriprise would step in to cover its liabilities remained uncertain. Securities America is not the first to fall into dire straits over the past year or more. As we watch one independent broker/dealer after another succumb to regulatory action, financial problems or consolidation, many advisors are questioning the security of their very livelihoods. It is terrible to see so many firms closing their doors. While we believe that the future of the independent broker/dealer business is bright for firms both big and small, we can't help but suspect that the trouble is far from over. Many of the litigations and regulatory actions are still pending and more importantly, margins have not improved enough for many firms to allow them to recapitalize. So what should advisors be doing if they start to smell smoke and suspect a fire?

Prepare Plan B: You Will Need Time For Due Diligence

The worst transition is one completed in haste. The result can cause increased aggravation for you, loss of critical data for your clients and unusually high out-of-pocket costs for everyone. To determine which firm is right for you, take at least two months to do your research. This should include onsite visits, a test drive of the firm's platform, and conversations with advisors currently working with the firm. If you are already feeling nervous about the future of your firm, you should probably start your due diligence now.

Select The Firms You Will Interview: Choose Carefully

The biggest danger in selecting a new affiliation is jumping from the frying pan into the fire. You don't want to go from one troubled firm to another. We recommend that you start with 10 firms that sound like a good fit for a specific reason — for example, they have a reputation for supporting a business like yours. Choose firms that have a clear strategy — they are known for doing one or more things particularly well. For example, a firm may be known for its industry-leading advisory platform, excellent practice management support, working with CPAs, innovative pricing, etc. Use caution if a firm appears “generic” in its message. Start by looking at firms of significant size ($100 million-plus) but also give the smaller firms a chance — provided you have a very good understanding of their long-term strategy.

Prepare Due-Diligence Checklist: Be Systematic

Once you select your 10 firms, send them a standard request for information. Take note of how well they answer your specific questions. If you receive a customary recruiting package, ignoring your specific questions, it might be an indication of the level of individual attention you can expect from that firm. The questions you ask should cover the following: the strategy of the firm, their ideal advisory firm, an investigation of the firm's strategic partners, their regulatory standing, the advisory platform, the workstation and its capabilities, key third-party vendors, general platform philosophy, their compliance process, the transition process, transition support, costs and payouts. Prepare a kind of scorecard based on the preliminary information you receive.

Analyze The Financial Deal Carefully: Do The Real Numbers

It always amazes us how often financial professionals ignore the numbers. The pay package you take home from a broker/dealer is a combination of payout (some firms have different payouts for different products), advisor fees such as technology, affiliation, E&O (some firms mark it up) and the platform costs — advisory platform fees (basis points), ticket charges and other costs passed to the client. This analysis is often complex and many firms artificially inflate payouts by increasing other costs. Watch out for payouts that are not retroactive to dollar one but only apply to “prospective” amounts. Be aware of high platform fees and ticket charges. Finally, look at the model with common business sense — the average broker/dealer has about 12 percent to 15 percent operating expense (as percent of total revenue). If they are paying out 90 percent or more of revenue, where does their profit come from? If they cannot answer that question to your satisfaction, walk away. You either are looking at a firm that may be losing money (many are) or a firm that is funding payouts through “sponsorship” revenue sources. The reliance on sponsorships for profits not only creates awkward conflicts of interest but also creates temptations to sell less-than-perfect product that happens to “sponsor” well.

Go Past The Recruiters: Meet The Team

Recruiters are certainly valued professionals; however, keep in mind you may never work with them again. So, make it a priority to meet the home office employees of a potential firm. During your due diligence visit, you should talk to members of the service team. Meet with the compliance analysts and supervisors. Interview the brokerage operations staff and rep-support specialists. Spend time with the advisory services folks. The quality of the service team will largely determine your service experience. Make sure you understand the workflow process. Ask many hypothetical questions like, “What happens if I make a typographic error filling out the form?,” “How can I …,” “Who will handle … if …?” What you hope to find is a well-established process (rather than ad-hoc reactions) staffed with professionals who are well-trained, experienced and who care.

Finally, always ask people you meet to describe the culture of their firm. Make sure it fits with your own culture.

Act Like A Regulator: Ask The Tough Questions

Many firms are still plagued by pending litigation related to private placements that failed, and other troubled investments. While several of the litigations have been highly publicized, there are countless others pending that could be just as big in their scope. A quick check on FINRA's site ( will reveal cases pending. Naturally, not all pending cases have merit, but it would be prudent in today's environment to ask the management of the firm to discuss each of the larger cases and provide an explanation. In addition, reach out to compliance consultants or compliance professionals you know and ask them about their perception of the firm. Finally, read through the trade press — what coverage has the firm generated? Any information that doesn't make sense or makes you feel uncomfortable should be construed as a warning sign.

Talk To Other Advisors: Make New Friends

The best information about a broker-dealer can be obtained from its current clients. Ask for references. Talk to advisors who have transitioned in the last month. Go a step beyond and reach out to a few advisors in your town or community who are working with that broker/dealer. Ask them about their experience. Lastly, question the advisors in your study group or coaching group to see if they know any advisors affiliated with this firm. Interview them. If their current clients are not excited (not just content) with the broker/dealer, this will tell you all you need to know.

Independent broker/dealers play a critical role in the industry, providing outsourced platforms for advisory and brokerage business. They affiliate with over one-third of the professionals in the industry and provide services to over 20 percent of investors who use professional help. There is a bright future for small firms with unique offerings and large firms with scalable models. So ask yourself, “What is my strategy and which firm can best support my strategy?”

Philip Palaveev is president of Fusion Advisor Network in Elmsford, N.Y.

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