When recruiters and independent broker/dealers talk to advisors about the benefits of changing firms they usually paint some variation of this picture: The advisor’s current firm is simply too limiting, too restrictive in what kinds of services or securities are available to clients; advisors should throw off the yolk of servitude and experience “independence” and the freedom to build a business the way they see fit.
Yet research, ours and others, show that most advisors decide to move not because they are wooed to greener pastures, but because pain points inside their current environment have become too great.
Is independence overrated? In our own annual Independent Broker/Dealer Report Card Survey, fielded earlier this year, we asked advisors whether or not they thought they would be at their same firm in twelve months.
While 80 percent said they would probably remain where they were, those that said they were likely to make a move had things other than “independence” on thier mind. Only 29 percent of that group said independence was the “most important” factor that would lead them to choose a new firm.
What is more important than independence? Compliance responsiveness, business and technology support, product selection and, not surprising, compensation. All of these factors were ranked more important to advisors looking for a change. Almost 50 percent said the most important factor was better service support. Again, this was among advisors who said they were likely to change firms in a year.
The notion that advisors aren’t looking to “break out on their own” as much as they are looking for better help in running their practice is backed up in this month’s issue. In her story on page 70, Diana Britton found that what transitioning advisors looked for in a new firm, more than anything else, was simply assistance in breaking the news to their clients and trying to get them to move with them. The advisors have already decided to move. Who was going to make it easiest for them?
Most anecdotal stories about advisor transitions, especially when told by recruiters, will usually end with the fact that the departing advisor kept “nearly” 100 percent of his or her clients. But in fact, as Britton mentions, only four percent of advisors manage to keep all of their clients after moving. The median advisor keeps between half and three-quarters, according to Aite Group. Perhaps an advisor takes advantage of the transition to clear out some unwelcome clients, but I suspect most of the loss is involuntary.
We hear far too little about the losing side of the equation, but Megan Leonhardt’s tale on page 64 of one advisor getting into a legal tussle with Edward Jones over his solicitation of clients pulls back the curtain a bit on how firms will seek to protect their turf. While the story reads like a great David and Goliath-style victory for the underdog, in fact she found that advisors are, more often than not, the victors in these kinds of disputes.
They should be. It was a surprise to read in her story that Edward Jones does not adhere to the so-called “Broker Protocol,” the agreement between brokerages that allows departing advisors to solicit clients without fear of legal ramification. That is a worthwhile agreement, and one that no doubt kept regulators from writing their own rules for the industry back in the pre-protocol days, when client accounts sat in limbo as their advisors engaged in legal standoffs.
The protocol ensures that, like any functioning capital market, assets can flow freely. Edward Jones is an innovative firm that deserves far more credit than they get for bringing quality financial planning to mainstream Americans and proving that, with the right scale, the advisory businesses can find a profitable niche helping the middle class. Their advisors are well-trained professionals and the Edward Jones brand is as good as any, perhaps even better than the more Wall Street-focused firms after 2008.
My guess is that Edward Jones can compete with any other brokerage out there for talent. And while losing a $100 million book of business would sting, it could be more than made up by appealing to future recruits with the sharp business support systems that firm has in place. Resorting to arbitration panels and legal agreements to try and keep clients from leaving with thier advisors may help firms win an occasional battle, but those that rely on it will certainly lose the war.
