Why Teams Are the Client of the Future for Broker-Dealers...Why Teams Are the Client of the Future for Broker-Dealers 3 In Brief—What You Need to Know in 30 Seconds 3 The top client

Why Teams Are the Client of the Future for Broker-Dealers

Contents

Executive Summary 4

Teams: A Critical Client for Broker-Dealers 5

Large Teams Still Need a Broker-Dealer 11

Understanding Large Teams 16

Who Are the Large Teams? 19

How Broker-Dealers Should Work With Large Teams 21

Conclusion 23

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Why Teams Are the Client of the Future for Broker-Dealers 3

In Brief—What You Need to Know in 30 Seconds

3 The top client of today’s successful broker-dealer is not a “rep” or even an “advisor” but a “firm,” or a team with multiple professionals, its own identity and leadership team and an ambitious strategy to continue growing.

3 Ensemble teams are already controlling a significant percentage of the revenue of broker-dealers, growing faster than the average practice, servicing a higher-net-worth client base and offering better careers.

3 The combination of high productivity with the increasing use of the team structure suggests that as much as one-third of all revenues inside broker-dealers are controlled by teams, and further, that is the revenue that is growing the fastest.

3 The traditional affiliation models in the broker-dealer industry have been set up for individuals and not necessarily for firms, and as a result, ensemble firms can feel like an awkward fit with the culture of the organization.

3 In order to work productively with firms, broker-dealers have to rethink the way they communicate to firms. The relationship with a firm should resemble a business-to-business relationship in the way it is structured but still retain some of the personal touch that creates a long-term partnership.

3 The modern broker-dealer should be seen as a resource hub that provides packages of pre-selected and pre-integrated building blocks for advisors to use in building their business. Such building blocks include investment platforms that combine custody, trading, reporting and billing tools, as well as traditional brokerage products that may round out the portfolio of a client.

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Executive SummaryThe financial advice industry is rapidly evolving, presenting broker-dealers with an opportunity to prosper by recalibrating their relationships with their advisors. Successful and ambitious advisory firms are emerging across the country, and they’re poised to be the future of the advice industry. These larger, multi-professional teams (“ensembles”) have a great track record—they’re growing faster than their solo-practitioner peers, they’re achieving better financial results, and they attract superior clients while consolidating smaller, aging practices. Broker-dealers can recruit these ensemble firms or retain large in-house teams, but either way they’ll be positioned to flourish if they offer the sophisticated advice services demanded by high-quality clients.

The advisor-client of the modern broker-dealer has changed. They are no longer “reps,” or advisors who focus solely on attracting investor clients, while relying on the broker-dealer for everything else. Instead, today’s advisor-client is a leader of a team—perhaps even an entire business—and is focused on growing an organization, rather than just a practice. This change of focus on the part of the advisor provides broker-dealers with a window for rethinking their overall strategies and perhaps even their affiliations.

A large percentage of broker-dealer revenue is already generated by ensemble teams (a.k.a. ensemble firms). Surveys suggest that nearly one in three advisors at full-service and independent broker-dealer firms are part of a team practice. However, although advisory teams generate significant revenues, broker-dealers are still working to understand them. Often their affiliation models—from compensation to relationship management—still treat advisors as reps, rather than as talented groups.

Advisory teams have a quantifiable track record of success. Results from the Pershing-sponsored 2014 InvestmentNews Financial Performance Study indicate that larger teams/firms grow faster than individual advisors, and attract clients who have three to five times the assets under management than clients of smaller solo peers. Broker-dealers who can successfully work with teams will be in a better position to benefit from this rapid growth, and will find better opportunities with large client accounts.

Moreover, as the industry consolidates, larger firms are poised to be the net consolidators. Close to 40% of the ensemble firms in the 2014 InvestmentNews Financial Performance Study are looking to acquire and merge other practices. The larger firms that result have better success at developing new professionals and grooming successors.

While teams are very valuable to broker-dealers, they’re also at risk of being lost as clients. Many larger teams have departed to RIA-only or hybrid business models, and industry changes continue to raise the possibility that successful teams will part ways with the broker-dealer. The good news is that broker-dealers can successfully recruit, retain, and work with “large producer” teams by understanding how these teams work and by reforming affiliation models. Because broker-dealers are accustomed to working with highly productive individuals, they have formed traditional affiliation models around individuals, which aren’t necessarily a good fit for ensemble teams.


Here are ways for broker-dealers to get more in-sync with advisory teams:

› Understand both the vision and strategy of the teams with which you work

› Recognize their leadership and organizational structure

› Differentiate between reps (traditional advisors) and business leaders

› Build relationships with the team’s operations staff

› Emphasize the advisory business rather than the traditional brokerage business

› Create platforms that compare with those offered by custodian firms

› Redefine the economics of the relationship to evolve beyond payout grids

› Give teams examples of success that they can study and replicate

› Build a culture of camaraderie that brings advisors and teams together

Today’s typical advisory team is three times larger than it was in 2001. If broker-dealers adapt to meet the rapid rise of advisory teams, they can grow alongside them and attract top clients. Prudent changes can ensure a strong relationship between advisors and their broker-dealer—a true strategic partnership.

