Picking a new broker-dealer? Here’s how to do it right this time

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As the independent investment advisory space has changed drastically over the last several years, so too has the relationship between advisor and broker-dealer. Yet many broker-dealer firms are clinging to not only an antiquated business model, but also an outdated name.

Many independent advisors today are dually registered, and the broker-dealer supports both sides of their business — commission and advisory. Today, the true nature of the broker-dealer-to-advisor relationship must encompass much more than the transactional nature of the relationship.

The IBD Triad Advisors, which my firm uses, recently made changes to its communication and collateral materials to establish itself as an independent advisory and brokerage, indicating its commitment to the industry’s future and acknowledgement of the ways in which the term broker-dealer can negatively impact a client’s viewpoint.

“The nature of the advisor and broker-dealer relationship is symbiotic — each firm is critical for the other’s success,” Nina O’Neal says.

Hopefully the industry will embrace this change and more firms will follow in Triad’s footsteps.

What’s an advisor’s biggest pain point, but most crucial business relationship? I’ve heard it time and time again: “My broker-dealer.”

Making the change to a new firm is both interruptive to business and financially straining, often halting an advisor's revenue stream entirely until the transition to a new broker-dealer has been completed.

The time has come for advisors to examine and evaluate their current broker-dealer relationship in consideration of the future for their business. Advisors, ask yourselves: “Will the firm that supports me today be well equipped to support me tomorrow?"

If the answer to that question is unclear, begin evaluating other firms to see if there might be a better fit. First, consider areas of friction like compliance, customer service or which custodian the firm works with. At my firm, Archer Investment Management in Raleigh, North Carolina, a broker-dealer and custodial change created more integrated technology and ease of operation, which resulted in an increase in productivity and revenue for us immediately.

When courting new firms, it is most crucial to consider the following:

Leadership and ownership history: For our firm, this was crucial to selecting our next partner. FINRA has reported a steady fall off in broker-dealers, with a 13.2% decline since 2011. Firms are being bought and sold constantly, and M&A is here to stay, with private equity acting as a big player in the IBD space.

The same goes for banks and insurance companies. Ask yourself whether the size of the firm (in both employee size and number of advisor representatives) indicates a certain level of service. Ask critical questions such as: “Who will be my dedicated point of contact?” and “Do I have direct access to key decision makers?”

If you do not want to be a number, a small firm may be the best fit. However, many small firms are struggling to compete amid increased regulatory pressure and declining revenue from formerly high commission products like alternative investments and annuities. When making your decision, the financial health of the firm should be a critical component of the due diligence process.

Company culture: Most firms will offer the opportunity to do a home office visit. During this visit, each department should provide an overview of their support capabilities — usually in the form of a presentation, which is a great opportunity to assess the firm’s company culture.

Consider employee tenure and backgrounds, especially among the heads of the departments and the executive leadership team. Consider whether the firm is based in a region that attracts top talent. After all, your broker-dealer’s team should represent competitive industry talent.

This home office visit should give you a clear picture of company culture and vision, and it is crucial to ask whether the broker-dealer’s values, customer service offering and overall culture align with your own. This is where the crux lies in identifying a successful long-term relationship.

Succession planning capabilities: It’s no secret that our industry is facing upheaval. Financial advisors are aging but not creating plans for the future of their businesses.

Every advisor needs to be putting succession plans in place — no matter whether they are 35 or 75 — and it is crucial that broker-dealers have the capacity to support this endeavor. When meeting a potential firm, ask probing questions on how they can support advisors in transition. Conversely, if growth and acquisition are a huge priority for your business, the right broker-dealer should be one that provides human and financial capital to support an expanding business.

Broker-dealers must step up to tomorrow’s standards by considering the stale nature of the term itself, and change their perspectives to best service advisors.

The nature of the advisor and broker-dealer relationship is symbiotic — each firm is critical for the other’s success. However, many advisors feel their broker-dealer is their enemy, not their advocate. Look for the firm that demonstrates tomorrow’s ideas and will provide a cultural fit for your company while empowering your firm for the future of the industry. A great relationship includes mutual respect, a dedication to client service and a clear understanding of whom everyone is serving at the end of the day — our clients.

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