3 Key Elements of the Perfect Broker Dealer Partner Profile

Deborah Aronson - financial advisors - independent broker dealers

November 14, 2017
By Deborah Aronson

Evaluating broker dealers? Here are the areas you need to pay attention to.

Whether you’ve been married to a broker dealer for the past several years and are searching for a new partner, or you’re exploring the independent broker dealer space for the first time, there’s a new set of factors to consider in a post-DOL world.

The changing regulatory environment created a new set of challenges for broker dealers (among them increasing technology and compliance costs), resulting in unprecedented consolidation and contraction among firms that has all but altered the IBD landscape. So, while self-assessment is the starting point for any due diligence process (as is a clear understanding of your business needs and those of your clients), advisors need to delve a bit deeper when considering a broker dealer in the evolved landscape.

In this new world order, the path to a broker dealer should take the following 3 points into consideration:

1. Scale

Over the past 2 years, there’s been a pretty steady pace of mergers and acquisitions among independent broker dealers and what’s become abundantly clear is that size matters. While headcount doesn’t necessarily equal stability, the law of large numbers is definitely at play in the face of the DOL and a changing regulatory environment. And that doesn’t mean that smaller, more “boutique” broker dealers don’t have staying power—as there are plenty of boutique firms who are well capitalized and have managed risk appropriately by hiring selectively and focusing on a niche business rather than trying to be all things to all people.

In a space where profit margins are thin to begin with, broker dealers are no doubt feeling the pinch as they have been forced to invest more heavily in their compliance infrastructure and technology platforms amidst regulatory changes. Smaller and insurance-owned IBDs cut bait early on and put themselves up for sale in the face of shrinking revenues and increasing costs while BDs that invested in infrastructure long before the DOL and had steady growth by way of recruiting were well-positioned as buyers.

While consolidation narrowed the playing field, selecting a broker dealer today is no easier than it once was and requires an advisor to evaluate more than a firm’s platform. Firms with scale can negotiate more competitive pricing with clearing firms and technology vendors which ultimately translates into an improved advisor experience. And a financially stable and well-capitalized firm that’s able to continually invest in technology, compliance, practice management and succession planning via recruiting next-gen talent is likely to be the winner amidst a shrinking pool of IBDs.

2. Ownership

From a sea of mergers and acquisitions among independent broker dealers, three ownership models have ostensibly emerged: privately held firms, publicly held firms and private equity partners.   Previously, many advisors paid little attention to a broker dealer’s ownership structure, but for any advisor who, over the past year, woke up one morning to the news that their firm was being acquired, the thought of having to endure that again is unnerving, to say the least.

While it’s impossible to say which of the 3 models may be most ripe for a sale, there are plusses and minuses to each. Privately held firms are free to invest their earnings in what’s best for the advisor as opposed to having to pay shareholder dividends, yet many small privately-owned broker dealers faced significant challenges in the face of the DOL. Publicly held IBDs often have the scale necessary to invest in their offerings for advisors, but are obligated to put the needs of their shareholders above those of their advisors—including a fiduciary responsibility to consider offers from potential buyers. The last bucket, private equity partners, have the capital necessary to fund service and platform enhancements and, while they’re not subject to quarterly earnings expectations, they typically have one agenda: to maximize the value of their portfolio and to sell it at the earliest opportunity.

So what’s an advisor to do when evaluating ownership models? Gather as much information as you can on the longevity and stability of an IBD’s ownership and perform thorough due diligence on the firm’s financials, including how well-capitalized they are.

3. Culture and Community

Culture and community are often overlooked in the IBD space. It’s essential to ensure that you’re joining a broker dealer with like-minded advisors, as the ability to synergize and share best practices can go a long way to helping you grow. In addition, look for a management team whose core values are in sync with your own, including a broker dealer who understands and values an advisor’s independence.

A quality broker dealer should have little to no turnover among their advisors and back office staff. The best way to evaluate longevity is by way of a home office visit: This will give you an opportunity to meet with the heads of product divisions specific to your business, as well as those in the back office with whom you’ll have the most day-to-day contact. During a home office visit, take the time to inquire about employees’ longevity, as well as get a sense of the culture and energy of the firm overall.

While the landscape has gone through dramatic changes, the reality is that for those who are looking at or are currently practicing in the IBD space, opportunity is at a pinnacle. Consolidation has certainly remodeled the face of many firms, but that isn’t necessarily a bad thing. These shifts may well translate to broker dealers who have to work that much harder to improve the advisor and client experiences. As such, this space stands to be even more attractive to advisors looking for the freedom and flexibility to serve their clients in a manner consistent with their goals.