Teams: A Critical Client for Broker-DealersThe top client of today’s successful broker-dealer is not a rep or even an advisor but a firm, or a team with multiple professionals, its own identity and leadership team, and an ambitious strategy to continue growing. The advisory industry continues to grow and evolve, and the evolution of independent advisory firms is pushing to the front a cadre of successful teams (ensembles) who are reshaping the industry.

Ensemble teams are already controlling a significant percentage of the revenue of broker-dealers, growing faster than the average practice, servicing a higher-net-worth client base, and offering better careers. Most importantly, ensembles are net acquirers—they are acting as a successor for many of the smaller, one-man (solo) practices and thus are likely to emerge as the ultimate consolidators of the industry.

Broker-dealers can struggle at times to understand and relate to ensembles. Compensation grids (payout grids) are frequently designed for a single advisor producer rather than a team. Likewise, management at the broker-dealer frequently focuses on the “rep number” associated with clients and revenues, often ignoring other leaders in the advisory firm who may be in charge of operations or client service. In addition, policies and procedures often assume that the clients belong to an advisor rather than an advisory team. Finally, the culture may often be one that recognizes those that sell the most rather than those that build the best business.

Yet, if broker-dealers were to rank their top clients in terms of revenue generated or especially assets under management, they are likely to find that the majority of names at the top do not practice alone but rather belong to a team where they are building a business with continuity and strength.

Broker-dealers that can acknowledge and understand that their top client is a team rather than an individual will not only strengthen existing relationships with their largest clients but also position themselves for organic growth and strategic acquisitions.

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A Significant Percentage of the RevenueA significant percentage of the revenue of broker-dealer firms is already in the hands of ensembles—team practices with more than one professional. Even among advisors who are building their own book of business, many work in a branch or other “silo” structure that allows them to share resources.

When describing their practice structure in the most recent WealthManagement.com compensation survey,1 23.6% of respondents affiliated with an independent broker-dealer noted that they are part of a team. Fifty percent of hybrid RIAs were team-based, and even within traditional structures like wirehouses and regional firms, teams are becoming a prominent part of the landscape: 32% of advisors in wirehouses and 22% of advisors in regional firms are working in teams (Figure 1).

Figure 1: Team Models Are Becoming More Common

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1 http://wealthmanagement.com/wealthmanagement.com/compensation2013.


Teams are even more significant as a client to broker-dealers if we consider their productivity. The average productivity of advisors who are part of an ensemble team or firm was almost 12% higher than those who were practicing on their own, based on data from the 2014 InvestmentNews Financial Performance Study. In the survey, advisors affiliated with an ensemble team or firm had average revenue per advisor of $565,000, compared to solo advisors, who had revenue of $505,000 (Figure 2).

Figure 2: Revenue per Professional of Solo and Ensemble Firms

Solo Ensemble

$505,000

$565,000

There are three key factors behind this higher productivity:

› Ensemble firms attract better clients.

› Ensemble firms allow advisors to focus on their strengths. For example, an advisor who is great at servicing clients but not so good at developing new relationships can be very productive working on clients of the team. The same advisor would be struggling in the traditional broker-dealer system.

› Ensemble firms provide better resources, ranging from better marketing tools to better support for professionals.

The combination of high productivity with the increasing use of the team structure suggests that as much as one-third of all revenues inside broker-dealers is controlled by teams, and further, that is the revenue that is growing the fastest.

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Ensembles Grow FasterWhen we compare the growth rates of practices that participated in the 2014 InvestmentNews Financial Performance Study, we find that the larger teams/firms (the ensembles) are growing at a much faster rate than their smaller solo peers. The typical $2 million ensemble firm grew at a rate of 17.1% in 2014 compared to 13.7% for solo practices (Figure 3).

Figure 3: Pre-Tax Income per Owner and Revenue Growth

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The faster rate of ensemble growth comes from their ability to support business developers with service professionals as well as their larger presence in their local markets. Above all, perhaps ensembles grow faster because they can attract better clients.

Ensembles Have the Top ClientsSuper-ensembles—firms with revenues greater than $10 million—outperform their peers financially and competitively. The largest firms in the industry clearly attract top clients. Moreover, the size of the average client relationship appears to be a perfect function of the size of the firm, i.e., the larger the firm, the larger the average relationship.


Figure 4: Revenue and AUM for Clients by Firm Size

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$2,777 $4,006 $4,932 $7,363 $8,704 $9,510 $11,800 $13,701 $14,937 $16,362

If we compare firms by size (horizontal axis) and average size of client relationships (vertical axis) in Figure 4, we find a strong correlation. Smaller firms, or those under $1 million in revenue, have the smallest client relationships with less than $4,932 in revenue per client (total revenue divided by the total number of clients). Larger firms, or those with revenue between $1 and $5 million, service clients with average revenues between $7,363 and $9,510. Finally, super-ensembles have clients with revenues between $14,937 and $16,362 on average. We can speculate about the sources behind this relationship:

› One hypothesis is that firms are large because they are able to attract bigger, better, and more profitable clients. In other words, the larger client relationships are the cause, not the result of size. There is certainly strong logic behind this hypothesis.

