“Should I stay or should I go? If I go there will be trouble! If I stay it will be double!” There is practically no better way of summarize the situation that thousands of advisors face when their broker-dealer is acquired or put for sale than the chorus of this Clash song. In light of the many changes in ownership of independent broker/dealers, including the recent announcements of Woodbury Financial, Capital Analyst and others, there are over 3,000 advisors facing that decision today. On one hand, the inertia and the desire to avoid changes are working very hard in the direction of remaining where you are. On the other hand, there is the sense of danger that retaining the status quo may be worse than any disruption caused.
Staying or going is a critical decision for your practice and given the gravity and consequences of that decision every advisor should take control of the situation. Whether you are staying or going, you should do that on your own terms and not let indecision be the final arbiter.
Advisors get lulled into complacency and tend to think that there is no reason to spend the time and energy when they can do nothing. “Why change something that’s not broken” is a common refrain. It is broken however and the situation will change, whether you want to or not. By definition, buyers buy so that they can change—change the pricing, change the services, change the staff, change the clearing firm, change the asset managers, etc. That’s what makes the dealer attractive. If the broker/dealer was doing just fine and not going to change, why would anyone buy it?
Accept the change as an opportunity. With the right research and negotiations, advisors can turn the change in their broker/dealer be a great new opportunity and a great boost to their practice. To do so however, you will need to have a process and devote time to that process. Here is the process I recommend:
1. Survey the landscape. Choose 10 broker-dealers that you would approach and send them a request for information. Ask for complete recruiting packages and perhaps a quick introduction to the firm. Your list should always include LPL, Cambridge, Commonwealth and NFP by virtue of the size and leadership position of the three firms (Raymond James certainly can be added as a fifth must-have). Look also for specialty firms that focus on a practice with your profile—firms like Multi-Financial, FSC, 1st Global, Cadaret and Grant, have their own specialties and provide high level of support to their target clients. The key here is to collect a large amount of information.
2. Create your criteria. Whatwill be on your scorecard? What are the factors that are important to you? Don’t just list generalities such as “technology” but rather be specific—what technology? What functionality? At what cost? For example, you can have “straight-through processing for new accounts and integration with a highly functional CRM.” The list should be pretty long but it should be prioritized and perhaps sorted in groups. Feel free to turn your criteria into a questionnaire and send it to your chosen 10 firms.
3. Chose the firms to engage. Based on your criteria and the information collected in step one, you should be able to select the top three firms you would want to engage with. If you find that the recruiting packages of a firm are not very informative, you can request more information from the recruiters. However, if a firm is not very forthcoming with information, that may be a reason to rule it out. A good third-party recruiter may be able to help you in gathering this information and organizing it. However, if they are trying to limit your dialogue to one or two firms early on that they have contract with, I recommend doing this on your own. When choosing the three firms, you should create a scoring system and apply it to your questions.
4. Visit the top three. You cannot choose the firm you will work with for the next five years without visiting it first. You will never buy a house without walking through it many times, would you? Customize your home office visit. Do not just run through the same recruiting presentations they have done a 100 times. Ask for an agenda and organize the agenda based on your priorities. A good office visit should last at least a day and a half. During that time, it will be great if you get to meet and spend time with the actual people you will be working with—service specialists, compliance analysts, advisory services consultants, etc. Nothing against the recruiters but they will be gone soon after the transition.
5. Spreadsheet the economics. During your office visit you should have a complete understanding of the firm’s compensation and how it will apply to you as well as any transition assistance that may be provided. Look for very specific terms—not for general ranges. If there are formulas, then you need to know and understand the full formula. Put all the compensation details side by side. Compare them to each other as well as your current compensation.
- Estimate the cost of transition—what will be loss of revenue and out of pocket time. Enter that into the equation.
- Estimate the change in out of pocket cost beyond the payouts—does the broker-dealer provide software you used to buy? Can you achieve more with less people? Will there be gains in efficiency?
- Don’t forget the rep fees. The total cost of rep fees and charges will hover around $4,000 to $6,000 so don’t forget to factor that cost.
- Estimate the retention bonus—if in doubt, add 10 percent to 15 percent depending on the size of your practice. To my knowledge (not very high) this was the range of retention bonuses paid to Securities America advisors.
6. Don’t forget the clients. It is very unfortunate to see high recruiting bonuses and high payouts essentially financed by high client charges. Create a spreadsheet that compares the cost of the different broker-dealers to clients. Include advisory platform fees, ticket charges and other costs in this spreadsheet. Review and model the cost of the managers you use frequently. Don’t assume that the cost is the same everywhere—you may find the same manager with vastly different fees on different b/d platforms. Dig deep—seemingly low ticket charges may be combined with confirmation fees, “low” platform fees in basis points may be complemented with custody fees in basis points or fixed dollar charges.
7. Make the final decision - If you have done the work so far you will find that the retention package will hardly change your mind. If your current firm compares well, then it will be gravy. If it does not, then it will hardly make a difference. Once you are closer to a decision, you can discuss your timing with the recruiters from your chosen firm. You may find that they are amenable to providing your extra assistance if you make the change sooner. Avoid the crowd and negotiate that extra assistance and enjoy a better transition experience rather than wait for all of your 1,000 + colleagues to make up your mind.
Staying or going are critical decisions to your practice. They will shape the economics of your firm for the next five or more years. You have to remember that indecision is a decision in itself. Don’t look at this change as hassle and pain—instead you will find that the knowledge and power you get from this process will dramatically improve your ability to work with your chosen broker/dealer. Now is a good time to choose a broker/dealer—even if you chose to stay.
Philip Palaveev is the President of Fusion Advisor Network, which generates $70 million in revenue providing business management services and camaraderie to a network of 120 independent advisory firm members. As president, Palaveev is responsible for the strategy of the firm and leads its practice management offering, with a focus on helping member firms grow.
