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You may be a wirehouse rep looking to go independent. Or you may be an independent adviser considering switching to a new independent broker-dealer. If so, you have plenty of company. A study last year by CEG Worldwide found that more than four in 10 surveyed independent advisers think it's likely they'll move to a new broker-dealer. But changing broker-dealers is never easy, so you need to do all you can in advance to ensure that your new broker-dealer is actually going to be able to support you in the direction you want to go, not just present you with a different set of problems.
You could, of course, start your own broker-dealer. Although this option is attractive to advisers because of the control and flexibility it provides, it can be expensive and time-consuming. (For more on the pros and cons of starting your own broker-dealer, see "To B-D or Not to B-D," Financial Planning, January 2003.)
You could also drop your licenses altogether and become an RIA. The freedom of this option is attractive, but advisers choosing to go this route must be completely committed to the fee-only model, since you'll be precluded from selling a lot of products--anything that carries a load or commission, including most insurance choices.
Assuming you don't want to start your own broker-dealer or become an RIA, you have two choices--joining a large broker-dealer or a small one. To start, take a look at both of these options to gain a good understanding of what each can offer you.
Option 1: Joining a large broker-dealer. Large, national broker-dealers have well-known brand names, thousands of advisers, and extended infrastructures. No two are exactly alike in what they offer and how they work with advisers, but there are some broad generalizations about the ups and downs of going with this type of broker-dealer.
In the plus column, large broker-dealer firms generally offer a wide range of resources geared to meeting the needs of a large number of financial advisers. These resources include comprehensive product selection, transitioning services, excellent training, marketing support, and in some cases cash incentives to join.
With these advantages come drawbacks, however. Because these broker-dealers serve so many advisers, there can be a lack of flexibility, with advisers largely restricted to working within established lines. They are often interested in branding themselves, and their advisers may be required to support that identity, not build their own. And with the consolidation occurring in the industry, your company name, your business card, and your broker-dealer structure might change every time there's a merger.
The larger broker-dealers bring huge pools of resources to the table for advisers. But as with any big company, their sheer size precludes personalized, flexible attention. When considering large broker-dealers as an option, you'll have to decide if their depth and breadth is important enough to you and your business to trade for your autonomy and agility.
Option 2: Joining a small broker-dealer. Smaller broker-dealers are in many ways the flip side of large broker-dealers. The strengths of the large broker-dealers tend to be the weaknesses of small broker-dealers, and where large broker-dealers fall short, small broker-dealers can excel.
On the plus side, smaller broker-dealers allow flexibility that gives advisers a level of independence that is impossible at a large broker-dealer. They also provide more responsive service, personalized attention, and freedom for advisers to build their own business brand and identity.
The negatives include less comprehensive product lines, less robust training and marketing programs, and technology that is less deep and broad than that of larger broker-dealers. And while it's fairly safe to assume the financial strength of large broker-dealers, smaller broker-dealers don't generally enjoy the same deep pockets.
With a clear understanding of which option is best for your practice, your next step is to evaluate specific broker-dealers. It's always easy to assume that the grass is greener someplace else, but to actually make a sound decision you need to take a hard look at specifics and objectively compare apples to apples. The last thing you want is to go through the entire process of choosing and transitioning to a new broker-dealer only to find that it isn't actually a good match after all.
There's no substitute for face-to-face contact. Visit any broker-dealer you're seriously considering. Talk to advisers currently with the firm. When possible, talk to the clearing firms with which they work and wholesalers who've done business with them. Every viewpoint is important.
As you evaluate each broker-dealer, make sure to address the following laundry list of issues:
Culture. Relationships are everything in our business. You'll need a thorough understanding of the people associated with the broker-dealer to find out if they will be a good match for you and your business. Start with management. How long have they been in business? What are their backgrounds? Have they ever worked as advisers themselves? Do they have good reputations? Are they people you can trust? Do they have a vision of where they're taking the firm and an understanding of how that vision has evolved? Do they take a personal interest in making sure issues are addressed and problems solved?
Are the other advisers in the broker-dealer a good fit with you and your practice? What is the average annual gross production of advisers in the firm? It should either be similar to your own or be an amount that you plan to reach. What about their experience, client markets, and goals? If you share some common ground with these advisers, they'll be able to challenge you and help you grow.
Products. What does the product list look like? Check out everything that you use now or may possibly use in the future, including individual securities, mutual funds, annuities, managed accounts, separate accounts, hedge funds, private equity, and life insurance. Does the broker-dealer have in-depth knowledge of and interest in the products you sell? What process is used for approving investments? How experienced are the people who investigate investments? Are there incentives to sell proprietary products?