› The other possibility is that the larger the firm, the more likely it is to attract larger client relationships. Perhaps wealthier clients prefer to work with larger, more prestigious firms, while top referral sources prefer to make referrals to larger firms. There is anecdotal evidence in our consulting experience that this is the case—top CPA firms and attorneys prefer to refer to the top wealth management firms.

› Finally, perhaps client relationships grow parallel to the growth of the firm. In other words, perhaps as a firm matures, the careers and wealth of its clients grow as well.

The reality is probably a combination of all three—they are not exclusive of each other. The final result, however, is a stark difference in the size of relationships, and that difference produces stark differences in productivity.

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Ensembles Develop Staff BetterIn addition to attracting better clients, ensembles are also a very good ground for recruiting. Many of the advisors joining a broker-dealer do not come to establish their own branch but instead join an existing branch/firm. Strong ensembles can frequently attract other high-quality advisors through mergers of books of business or through the development of advisor careers from the ground up.

Ensembles can offer career tracks to young professionals and frequently do. They can hire less experienced but credentialed professionals to join the team and develop their careers by first servicing clients of the team, and later contributing to business development. This allows very talented young people to join the team and contribute their knowledge and energy. These same young professionals would struggle to find careers with the broker-dealer if they had to go into production on their own.

Ensembles Are Net BuyersAs rapidly as advisory firms are growing organically, their desire to grow even faster has them turning increasingly to non-organic sources of growth, such as mergers and acquisitions. This is particularly true for the largest firms. Forty-four percent of the largest firms in the industry are looking for acquisitions and 23% percent are looking to merge another practice. The differences between a merger and an acquisition may be just a matter of presentation. No doubt, however, that the large firms across the industry are the buyers and “net consolidators” of practices.

Ensembles Are VulnerableEnsembles are growing and productive, but they are also vulnerable as a client, and broker-dealers have lost many of their top teams to the RIA channel and competitors who offer hybrid affiliation.

The typical broker-dealer firm in the FSI Broker-Dealer Financial Performance and Compensation Study added $11.3 million in new recruited revenue in 2013 and lost $5.3 million in existing revenue in the same year. Much of the revenue lost came from the loss of top-producing advisors: in 2013 the average firm lost six relationships with over $500,000 in productivity each. If broker-dealers could stop the “bleeding” of large relationships, this alone would increase their rate of growth by 50%.

Many of the departures have been to the RIA and hybrid channel, and broker-dealers need to understand and counter the reasons for such departures.


Large Teams Still Need a Broker-DealerThe advisory industry is developing a dangerous assumption that when a team/firm becomes large enough it “graduates” to being an RIA and leaves its broker-dealer behind.2 This assumption is very dangerous for broker-dealers because it means that they will continue to lose some of their best customers.

The reality of the industry is that there are many successful teams/firms of large size that maintain a broker-dealer relationship, and there are many strong reasons why a team/firm needs a broker-dealer relationship.

There Is No BorderThe borderlines between the broker-dealer and RIA communities do not exist. At many industry conferences that are not sponsored by a broker-dealer or custodian, advisors from both business models often come together to learn from each other and establish connections. In fact, in their conversations and interactions, advisors are often unaware of whether the other party is an RIA or is affiliated with a broker-dealer, or both.

The services provided by advisors in all industry channels are also very similar. The majority of advisors focus on strategic investment advice, financial planning, and wealth management. In fact, data from the 2014 InvestmentNews Financial Performance Study suggests essentially no differences in how advisors describe themselves and what advisors say they provide to clients. Consider Figure 5 below.

Figure 5: How Advisors Describe Themselves

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2 “4 Reasons Not to Launch Your Own Hybrid RIA,” InvestmentNews Magazine, May 14, 2014.

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In addition to providing the same services to clients, advisors are also gradually shifting their pricing method to fees for assets under management. In fact, across the broker-dealer community, AUM fees are increasingly accounting for more than half of the revenue. The FSI Broker-Dealer Financial Performance and Compensation Study reports that in 2014 the typical independent broker-dealer had 41% of its revenue come from advisory fees. Top-performing firms in the same survey had 54% of their revenue from fees.

In many ways, the modern broker-dealer is actually a giant RIA. The lines are further blurred by many innovative business models. For example:

› HighTower is a corporate RIA and a broker-dealer that has experienced a lot of success recruiting high-quality teams to its network.

› Spire Financial Partners can be described as a fee-based network that resembles a broker-dealer in its structure and support but in fact focuses on fee-based business.

› Cambridge Investment Research is known for supporting advisor-owned RIAs and builds strong relationships with such hybrid firms. The firm is consistently ranked as one of the best broker-dealers in many industry surveys.

› United Capital Partners is acquiring and bringing together practices from both the RIA and broker-dealer communities and uses a broker-dealer as part of its service process.

The many different business models at work in the industry strongly suggest that RIA and broker-dealer affiliations are not opposing business models but rather two possible ingredients to the formula for business success. The decisions advisors make are allocated along the continuum of where they seek resources and what they choose to outsource.

