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The Rise of the Super OSJ

The Rise of the Super OSJ

Super OSJs are increasingly taking over the supervisory burden and providing other back-office and business services for breakaway advisors.

It's a great time to be a Super OSJ — an extra large office of supervisory jurisdiction, or independent b/d branch that both supervises and provides consulting and business services to other independent advisors for a fee. Though the model has been around for decades, it's getting a boost from all of the wirehouse advisors who are going independent and need or want extra help setting up shop, managing compliance and supervision and keeping their operations in order. Some firms are turning their Super-OSJ services into a major part of their business models.

LPL-affiliated Morristown Financial Group is one of them. In August, it launched a comprehensive supervisory service for other LPL advisors called Advisor AdvantEDGE. So far so good: Morristown has attracted roughly an advisor a week since then, and this year 21 advisors have begun using the service. Today Morristown has six licensed branch managers supervising 120 advisors and $3 billion in client assets for the entire group, all of whom use the firm's Advisor AdvantEDGE service. That's up from approximately 70 advisors last year. The firm expects to generate $23.5 million in revenue this year, up 70 percent versus 2009. Morristown has found that the service is especially appealing to advisors who are new to LPL — and new to independence.

After all, independent b/d affiliated firms are required to either get someone licensed to supervise them in-house or hire the closest OSJ to do it. (In rare cases, a firm can pay the home office to supervise them, which then gets deducted from payout.) Of course, doing supervision in-house can be a hassle, especially for someone who is just getting used to running a business. Today, independent advisors face an increasing slate of complex compliance and risk-management responsibilities as traditional branch managers are being forced back into production, and have less time to help with supervision. But self-supervision is often simply not an option: to do so an advisor must meet certain production and asset thresholds and pass the Series 24 (or Series 9 or 10) licensing exam. The alternative, hiring an outside OSJ, can get expensive. Typically, a regular OSJ will charge anywhere from four to 10 percent of gross revenues for such services depending on the nature of the oversight required. Because of their scale, super OSJs can charge quite a bit less. Morristown's Patrick Sullivan and John Hyland, founding and managing partners of the group, say 80 percent of the advisors affiliated with Morristown Financial Group pay two percent or less on gross revenues. Advisors pay on a sliding scale based on production. The highest fee is 15 percent.

In addition to a significant savings, the advisor gets much more than supervision. For one thing, Morristown Financial Group helps with the advisor's transition — the upfront paperwork required to transfer and open new accounts, among other things — essentially cutting the time it takes from between three and five months to between three and five weeks. “We have a team that joined us recently, temporarily working out of an empty office here, and they're going to walk out of here into a new space, fully functional, know the LPL systems and technology, and be back in production in six weeks,” says Sullivan.

Some industry professionals predict that more super OSJs will offer this type of service model going forward. While the breakaway broker trend has slowed a bit since 2009, it is not going to die out, and the kinds of brokers who will go independent in the future may be the very ones who most need the services of an OSJ, says Stuart Porterfield, former national sales manager for Wachovia Securities Financial Network (Finet), and now founder of AdvisorPT, an industry consultancy. It used to be that only financial advisors who were wired to create, own and run their own small business would go independent, said Porterfield — but these types only represent 10 percent of wirehouse advisors, he estimates. In the future, it's the wirehouse guys who are not natural entrepreneurs who are going to be going independent. And they are going to want to hook up with firms like Morristown for everything from training and compliance help to transition support. Some of the breakaways will opt to join super OSJ branches directly in exchange for the possibility of equity and a higher payout.

Supervise Me

Focus Financial Network, one of Royal Alliance's largest affiliated independent firms, has been providing a similar soup-to-nuts service to 116 Royal Alliance advisors since 1993. But as the industry has evolved and gotten more complex, advisors are looking for more services; either at a very competitive price or no charge, says John Bina, president of Focus Financial Network. Bina says Focus offers advisors a turnkey office space, and additional services like on-site financial education, marketing support, and help with succession plans. Bina says the charges for these services aren't bundled together, but are built into the advisor's payout. Focus also folds into a larger model based on a network of super OSJs. Art Tambaro, president and CEO of Royal Alliance, says the firm's business model is based around creating large producer groups which then help advisors to utilize the b/d's tools.