Technology. Look at the kind of resources the broker-dealer is devoting to technology. Is it aggressively building new tools? To what extent does it involve the advisers in developing new technology? Get a complete demo of the broker-dealer's technology to see for yourself if it offers what you need.
Payouts. Get a complete payout schedule of all products. Many payouts are structured to increase incrementally as your production increases, so find out if the payout is less if you fail to do a particular volume. Evaluate payouts in the context of what the broker-dealer has to offer. An above-average payout won't make sense if the broker-dealer doesn't have exactly the support or products you need. On the other hand, if you don't need many support services, payout may be more important to you because you won't want to have to pay for the bells and whistles.
Service and support. Every broker-dealer will tell you that it excels in service, so this is perhaps the most challenging area to evaluate. The best way is to ask for referrals from the broker-dealer from one or two advisers who have a mix of products and services that is similar to your own. Ask careful questions, because it's poor service, above all else, that will get you into trouble with clients. Besides general service, look at the specific types of support the broker-dealer may offer, including transitioning support, marketing support, and practice management support.
Costs. Ask for a complete fee schedule. Look at the standard costs, such as your ticket charges, but also look at all the little extras. For example, is there a monthly fee just to be with the broker-dealer? What is the cost for errors and omissions insurance? What does the fidelity bond cost? Is there a set-up charge or monthly fee for the technology?
Compliance. What kind of experience and training does the compliance department staff have? Is the department fully staffed to be able to turn your requests around in a timely manner? What is the process for getting advertising or marketing materials approved? Can they help you improve your materials? Are they flexible and willing to show you how to do something legally and safely, or do they stick to rigid, non-negotiable company rules? Most importantly, do they use procedures that will work in the real world? Skilled compliance departments will create procedures that satisfy the dictates of the rules while meeting the needs of advisers and clients.
Clearing firm. The clearing firm should have an excellent reputation for providing solid service. And because client statements come from the clearing firm, you want a name that is trusted by investors. Look closely at the clearing firm features that will affect your daily activities. How about investment research--does the clearing firm offer the reports, charting, and analytical tools you want? Does it have in-house research analysts? If so, are the analysts accessible? Can you use your own brand name on the clearing firm's statements, or will only your broker-dealer's name appear?
Make a rational, systematic assessment of your choices, but don't forget to listen to what your instincts tell you. Above all, remember that there is no "best" independent broker-dealer--there is only the best choice for you. As you make your decision, carefully consider the highly individual needs of your business and how a broker-dealer can help you meet them.
Transition Steps
Congratulations! You've found a terrific broker-dealer, perfect for your practice, and are ready to make the transition.
Your new broker-dealer will have a game plan laid out for you to take care of the routine chores of transferring your licenses, getting new marketing materials approved by compliance, and setting up the new technology. The broker-dealer should let you know everything that is required, describe who is responsible for what, and give you regular updates on the status of each step.
On your end, there are some key steps to take that will help ensure a smooth transition:
- Be a class act. The most professional advisers are upfront with their old broker-dealer about why they are leaving and strive to maintain a good relationship throughout their transition and beyond. The best broker-dealers will handle your exit professionally in return.
- Build in plenty of lead time. Allow at least 12 weeks from the time you choose your new broker-dealer and initiate the move until your target date for switching. If you have a large office and an extensive client base, plan on more time.
- Get legal advice if you need it. If you're an independent solo practitioner simply going from one broker-dealer to another, the process will be relatively routine, and you may feel that you don't require assistance from an attorney. However, if there are any complicating factors, particularly if you anticipate any problems from your old broker-dealer or if you have any partnership issues, consider hiring an attorney to negotiate the finer points of the transition.
- Get your service team involved. Make the process flow more smoothly and quickly on your end by dedicating one of your staff members to coordinate facilitating the transfer. As an adviser, you excel at sales, not the detailed, nitty-gritty service work your transition will require. Get your service team involved so that you can keep selling to keep the cash flowing throughout the process.
- Bridge the gap between old and new. Realize that a gap--from a day or so up to a couple of weeks--when you are no longer the adviser on some or all client accounts is going to be nearly unavoidable. Structure your transition to narrow the gap as much as you can, and if possible, to still be able to take care of clients during this period.--CO and JRP
Cliff Oberlin, CFP, CPA, PFS, is CEO of Oberlin Financial Corp., a full-service financial advisory practice and broker-dealer in Bryan, Ohio. Jill R. Powers, CFP, is president of Oberlin, directing the firm's marketing, operations, and compliance divisions.