Broker-Dealers as Resource HubsNo advisory firm does everything on its own—every firm outsources and draws from the resources of a larger strategic partner. The question is who to choose as your preferred resource hub and therefore your strategic partner. Advisors have to make many operating decisions regarding custody of assets, trading, account maintenance, performance and tax reporting, billing, rebalancing, financial planning, regulatory compliance, client communications, and data security. Even the largest firms do not tackle each item on this list on their own. Most choose to outsource many of their operations’ needs.

The modern broker-dealer should be seen as a resource hub that provides packages of pre-selected and pre-integrated building blocks for advisors to use in building their business. Such building blocks include investment platforms that combine custody, trading, reporting and billing tools, as well as traditional brokerage products that may round out the portfolio of a client.

The purpose of a resource hub (and therefore of a good broker-dealer) is to:

› Keep the client’s best interest as the focus of all decisions

› Select the right (best) ingredients to the platform

› Integrate the parts to facilitate the ease of use and efficiency

› Train the advisor’s staff to use the platforms well

› Troubleshoot things that may malfunction


When viewing a broker-dealer as a resource hub rather than a regulatory model, we find that advisors in all business models are using such outsourcing platforms extensively and with great success. In fact, most RIAs outsource at least a portion of their technology and often much of their operations to a third party.

Broker-Dealers as Centers of CapitalBroker-dealers are also increasingly becoming resource centers of capital for growth and acquisitions. As advisory firms look to grow and acquire other firms, they find it difficult to raise cost-effective capital from traditional sources such as banks. This is where a strong broker-dealer connection can play a significant role in the success of an acquisition strategy. Many broker-dealers will be willing to become a lender to the firm given a good strategy and a strong connection with the firm.

The Preferred Client PhenomenonWhile custodians and broker-dealers often provide similar services, it is important to remember the advantages of being a premier client, even to a smaller provider. Frequent flyers are very familiar with this phenomenon. If you fly with an airline often, you achieve a preferred status that allows you to select better seats, receive upgrades to first class or change tickets without penalty. It is often worth it to sacrifice a bit on price or convenience in order to receive this preferred treatment.

Similarly, it may be beneficial to an advisory firm to stay one of the largest clients of a smaller broker-dealer rather than be lost in “the main cabin” of a gigantic custodian.

Sale of Securities as Part of Firm StrategyIf the sale of securities is part of the business model of an advisory firm, then the firm will need a broker-dealer for regulatory reasons. There are still many firms who maintain a broker-dealer affiliation because they use, to a substantial degree, products such as:

› Variable annuities

› Trails on past commission sales

› Alternative investments and private placements

› Non-traded REITs

› Other securities

If the use of securities sales is strategic, then the broker-dealer relationship should be as well. After all, a business strategy is only as good as its weakest link, and a broker-dealer that is limited in its capabilities and resources may in fact become that weakest link.

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Network of OpportunitiesThe national scope of a broker-dealer and its thousands of relationships can tremendously benefit an advisory firm with whom it has a strong relationship. Such networking opportunities can be invaluable in the following situations:

› Seeking acquisitions: When a large firm sets out to acquire other practices, it often encounters difficulty finding firms who are looking to be acquired. A broker-dealer can help by connecting its clients to each other and identifying (in a confidential manner) those who are retiring. The advantages of succession transactions within the same broker-dealer are undeniable, and networking within the broker-dealer can be the most rewarding strategy.

› Seeking hires: A broker-dealer and its associated partners can also help an advisory firm identify suitable hires, particularly experienced advisors who are also bringing a book of business or have a higher level of experience.

› Identifying partners to service remote clients: Frequently advisors find that they have clients in a remote location and need help servicing them. For example, an advisor in Chicago may find that she has a high number of retired clients in Florida and could use the help of a local colleague to provide some services or even just a place to meet.

Networking can go far beyond those three examples, as well. It can be focused on identifying another firm that uses the same software, locating another advisor who has experience with a vendor or product, or even finding references for a client to check and consult.

Risk ManagementAdvisors who have experienced a formal client complaint have a completely different level of understanding of what risk management means and how a broker-dealer can help in such situations. The investment industry is frequently subject to litigation and complaints—the stakes are high, large amounts of money are involved and the industry is often targeted by specialized law firms who encourage clients to seek redress in court. Advisors should understand that compliance is not just a function of following a set of rules, whether FINRA or SEC, but also requires following a set of procedures that reduce the risk of client complaints and increase the chance of defending against such complaints, if and when they do occur.

A broker-dealer can provide valuable guidance to a firm and substantially reduce the legal and compliance costs associated with the normal running of the business, as well as litigious situations. Among many other advantages, broker-dealers provide:

› Access to in-house counsel who can review situations or documents

› The advice of a consultative compliance department that has experience with many situations and products

› The interpretation of regulation when needed, with many broker-dealer executives having former regulatory backgrounds or sitting on regulatory committees

› Updates to regulatory developments and quick implementation of policies

› A trained response to crisis situations—something that the advisory firm may not have experienced before

All of these reasons so far have been very tangible—they are items that reduce cost or increase productivity. However, one of the biggest benefits of having a broker-dealer may be an intangible one.


CamaraderieThe investment advisory industry is like a vast ocean full of exciting opportunities and rich resources. It is waiting to be discovered, but it can also be very lonely. Advisors often find that in the daily effort of servicing clients and building a practice, they feel somewhat isolated and alone. As a business owner and/or a leader, it is not always possible to share your fears and challenges with your employees, but advisors often need advice or a sympathetic sounding board. In celebrating success, who do you turn to for recognition and encouragement?

