Residential houses and broker/dealers have a lot in common — both create the environment where you function, determine a lot about the quality of your life, and surround you with the right or the wrong neighbors. As we know, housing and broker/dealers are not selling as easily as they used to. Low interest rates, lack of differentiation, waning sponsorship fees and increasing cost of compliance have shaken up the brokerage industry, creating organizations torn between their desire to grow and their economic reality. Broker/dealers see recruiting as their lifeline and, therefore, focus intensely on adding more advisors. They would love to invest in recruiting, but the reality is that their margins can't support the historical bonuses they have paid. Most independents have almost stopped paying any sizable bonuses; wirehouses, it's true, continue to come up with higher and higher bonuses, but they now wrap them in more and more years of steep growth expectations. Many advisors are realizing that they need to look at the cost of changing firms as a cost of doing business — an investment offset by the future benefits of the new affiliation.
When you change broker/dealers or custodians, your decision should be based on your strategy, your growth ambitions and the type of organization you want to associate with. Changing BDs just for profit (recruiting bonuses) is a flawed strategy that backfires through damaging client relationships. Still, when you are confronted with a change, it is important to understand the cost of the change and how to capitalize on what you have created.
Based on my experience working with advisors, I strongly believe that:
- Changing broker/dealers frequently is a sign of poor decision-making, poor understanding of your own strategy, and it ultimately undermines client relationships.
- Staying with a firm that is a poor fit does long-term damage to a practice. This is often seen through increased cost of operations and missed efficiencies. This has the effect of sucking the energy out of the FA and gets in the way of focusing on growth and client relationships.
In other words, it comes down to cost-benefit analysis, so let's examine the cost. The cost of transitioning to a new firm consists of three major components:
- Out-of-pocket monetary cost
Changing broker/dealers does cost money — whether you are switching independent firms or wirehouse firms. Here are some of the costs you will face:
- Closing costs at the departing firm
Most clearing firms charge retirement accounts termination and custody fees upon account closing if an advisor leaves the firm. However, custody fees are normally charged annually even if you stay with the same clearing firm. The cost is between $75 and $100 per account depending on the clearing firm. Still, most of the time the incoming clearing firm will pay for the closing cost at the departing firm so the advisor should not suffer a financial setback due to change of clearing firms. This is particularly sensitive to wirehouses who are all self-clearing. The exception is a firm with a lot of small accounts, since clearing firms usually have a minimum on the accounts they will pay for.
- ACAT fees
The departing custodian will usually charge $25 to $100 in ACAT fees depending on the mark-up applied by the departing broker/dealer. (If the b/d is the clearing firm, it is usually the custodian too; if a third-party custodian is used, there is no need to change.) Yes, broker/dealers do mark up the transfer fees. The charge is typically fully offset by the new firm, except for the smallest accounts. Again, this is only an issue if the advisor has used the corporate RIA of the departing firm and the new firm custodies with a different custodian.
- Cost of mailing and printing new forms
Naturally, the new account forms have to be sent to clients for their signature. While many advisors will use meetings in their office to renew their contracts, there is always some need to mail or courier forms and brochures to clients. The total cost will vary by firm but should normally not be more than $1,000. Wirehouse firms will do this for their new advisors while independent firms often pay for the mailing themselves. Some independent broker/dealers produce and mail the form for their new recruits, but since the advisors cannot share client information with the new firm until they resign and move their licenses, this can actually delay the process.
- Rebranding the practice
Once you've jumped firms, the practice will have to change all of its marketing material, including business cards, brochures, websites and letterhead. Typically, that should cost about $2,000 or less. For wirehouse moves, the cost is born by the new firm. RIAs who change custodians usually are not faced with such costs.
- Transition software
Form filling software such as Quik! Forms or LaserApp can speed up the repapering process of the accounts significantly by tapping into the CRM database of the advisor and filling out the majority of the information automatically. The software license cost for one year should be under $1,000. Often, the incoming broker/dealer will provide the software. Wirehouses will typically prepare all the forms.
- Overtime for staff or hiring additional staff
A well-prepared transition often does not require the use of overtime or hiring additional staff. It is not uncommon for advisors to offer their staff bonuses at the end of the transition. While this is not necessarily a standard practice, I would budget $3,000 to $5,000 in additional staff expenses depending on the size of the firm.
- Paying for client charges
There could be a number of costs that are incurred by clients in addition to the account closing fees. This will vary greatly from one firm to another, but it could include items such as settling margin loans and the associated fees, establishing check writing at the new firm, wiring funds to the client, trading out of positions that cannot be transferred, and so on. The cost of such items will vary greatly from one firm to another but should probably be in the $1,000 to $5,000 range. Often the incoming clearing firm and broker/dealer offset or suppress such charges.
