Growing regulatory risks, shrinking margins and increasing litigation have the owners of many small and mid-sized broker-dealers in search of an exit plan.
One increasingly popular option for owners seeking to capture the value they’ve built up while continuing to serve clients and financial professionals is to reposition their practice as a branch office under a larger broker-dealer better equipped to handle the continually growing list of regulatory and financial challenges.
The desire to renew their focus on better serving clients recently led Wall Street Financial Group (WSFG), a 22-year-old independent broker-dealer in Fairport, N.Y., to transition to a branch office under Securities America.
“Now we can leverage our client-focused approach with industry-leading resources,” said WSFG President and CEO Victoria Bach. “As a large OSJ branch under a leading broker-dealer, we gained compliance support, strong technology and important value-add programs like succession planning, practice management and a full suite of asset management resources.”
Securities America has developed expertise in transitioning large groups of advisors.
“Our proven, sophisticated, multi-departmental approach to the acquisition process, along with our industry thought leadership, have made us a desirable business partner for firms such as WSFG,” said Gregg Johnson, executive vice president of recruiting and acquisition for Advisor Group.
Like Bach, owners and executives at small and mid-sized broker-dealers are discovering a host of benefits as they find new life as branch offices.
Reduced Risk to Net Worth
Many owners of regional independent broker-dealers have a significant portion of their personal net worth tied up in their firm.
Unfortunately, given the current litigious and business environment, actions of a single “rogue” financial professional or poor advice from a well-meaning one may lead to liabilities that can wipe out an owner’s hard-earned equity overnight. And oversights can result in substantial regulatory fines as well as black marks on an owner’s Form U4.
By winding down the firm and becoming a branch, owners reduce their financial risk through:
- Innovative technology that enhances compliance and supervision processes
- Broader and more affordable Errors and Omissions coverage
- Sharing risk with a larger, well-capitalized broker-dealer
Access to Superior Compliance and Technology
Productivity has drastically improved in recent years, due in large part to developments in portfolio management, performance reporting and client relationship management software. In addition, advancements in compliance technology have improved supervision of client communications and management of client accounts.
But keeping pace with rapidly evolving technology can put a significant strain on smaller broker-dealers.
A larger broker-dealer is better positioned to provide its branch offices up-to-date compliance systems, performance reporting, portfolio management and client management systems and the supervision systems to go with them. Access to these tools increases productivity, accelerates the branch’s revenue growth and helps recruit and retain financial professionals.
“We had one financial professional looking to get out of managing people and another considering their continuity plan,” said Bach. “Now, they're saying, 'Wow! We have all these services and tools. Forget the five-year plan I was on. We're not going anywhere. You're stuck with us for 10 years.’”
Increased Ability to Recruit
Recruiting is a common core competency among broker-dealer owners. By streamlining the day-to-day supervisory and compliance responsibilities, owners are left with significantly more time to recruit and develop their advisors.
WSFG Vice President D. Robert Anderson, who will serve as an OSJ of the new branch, said the change will allow him to get back to his real passion — working closely with financial professionals to help build their businesses.
“When Vikkie and I purchased WSFG, I was an OSJ and an advisor that managed a branch for WSFG,” Anderson said. “I was used to developing advisors. As an industry, we're doing a better job, but we're still doing a poor job of drawing young people into the business. There’s not enough focus on helping advisors reach their goals.”
Because large broker-dealers typically have internal teams of recruiters, owners are no longer dependent on their own bandwidth and resources to grow their branch.
Smaller firms unable to match the incentive packages of larger firms find it difficult to compete for the largest producers and retain the ones who bring the highest profit. Even if they have the capital to match such offers, their margins shrink even more, because they lack the operating scale to recapture these costs.
But as part of a larger broker-dealer, branch managers have access to capital and incentive packages, including up-front money, needed to recruit more profitable financial professionals.
Find the Right Partner
There are many details to consider when comparing broker-dealers with which you might affiliate, including:
- Do they have expertise in large group transitions?
- Can they consult with you on your future and on-going business model?
- Can they develop important communication materials (e.g., a timeline; talking points for financial professionals, employees and the media; and a web-based communication portal as a one-stop location for all transition-related information)?
- Do they use project management methodology and provide detailed project and transition timeline plans?
- Will they designate a transition liaison to work closely with designated representatives?
- Do they have expertise in the continuation of revenue for you and your retained financial professionals?
The rapidly changing business environment has caused many owners of small broker-dealers to reevaluate their current operating structure. Many are coming to the conclusion that the perceived reward of owning a small broker-dealer is not worth the risk.
But operating as a branch manager lets them focus on what they do best – recruiting financial professionals and helping them grow their productivity.