The presence of like-minded individuals with whom advisors can build professional and social bonds may be one of the most undervalued but most important reasons to have a broker-dealer. It is not uncommon for advisors to build strong friendships and professional connections with their peers in the same broker-dealer. Conferences are often not just a chance to listen to industry speakers and update knowledge. They can also be an opportunity to revisit with friends and renew connections.

Even among the RIA community, advisors continue to look to camaraderie, creating structures such as study groups and frequenting the same meetings. Building a practice is a rewarding experience, but it is even richer when done in the context of the right culture. In fact, when asked why they remain at their broker-dealer, advisors in the Pershing-sponsored report Broker-Dealer of the Future cited culture as the number one reason. Perhaps the loss of camaraderie is the worst possible change.

Broker-dealers cannot force such social connections, but they can be better at recognizing their importance and encouraging them. They can start by asking themselves these questions: Do conferences allow for ample social time where advisors can connect with each other? Are there opportunities to create social connections in the context of the broker-dealer (e.g., social clubs or interest groups)? When determining the participants of reward conferences, are the criteria sensitive to those who are social influencers? (After all, even the tennis tournament Wimbledon allows for wild cards.)

There are many reasons large firms affiliate and will continue to affiliate with broker-dealers, but to turn these reasons into a stable business model, broker-dealers need to improve their understanding of firms as clients.

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Understanding Large TeamsEvery broker-dealer understands the importance of recruiting and retaining large producers. However, when it comes to working with firms rather than highly productive individuals, broker-dealers struggle at times. The traditional affiliation models in the broker-dealer industry have been set up for individuals and not necessarily for firms, and as a result, ensemble firms can feel like an awkward fit with the culture of the organization. This section examines a few of the most common areas where broker-dealers and firms find it difficult to work together.

Relationship With Whom?An ensemble advisory firm will, by definition, involve multiple professionals. The roles and responsibilities of the professionals may differ—some may be developing new business and servicing clients while others may just be servicing clients; some may be owners while others are not; some may be specialists in financial planning or asset management while others are generalists; and some may be working on their book of business while others may be working for the firm. Broker-dealers sometimes struggle to identify the professionals with whom they actually have a relationship.

Consider for example the following firm: a large multidisciplinary organization owned by two individuals who founded the firm. The roots of the firm are in the employee benefits business, but the firm also has a sizeable unit focused on individual financial planning and investment advice with over $2 million in revenue. The founders are CEO and COO of the firm and spend all of their time in management. They do not service clients, but both are fully licensed. There are five advisors (who are employees of the firm) who service clients and also develop new business from the referrals generated by the benefits division. With whom does the broker-dealer have a relationship?

The traditional approach in most broker-dealers will be to examine the production reports and find out that there are five productive reps in the organization. The broker-dealer executives may give attention to the five as “high-producers,” and they may even be invited to the “top producer conference.” Someone may notice that there are a couple of “non-producing” or “low-producing” reps in the firm, but those would hardly get any attention. Except—and this is the problem—those are the two individuals with whom the broker-dealer should really be talking. This is not an unlikely scenario. In fact, it occurs often. While executives may remember who the right people are, the system is usually set up to recognize individual production, and therefore it is easy to forget.

EconomicsA further problem is presented by the economic relationship between the broker-dealer and the ensemble. For starters, what grid should apply to ensembles? Some (very few, but some) broker-dealers only apply an individual grid, meaning that the payout is determined by the production of each individual rep rather than the production of the firm or the team. This clearly fails to recognize the potential scope of the entire relationship. Most broker-dealers have a firm-level or branch grid, but even that grid has issues.

The fact that the branch or firm grids are often much less lucrative than the individual grid shows that there is still some bias toward high producers over firms. A good example is the grid of a very large broker-dealer, where the top level of individual production is compensated by a full 2% more than the top level of the branch grid.


Broker-dealers often suspect advisors of simply combining production in order to achieve higher levels of revenue rather than forming a true ensemble. These kind of workarounds heavily undermine the ability to work and service real firms.

Beyond the grid, a further economic problem is presented by the advisor fees and the structure of a firm service model.

LeverageMany advisory firms use a leveraged service model where there is a “lead advisor” who is in charge of the relationship and a “service advisor” who works with the client on most service requests and routine tasks. Perhaps a good way to illustrate such a model is the doctor and nurse setup familiar to everyone. This leveraged model is very heavily used by most large firms and is essentially the norm among large RIAs. However, it is very difficult to implement within the broker-dealer system.

It is unclear in most cases how to set up the service advisor. Usually all clients and revenue are put in the name (and rep number) of one advisor. Commission splits can be used for two advisors to access the same client account, but that results in some of the revenue from the account being sent to the personal checking account of the service associate, which can be problematic for the lead advisor.