In total, we believe that a large (over $1 million in revenue) firm should budget between $5,000 and $10,000 in out-of-pocket costs with many of the items (if not most) being offset by the new firm. A smaller practice (between $300,000 and $500,000) should budget $3,000 to $7,000 in out-of-pocket costs, again counting on significant support from their new firm.
- Closing costs at the departing firm
- Opportunity cost of lost revenue and productivity
The biggest cost of switching broker/dealers is the opportunity cost of making the change. It can be a time suck, even though most firms and custodians offer a detailed road map and other assistance. We have tried to estimate that cost below:
- Staff time
For the period of the transition, the staff will spend a lot of time re-papering accounts and moving accounts and assets rather than being engaged in other work. While this cost is difficult to estimate, we would suggest that a typical brokerage account will require 15 minutes of time to complete and another 15 minutes of time to mail the information to clients or to verify transfers. Advisory accounts can be more time intensive if the advisor has to renew the Investment Policy Statements and other supporting documents and can require up to 30 minutes per account to repaper and another 30 minutes to verify and renew the set-up. Finally, direct-to-sponsor accounts (held at mutual funds, annuity companies or direct participation programs) are perhaps less time intensive and only require a change of dealer form — 10 minutes or less.
- Training cost.
The staff will also need to learn how to work with the new firm and often will need to learn new software systems. This may include a new workstation and other tools. The total training time required will be between 20 hours and 40 hours per staff person depending on the similarities or differences between the firms. This will translate into training cost of $400 to $800 per person if we use the $20 per hour estimate.
- Transitioning rather than developing business.
Advisors will also spend a lot of their time focused on transitioning client accounts rather than developing new relationships or opportunities. The cost of that distraction is difficult to quantify, but it has been our experience that the transition year will result in approximately a 5 percent drop in productivity for the firm going through change. In other words, a million-dollar firm will incur an opportunity costs of about $50,000 due to the transition.
In total, a million-dollar firm can expect an opportunity cost between $50,000 and $60,000 including revenue lost and staff distraction. A smaller firm with, say, $500,000 in revenue will incur a cost between $20,000 and $30,000. Note that a lot of that cost can be mitigated if the transition is well planned and the staff is well trained and prepared to handle the process. This will result in a lower level of involvement for the advisor and will significantly reduce this cost.
- Staff time
- Lost compensation
Finally, depending on the compensation methods at the departing firm, there might be some compensation lost in transition. These items are typically:
- Quarterly billing
Most firms pre-bill their fees in the beginning of each quarter. Occasionally though, there are some firms or managers that bill in arrears, resulting in an awkward switch from one firm to another, where the client is billed twice within 30 days — once by the old firm and once by the new. Also, when leaving from one firm for another, advisors sometimes lose days of fee-billing since they had a contract with the old firm until, say, the fifth of the month but did not start the new contract by, say, the 10th of the month.
- Proprietary product
This most often happens with proprietary variable annuities where the advisor has trail compensation that is not vested. There may be other products that are compensated on a trail or fee and cannot be moved to the new firm. This is relatively rare but may be an issue with some firms.
Most firms have a “bonus” that is earned through the year and if an advisor leaves his broker/dealer mid-year, he forfeits the bonus year to date. Depending on the firm, bonuses will range from 1 percent to 4 percent of the revenue generated. So a departure will forfeit between 0.5 percent and 1 percent of the compensation.
- Accounts left behind
Finally, some accounts are always lost in transition. In the independent world these are usually accounts the advisor wanted to leave behind. In the wirehouse world, the accounts are “fought over” from both sides so the attrition may be more significant.
- Quarterly billing
The bottom-line is that a broker/dealer change will incur a $5,000 to $10,000 in out-of-pocket costs and $20,000 to $60,000 in opportunity cost, depending on the size of the firm. The cost is high but not overwhelming. It will represent between 5 percent and 10 percent of the revenue of the firm and can easily be offset by better services, efficiency or growth at the new firm.
I purposefully did not discuss recruiting bonuses in this analysis. These bonuses are typically not offered in the independent world, and they have completely run away in the wirehouse world. We all know that costs are ultimately born by the client, so when we see a 300 percent deal, I believe we know who is going to pay for that.
Finally, we find the most significant “cost” is the scary thought of asking clients to “rehire” you. As an advisor, the fear your clients will not follow you is the biggest “cost” that stands between you and a desired change. As we can see above, the real cost of transition is not overwhelming. In fact, for most practices, it represents a similar cost to the expense of filling the spot of a departing, valued employee. The fear is hard to measure but is the only real obstacle to change.
Moving to a new house can be a new beginning. The weight of the change and the decision can be overwhelming. The cost, though, is not and should not be the hindrance. The real cost of transition is not worth the cost of practicing in the wrong environment.
The author is the president of Fusion Advisor Network, a consultancy to help FAs manage and grow their businesses.
Jason Lytle, who leads the transition department at NFP Securities, provided the research and detail for this article.