For the independent b/ds themselves — where margins are slim, competition is heated, supervision is pain in the neck, and support services are essential — these Super OSJ arrangements are a great deal. For one thing, anything that helps smooth the transition process for new recruits is a big plus at a time when recruiting is particularly essential to growth in the financial advisory businesses. In addition, it allows the b/ds to offload their liability to a certain extent. “The fact that the b/ds have now picked up additional assets and offloaded any liability they would otherwise have with these advisors is huge,” says Brian Hamburger a securities attorney and managing director of a business and regulatory compliance consulting firm, MarketCounsel. Hamburger says the OSJ is “basically indemnifying the firm, saying, ‘Listen, we're going to pick up this extra million of assets, but should there be any liability that comes of it, we're responsible.’”

When Timothy Flynn decided to leave UBS in 2008 to go independent with LPL Financial, one of the first things he wanted to do was offload his compliance burden. Flynn wanted to focus his energies on his clients and his business, Flynn Financial Partners, and he didn't want to hire an in-house supervisor. For one thing, a fulltime compliance officer would have meant a fixed cost of $100,000 a year or more, he says. For another, Flynn thought it was important to have neutral, objective oversight and thought that outsourcing the supervisory function to a third party would be a better way to make this happen. LPL referred Flynn to a number of OSJs and compliance officers, mostly producing advisors manning their own offices who charged 100 percent to 200 percent more than Morristown Financial Group for the supervisory service. Signing on with Morristown Financial for a 1 percent fee was a “no brainer,” he says. It created tens of thousands of dollars in savings that can be redirected to client service.

“When you think about it — how is an advisor doing $100,000 a year going to truly take the time to focus on compliance when they're running like crazy to make money to live in the metropolitan area?” says Flynn. “You and I both know they're not going to do that and they can't afford to pay someone in-house either, so this model is perfect for someone like that.”

Morristown Financial is also helping Flynn recruit and transition new advisors. Flynn says his firm's affiliation with Morristown Financial Group also provided the shop with better access to LPL corporate than they would have had on their own. And the service is high-touch, with daily contact when necessary. In fact, Flynn says there is probably not a day that goes by when he or another member of his team are not on the phone with Sullivan, Hyland or another member of the Morristown Financial Group staff. “It's a friendly voice and friendly face if you will, which is needed as people go independent. How would you learn the processes of any company if you didn't have some guidance?” says Flynn.

Islands In A Stream

For advisors like Flynn, part of the attraction of working with a super OSJ is participating in a larger network with a smaller boutique touch. Most super OSJs are small enough to know the businesses of each of their advisors intimately, but large enough to cut cost-efficient deals for their affiliated advisors. Morristown, for example, is using its close relationship with its advisors to generate business leads for them — connections that might be tougher for LPL to make. The group recently hooked up an advisor who is a 401(k) pension expert with an advisor who has connections in the 401(k) world, and they've generated $200 million in new business. They also host conferences for their advisors which allow for networking, education and insight from guest speakers. The group's February conference drew 100 advisors and featured a market outlook by BlackRock's chief equity strategist, Bob Doll.

“What we really feel we add is that the advisor becomes part of a network, they're not out on their own or a group of two or three on their own,” says Hyland. “They get to know other advisors in the area, who are a part of Advisor AdvantEdge. Of course they meet people at other LPL events, but it is not the same connection.”

In addition to creating a professional network, large producer groups also create the possibility for advisors to have ownership in the group while maintaining their independent practices. Take National Planning Corporation's Advantage Financial Group based in Cedar Rapids, Iowa which incorporated as a C corporation in 2000. Joseph Russo, founder, president and CEO of Advantage Financial Group, says the group's 100 advisors went independent because at some point in their careers they realized that the ownership of the business must be aligned with the person who owns the relationship with the client. “We sought to validate that ownership by forming a group owned by individual partners,” says Russo, who has a 20 percent stake in the business.

While the group's model is meant for existing independent advisors, rather than advisors new to independence, like other super OSJs, the group's scale creates a better deal than an individual advisor would get affiliating directly with the b/d, says Russo. For example, on top of the ownership structure, Russo says the group's Cedar Rapids home office offers advisors a “concierge service,” where advisors have their daily problems and questions answered without having to go to the b/d's home office first. Like other super OSJs, the group's scale helps: The firm has $18 million in revenue and $3 billion in assets. Meanwhile, the firm's revenues have risen by 300 percent since 2003.

“It's just a matter of scale, it allows you to maintain the payouts and still create enough margin for a super OSJ to operate,” Russo says. “Part of our obligation as a super OSJ is to stay ahead of the curve — and as it relates to right now with the discussions of the regulatory structure running rampant in Washington D.C. — to be better prepared to foresee the future and help advisors model their businesses around it.” In fact, Russo says the group launched a registered investment advisory in 2008 in anticipation of the overall industry move towards fee-based business and the fiduciary standard; it's something a an individual advisor might find it difficult to do on his own.

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