There is really no position in standard broker-dealer terminology for service advisors—those who do not develop business but manage the client service relationships. If the service advisors are coded as reps, they frequently end up being below the production minimum of the broker-dealer and can be subject to low production fees and similar charges. If the firm puts some accounts under the ownership of service advisors, that can tackle the problem with the fees but can also disrupt the sense of firm ownership. Finally, some advisors may be coded as “licensed assistants” to avoid the broker-dealer fees, but this can often be problematic from a compliance perspective.

ScaleIt is very typical for the size of the relationship between an RIA and a custodian to focus on the amount of assets under management (AUM) the advisors have with the custodian. The result can be lower custodian fees and lower trading costs as well as higher levels of support. However, there is rarely a way for a broker-dealer-affiliated firm to gain scale in its service relationship beyond the grid. There is usually no way for an ensemble to lower trading costs based on the AUM it has with a broker-dealer. In fairness, though, some platforms do lower service fees based on AUM.

In general, the economic relationship between the broker-dealer and the affiliated advisors is outdated and still focused on the notion of a producing rep as opposed to an advisory firm.

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Shared Ownership and EquityEquity in a firm is fundamental to the notion of independence. One of the biggest reasons advisors desire to be independent is the ability to build equity in their own practice. The notion of equity in a firm, however, is not so simple from a broker-dealer perspective. First, FINRA rules may limit the ways in which a broker-dealer can pay an individual advisor rather than a firm. Second, the agreements that advisors sign with each other in the form of a shareholder or operating agreement can be quite difficult for broker-dealers to follow.

For example, imagine a partnership between three advisors. They have agreed to be partners and build a business together. One of the advisors is the founder of the firm and has 60% of the equity; the other two have 20% each. This agreement can be very problematic for a broker-dealer to support if the clients are not allocated 60:20:20. In any other kind of business this would be simple: the partners pay all expenses first and then distribute the income accordingly. Not in the securities business, though.

What if over time the client revenue split becomes closer to 1/3:1/3:1/3? Each partner will receive a share of the payout individually in his or her own checking account. How do they even enforce or account for the 60:20:20 agreement? Should they change the compensation on all client accounts? Should they contribute money to the business entity to pay expenses? What does the entity even mean from an equity perspective?

The answers to these questions are not clear and not easy. However, these are questions that are very important to the advisors in larger firms. If they cannot create and enforce their partnership agreements, they are not confident that they are building equity. If they are not building equity, why be independent?

Operations Staff and LeadershipFinally, in a larger ensemble, there is frequently a leader in operations (a COO or business manager) who is responsible for all of the back office of the firm but who is perhaps not recognized as a decision-maker by the broker-dealer. Much of the broker-dealer communications and training assumes that the advisors are the decision-makers in a firm, and that they are the primary users of the technology and capabilities of the broker-dealer.

The reality in larger firms is that the back office of the branch is managed by professionals with extensive knowledge and expertise who often make the decisions on what technologies and which vendors to use. Broker-dealers frequently do not recognize the presence of such operations leaders and often fail to involve them in the necessary dialogue about how the firm is supported.

Firms present a challenge for broker-dealers, as much of the traditional affiliations and relationship management are still focused on the notion of a rep. Understanding who the firms are and how best to relate to them is critical for the success of a broker-dealer.


Who Are the Large Teams?Up to this point we have referred to firms, large firms and ensembles without elaborating much on the definition of the terms and, more importantly, on the nature of the firms we are discussing. While all firms are important clients for broker-dealers, it is necessary to differentiate between the different types of organizations that are present in the marketplace.

Ensemble FirmsAdvisory firms consisting of multiple professionals have a special importance in the industry as clients. Their size, competitiveness, and continuity make them a valuable client for broker-dealers. An ensemble practice relies on a team of financial advisory professionals rather than an individual to service and manage client relationships. The ensemble practice involves multiple professionals who often have specialized roles and bring different skills and knowledge. Ensembles also employ different levels of professionals, combining the enthusiasm, energy, and lower cost of less experienced advisors with the experience, wisdom, relationships, and network of highly experienced team “principals”—a process we will call “leverage.” Most of all, an ensemble is defined not only by its organizational structure but by its culture—a collective behavior that focuses on the team goal rather than individual agendas and uses “we” more than “I.”

As a result of leverage (multiple levels of professionals), specialization, the larger pool of combined resources, and the “two-heads-think-better-than-one” effect, ensembles have performed better than other types of financial advisory practices. In fact, ensemble practices have proved to be faster growing, attract larger client relationships, achieve higher levels of profitability, and create long-term value for their principals. What is more, they tend to survive the founding generation and pass their resources and knowledge to a new generation of professionals. Ensemble practices tend to create and invent more successfully—they develop new methods and ways of servicing clients, original analysis, and planning processes. Last but perhaps most important is the fact that clients have shown a clear preference for working with ensemble practices and have overwhelmingly gone to firms that have been early adopters of the ensemble concept.

Silo FirmsNot all non-ensemble practices are solo. There are many firms that have multiple professionals and even multiple partners but still do not practice a team-based service model. It is very common in the industry to see practices that have multiple principals where the principals work with their own clients and, to a substantial degree, derive their income from their own client base. We will call such practices “silo” firms. There is no clear way of differentiating a silo firm from an ensemble firm, but usually the most telling sign is the presence (or absence) of a shared bottom line that significantly impacts the income of the owners. In other words, if 40% or 50% of the income of a principal depends on the shared result of the practice, we are certainly working with an ensemble firm. If, on the other hand, the shared bottom line only determines 5-10% of the principal income while the personal results determine the remaining 90-95%, the firm is most likely better classified as a silo.

