Ninety-five Percent Payout? I Don’t Think So

You know that 95 percent payout the broker/dealer down the street is offering you to join? Sounds very appealing right? But have you pulled back the curtain on that number a little bit? The headline payout numbers offered by firms can often be quite misleading so it’s not a bad idea to take a second look. There are typically a host of costs that cut into an advisor’s net take-home pay, and these can add up.

“Reality is that it costs broker-dealers far more than 5 percent of revenues to run their business,” says Adam Antoniades, President of First Allied Securities, an independent broker-dealer in San Diego. “In fact, it costs upwards of 15 cents on every dollar of revenue earned—including gross dealer concessions and ancillary revenues such as money market revenue, contracts with vendors, ticket charge mark-ups, etc—to operate a successful broker-dealer,” he says. This number varies of course depending on variables such as location, staff-to-advisor ratios, services provided. But the old adage applies: “If it seems too good to be true, then it probably is.”

Here are a few things to consider when comparing broker-dealers:

Fee-based account charges

Advisors often overlook dramatic differences in what broker-dealers charge on fee-based accounts. These administration charges can range from as little as 5 to as many as 25 basis points. For advisors doing a large percentage of fee-based business, such costs make a significant difference on the bottom line. Consider that an advisor with $25 million in assets under management in fee-based accounts in a given year would pay $12,500 in administration fees at a firm charging 5 basis points versus $62,500 at a firm charging 25 basis points. Annually, this is a difference of $50,000.

Technology costs can be tricky to evaluate. Because broker-dealers offer a variety of different models for providing technology to advisors, it’s important for advisors to consider their needs and figure out which models are the most cost effective for them, as well as how those costs will affect their net payout. For example, some firms charge advisors as little as $20 per month for their basic technology platform, which generally includes basic trading, statements and client access. Other firms may charge up to $250 per month for more advanced platform technology, including basic trading, consolidated statements and marketing systems. If you don’t anything advanced, the former is obviously the better option. Some firms also offer an a la carte menu of technology services with a wide range of costs, such as monthly document storage fees of up to $35 a month and monthly RIA fees of up to $50.

In 2009, the Security and Investor Protection Corp (SIPC) increased its assessment fees from a $150 flat fee, implementing a new fee schedule of 25 basis points on net operating revenue (unlike gross revenue, net operating revenue excludes interest expense and dividend expense), as a direct result of Bernie Madoff and other scandals which caused its fund to run out of money. For larger broker-dealers, the change resulted in fees that increased by tens and even hundreds of thousands of dollars. Some broker-dealers pass these costs along to their advisors, while others absorb them. Fees for advisors now range from a flat $160 to as much as 45 basis points of net operating revenue. This means that a $550,000 producer would pay $160 in SIPC assessment charges at a firm that charges the flat fee, or $2,475 at a firm that charges 45 basis points of net operating revenue.

Ticket charges

Broker-dealers vary significantly in how much they ding you for ticket charges, postage and handling on tickets and cents per share. In our experience, ticket charges can range from $16 -26 per ticket. Cents on tickets can range from zero to two cents per share, and postage and handling can range from between $2.50 and $7.50 per ticket. These charges add up.

If you are considering changing firms, looking beyond payout and comparing the charges you’ll pay your broker-dealer is essential to realistically evaluating your bottom line.

Jodie Papike is the Executive Vice President of Cross-Search, the first third-party, independent broker-dealer advisor and executive placement firm. Cross-Search consults with financial advisors transitioning to new independent broker-dealers, leveraging due diligence on over 100 independent broker dealers. The firm acts as a concierge to financial advisors in transition, guiding them through the entire process of identifying their most appropriate options, negotiating a deal and transitioning clients. For more information, please visit www.cross-search.com.