B/Ds Need to Embrace New Adviser ‘Team’ Model

Broker/dealers’ traditional affiliation approach could leave them in the past

When a broker/dealer (B/D) recruits an adviser firm, whom should it target as chief decisionmaker? If you’re a B/D and the answer seems too obvious, you should probably think again. Gone are the days when top producers are the focal point—at least if you’re recruiting a large ensemble team.

“The top client of today’s successful broker/dealer is not a rep or even an adviser but a firm, or a team with multiple professionals, its own identity and leadership team and an ambitious strategy to continue growing,” says “Why Teams Are the Client of the Future for Broker-Dealers,” a new white paper from Pershing LLC. Nearly one-third of advisers who work with broker/dealers now do so en ensemble, the paper says. Yet, many B/Ds still operate from a “rep”-based perspective, e.g., ignoring key behind-the-scenes players, and employing a hierarchical pay system unsuited for a team.

Large teams, or ensemble teams, offer a depth and breadth of experience and skill, says the paper. They tend to be inventive, service-oriented, self-perpetuating—outliving the founder’s retirement—and profitable beyond solo peers. All together, this creates an “overwhelming” draw for clients. Whether or not B/Ds actually employ them, ensemble practices are to be reckoned with: “They are setting the standard in many important management categories and defining the competitive marketplace.”

It is in broker/dealers’ best interests, therefore, to recognize the shift and recalibrate their strategies accordingly, the study says. As much as one-third of B/D revenue may already be controlled by an adviser team, surveys suggest, and this is B/Ds’ fastest growing income. That revenue stream dries up quickly, though, if the team decides it has outgrown its B/D relationship and moves on—as many have—starting its own registered investment adviser (RIA) or hybrid firm.

NEXT: The new “super” client

“The good news is that broker/dealers can successfully recruit, retain and work with ‘large producer’ teams by understanding how [they] work and by reforming affiliation models,” the report says. Thereby, both parties in the relationship gain.

Until the more recent past, advisers’ function was to attract investor clients, and the broker/dealer’s to do the rest, the Pershing study says. Changes in the industry have encouraged consolidation. The result: As of 2013, almost one-quarter (23.6%) of advisers affiliated with independent B/Ds were part of a team, as were 50% of hybrid RIAs, 32% of advisers in wirehouses and 22% of those in regional firms, according to the most recent WealthManagement.com compensation survey, cited in the paper.

Referring to Pershing’s own 2014 InvestmentNews Financial Performance Study, the authors report that large ensembles grow faster than individual adviser firms and attract clients that have three to five times greater assets under management (AUM).

The largest—super-ensembles with over $1 billion in AUM—make super-clients for B/Ds, indeed, attracting top clients of their own. There are roughly 250 such firms, the paper says. Nearly all are RIAs; up to 20% are affiliated with a broker/dealer.

For B/Ds that have achieved these partnerships, retaining them is vital. The study estimates that the loss of a large relationship can decrease a B/D’s growth rate by 50%. Many large teams mistakenly think independence is required, that it’s the natural next step on their road to success. “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 [one].”

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Whereas broker/dealers have traditionally performed a more regulatory role, the paper suggests they recast themselves as “strategic partners.” In that position, they can serve as a “resource hub,” providing “packages of preselected and pre-integrated building blocks” to help advisers build their business, or a “resource center of capital for growth and acquisitions,” lending at a cost-effective rate, so team affiliates may expand. B/Ds can also aid with networking, security sales and strategies, and risk management—even camaraderie, the report says. “The presence of like-minded individuals with whom advisers can build professional and social bonds may be one of the most undervalued but most important reasons to have a broker/dealer.”

B/Ds need to start at the foundation level, though, rethinking basics such as whom to reach out to in the organization as potential key contacts—operations officers, perhaps—and how to replace the payout grid system so all can be compensated fairly and the economies of scale can reward productivity. If adjustments are not made, teams will feel unable to fit into the B/D’s culture. A model for the relationship would combine a business-to-business structure with a partnership’s personal touch, Pershing says.

That partner may add value to a firm’s business by entering into its processes and giving specific support. This could mean studying its investing philosophy, then supplying pertinent advice, or becoming proficient in the advisery field’s technological systems and tools.  It could also mean equipping the client with additional tools by which to provide financial, business and estate-planning services.

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Underlying any strategy is the importance of building the relationship—“the foundation upon which a winning firm serves its clients.” Success is more certain for both parties when they share values and vision, have complementary cultures, the paper says, urging them to meet periodically to discuss strategies and expectations.

“There is no better question for a business owner than the question, ‘What do you envision your firm to be like in five 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 advisers’ firm, and also a vision to which the broker/dealer can contribute,” it says. “The more the advisers share and work on their business strategy with the broker/dealer, the more lasting and strong the relationship will be.”

Pershing, a BNY Mellon company, is a global financial services provider. The company’s white paper may be downloaded here.