While an ensemble firm is one client for a broker-dealer, a silo firm is in fact multiple clients since the broker-dealer supports distinctly different practices with different needs.

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Super-EnsemblesBased on industry lists such as those compiled by InvestmentNews and Financial Advisor magazine, there were an estimated 250 advisory firms with over $1 billion in AUM in 2014—firms we will call super-ensembles. Essentially every firm on the list is a registered investment advisor, and as many as 20% of the firms on the list are affiliated with a broker-dealer, as reported by the Investment Adviser Association report Evolution Revolution.3

In addition to the hybrid RIAs, we estimated that there are as many as 300 teams within broker-dealers that manage over $1 billion in AUM but are not reported in other lists because their assets are part of the broker-dealer ADV. The vast majority of such teams are with traditional broker-dealers, but the number affiliated with organizations like HighTower (a premier partnership of advisors) is increasing. The estimate is in part driven by the Barron’s list of top advisors.4

Regardless of whether a broker-dealer plans to target the super-ensemble firms, every firm has to account for the presence of the super-ensembles in the market. They are setting the standard in many important management categories and defining the competitive marketplace. In fact, some are competing for advisors with broker-dealers.

Networks and Super OSJsUnlike super-ensembles, who are very large organizations focused on serving clients, networks and “super OSJs” (Office of Supervisory Jurisdiction) are organizations focused on recruiting and servicing advisors. In some ways, networks play many of the roles that a broker-dealer traditionally performs. Such services may include technology, practice management, sales and marketing support, and others.

Networks are a difficult client for most broker-dealers:

› The large size of the network may lead negotiations to levels of compensation that are well beyond what is profitable for the broker-dealer.

› The constant threat of a network departing may paralyze strategic initiatives at the broker-dealer level.

› The service needs of advisors within the network may not be lower and, in fact, may be higher—in essence the network may not be providing any services other than very efficiently channeling service requests to the broker-dealer.

› The quality of advisors within the network may be poor since the broker-dealer may not have the same ability to screen new advisors.

› The recruiting advantage of the network may be questionable, too—the network may very well be capturing advisors who will be interested in the broker-dealer regardless of the network.

› Finally, the presence of a network and a “direct” relationship always creates awkward comparisons between the affiliation models and even internal recruiting—solicitation of advisors to move from one network to another or from direct to network.

For these and other reasons, broker-dealers should carefully consider whether there is a place in their strategy for networks. When we advocate that broker-dealers prioritize large firms, networks are not our focus.

3 Investment Adviser Association and National Regulatory Services, 2014 Evolution Revolution: A Profile of the Investment Adviser Profession, https://www.investmentadviser.org/eweb/docs/Publications_News/Reports_and_Brochures/IAA-NRS_Evolution_Revolution_Reports/evolution-revolution_2014.pdf.

4 Barron’s, “2014 Top 100 Financial Advisors,” http://online.barrons.com/report/top-financial-advisors/100.


How Broker-Dealers Should Work With Large TeamsLarge advisory firms are critical clients for broker-dealers—they bring revenue, competitiveness, longevity and economies of scale to the broker-dealer organization. To recruit and retain these firms, however, broker-dealers have to change their approach from the traditional rep affiliation. As we have already seen, the way larger firms are organized and operate is different and more complex but also rich in opportunities for broker-dealers to differentiate.

Restructure Relationship ManagementIn order to work productively with firms, broker-dealers have to rethink the way they communicate to firms. The relationship with a firm should resemble a business-to-business relationship in the way it is structured but still retain some of the personal touch that creates a long-term partnership.

Within a firm there may be several individuals with whom a broker-dealer needs to have a relationship:

› CEO/Managing Partner/Leader: Within many firms there will be one leader who is responsible for the vision and strategy of the firm, and who will make business decisions at the highest level.

› COO/Operations Leader: Within firms there may be a leader in operations or COO who is responsible for technology and operations. This may be the key person to work with on issues of process, technology, errors, training, and others. Approaching the CEO of a firm with such issues is not only unproductive, but may reveal a lack of understanding of the way the firm works.

› Advisors: The advisors within a firm may be owners or employees of the firm. They are the individuals who should be contacted with compliance questions, training, product information, and other professional topics.

› Next Generation/Successors: There is a tendency for the broker-dealer to only reach out to the high producers and ignore the next generation within a firm. No wonder that when the next generation takes over the business they often choose to change broker-dealer firms or become an RIA. Broker-dealers need to reach out to the next generation sooner rather than later, much like they advise advisors to develop a relationship with a client’s children.

Focus on Holistic Financial AdviceMore than 70% of a large advisory firm’s business comes from advisory fees, so a broker-dealer’s relationship with a firm will benefit the most by offering a spectrum of financial advice. Broker-dealers can reframe themselves more as custodians by investigating the technology and capabilities that benefit the advisory business, rather than focusing solely on the brokerage business. Advice involves many disciplines and subject-matter experts, leading to many viewpoints. By integrating these viewpoints into a single message, we can shield clients from potential disparities in advice so they can focus more clearly on their life goals.

Building a winning broker-dealer firm means:

› Understanding the investment philosophy of the advisory firm. How do they invest? Advisors don’t always outsource investment management to third parties—they’re in need of investment capabilities. Very often advisors manage portfolios of mutual funds, and while not seeking to create “alpha” (above market return), they are looking to control the portfolios beyond what a third-party asset manager (TAMP) will offer. “Advisor as manager” platforms are among the fastest growing in the industry.

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› Knowing the tools. Most broker-dealers derive well over 50% of revenue from the advisory business but have very little knowledge of the tools used on the advisory side. To support the advisory business, a firm should gain expertise in the major portfolio reporting tools, rebalancing and trading tools, portfolio accounting, research, and financial planning systems. Moreover, broker-dealers should learn about the outsourcing platforms available and perhaps offer alternatives.

› Integrating technologies and support. Ideally advisors have one relationship with, and one workstation for interfacing with, the broker-dealer. In reality, though, the advisory business is often conducted in a completely different technology environment, with technical support coming from different departments.

› Offering Holistic Planning. Provide your firm with the tools and support needed to provide financial, business, and estate planning to clients. By operating in all these areas, you can better manage client risk and offer tax efficiencies. Of course, offering these various flavors of planning may require upgrades of your systems and staff—and perhaps even changes to the firm’s culture.

› Building Confidence and Trust. It almost goes without saying—integrity, open communication, and developing relationships with advisors is the foundation upon which a winning firm serves its clients.

Define the Economics BetterThe economics of the relationship between a broker-dealer and a firm are still focused on the grid—a vestige of the rep relationships. Broker-dealers need to create economics that:

› Focus on the assets under management and advisory business

› Compare and compete with RIA alternatives

› Recognize the firm relationship and not individual rep production

› Demonstrate an understanding of the way the firm functions

Understand the Firm’s Vision and Business StrategyThere is no better question for a business owner than the question, “What do you envision your firm to be like in 5 or 10 years?” To be a good business partner, broker-dealers need to keep asking that question and knowing the answer, as well. Ideally, the vision is one where the broker-dealer can continue to be part of the business of the advisors’ firm, and also a vision to which the broker-dealer can contribute. The more the advisors share and work on their business strategy with the broker-dealer, the more lasting and strong the relationship will be.

Think in Terms of OutsourcingA modern broker-dealer should think of itself as a strategic partner to the advisors, not as a regulatory requirement. One of the most obvious and productive avenues for strategic partnership is outsourcing. Advisors can outsource key activities to their broker-dealer:

› Compliance

› Technology

› Due diligence

› Back-office operations

› Practice management


It is always surprising how outsourcing platforms among RIAs are growing, while advisors are leaving broker-dealers that could provide the exact same services.

Provide Examples of Success and Thought LeadershipOne of the most important reasons why advisory firms leave broker-dealers and become RIAs is that they perceive it to be the path followed by large and successful businesses. When they look around at the broker-dealer conference, they often don’t see an example they want to follow. Frequently firms say, “We can’t learn anything here” or “We have outgrown our broker-dealer.” This is a fatal problem in the broker-dealer relationship. To be successful, broker-dealers need to create examples of success and advertise them. Bringing the larger firms within the network in a group will help foster learning and perhaps will refute the argument that “there is nothing to learn.”

Create a Culture and Sense of BelongingFinally, culture is defined as the “shared set of values and goals of an organization.” If a broker-dealer shares values and goals with the advisors, the relationship will be strong, durable, and successful. Unfortunately, despite the best of intentions, recruiting is often not done with culture in mind but rather succumbs to revenue goals.

Culture needs to be nourished as well. To truly share goals and values, advisors and the broker-dealer need to keep coming together in a constructive dialogue of their respective business strategies and expectations of each other.

ConclusionSize is not just about quantity, but also quality. Working with the larger firms in the industry not only has economic appeal, but it also brings relationship quality to a broker-dealer. Working with the best also challenges the broker-dealer organization, bringing public recognition and increased awareness among other advisors and potential business partners. Working with the largest firms promises economies of scale and better profitability. Most importantly, working with the best in the industry may bring the ability to be a net consolidator of talent and practices.

Working with the largest firms in the industry is a coveted prize. However, the industry continues to grow, evolve, and offer opportunities to define new strategies and attract new clients. Many of tomorrow’s firms may be ignored by a competitor today, or may even exist within the broker-dealer’s own network. Perhaps many of today’s smaller firms will be future stars.

We Are Pershing. We Are BnY MeLLOn.

Pershing, a BNY Mellon company, and its affiliates provide global financial business solutions to advisors, asset managers, broker-dealers, family offices, fund managers, registered investment advisor firms and wealth managers. A financial services market leader located in 23 offices worldwide, we are uniquely positioned to provide advisors and firms global insights into industry trends, regulatory changes and best practices, as well as shifts in investor sentiment and expectations. Pershing provides solutions—including innovative programs and business consulting—that help create a competitive advantage for our clients. Pershing LLC, member FINRA, NYSE, SIPC.

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