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Analyzing Your B-D Relationship

We can analyze your B-D arrangement and assist you in negotiating a higher payout. This is a service in which we examine your practice and forensically show you how your broker-dealer makes money from your OSJ/office. Why is this valuable? Simply from understanding the game and how you can better negotiate your financial arrangement and/or the same with finding a new B-D. Knowledge is power and it will help you.

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Finserv CG seeks to be a source of timely and relevant information to our clients in the Financial Industry. Click on the headlines below to read these valuable articles in their entirety.

Business Analysis

Will Your Business Model Change Due To A New Fiduciary Rule?

It may be in your best interest to pay close attention to the Department of Labor's new fiduciary rule, even if Congress reverses the rule. The ripple effect could impact the way you operate your business in the future, which means the potential for real change is a valid possibility.

It is believed that approximately “70% of RIAs think the DoL rule will have little impact on their business," says Tom Corra, the COO of Fidelity Clearing & Custody Solutions as reported in Financial Planning Magazine’s March 14, 2016 article. According to a new survey from Fidelity Institutional, RIAs see "moderate or no impact to their business" as a result of the new DoL Investment Advice rule, but this may not be reality. As the great hockey player, Wayne Gretsky, said; “Go where the puck is going, not where it’s been”. The industry and your clients are pushing everyone to the advisory platform.

Show More...One thing is certain, there is an evolution going on from a securities sales mentality to becoming true advisors to your clients. But an even more compelling development, as this all rolls out over the next couple of years, is what will be the future role of the broker-dealers?

So think through this for a minute, if advisors are paid for their advice versus selling investment products, what is the relevance of a broker-dealer relationship? Will broker-dealers have to reinvent their value proposition or will you simply not need a broker-dealer anymore. And for that matter, what has your broker-dealer really done for your business other than apply an overlay of compliance and regulatory supervision? It’s rather comical how most broker-dealers tout all their business and practice management support as a “value” to their relationship with you. Seriously? When was the last time your B-D helped you grow or improve your business model?

But let’s first start with the historical past of a broker-dealer. The beginning of today’s broker-dealers originated after the 1929 great depression, which was when the Securities and Exchange Act of 1934 was created. Broker-dealers were originally created as an organization that engages in the business of trading securities for its own account (Dealer) or on behalf of its clients or your clients (Broker). Broker-dealers later expanded into offering a wide array of investment products, mutual funds, variable annuities and passed along compensation from all these products while keeping a portion for themselves. Some also started assisting companies in raising both debt and equity capital, which is a more modern function of an investment banking operation today. Broker-dealers are currently at the heart of the securities and derivatives trading process and come in all shapes and sizes. As a matter of fact, many broker-dealers are business units under commercial banks, investment banks, investment companies and/or under large corporate holding companies.

Today, all broker-dealers either own an internal clearing operation (self-clearing) or they contract with a clearing firm like a Pershing or Fidelity (NFS). Custodians like Fidelity, Schwab or TD Ameritrade also provide that same service for independent RIAs.

Many of the broker-dealers over the years changed from creating and dealing in investment products to overseeing the sale of “third party” securities products, which included researching and evaluating securities products, to managing the compliance and oversight of investment products and collecting and disseminating the commissions all in a self-regulatory environment. This was the genesis for many of the independent broker-dealers of today.

There are those that believe being paid to manage the assets under your supervision or advice is clearly in the best interest of your clients. Under this model the elimination of so-called “commissions” will clear the air in your relationships with your clients and “so-to-speak” put you on the same side as your clients. But nonetheless, the registered representatives, and sometime so-called “advisors” who work for or under a broker-dealer, are ultimately trying to do what’s best for their clients as well. They are simply paid by the investment products but their broker-dealers are also trying to collect additional funds from these same firms to offset giving them access to their financial advisors. Ultimately the client ends up paying for all this in the process.

It’s all an interesting perspective that will be figured out by the client in the process. The bottom-line is that under the current structure all parties agree on one thing; “Do the Right Thing for Your Clients” and you will be successful and provide true value in the process.

So it’s a natural thought process of trying to understand the future relevance of the current structure of broker-dealers as our industry zeros in on changing the way you, as investment advisors, interact with your clients. There are some great Broker-dealers that provide value for you and your practice. Ultimately, this will have an effect on the way you operate your practice, so pay attention to the tide of change that is upon you. We are trusted consultants that can ask the right questions and help you determine the best business strategy for you and your practice. Contact us for a confidential conversation.

Tim O’Rourke
FINSERV Consulting Group
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What Does Your Broker Dealer Make On Your Practice

Operating an independent investment practice is not as easy as it use to be. The craze of the 90’s and 2000’s was the growth of the independent model and the independent broker-dealers (IBDs). The wirehouses saw their biggest decline in registered representative population during this timeframe since their formation in 1930s. Financial advisors were setting up their independent offices across America at a breathtaking pace.

But the role of the broker-dealer has also changed in the process. B-Ds have become the police for the regulatory aspects of the industry, research and approve investment products and disperse commissions and fees of the products their financial advisor/registered representatives sell.

For a number of reasons, the regulatory bodies are becoming more stringent on oversight and forcing all B-Ds to keep closer tabs on each financial advisor. Capturing emails, closely reviewing client communication, monitoring industry CE, managing the investment advisory accounts, overseeing social media are all just examples to the burden B-Ds carry. So in turn B-Ds are literally “dumping” more and more responsibility and liability on individual practices and OSJs primarily due to rising costs.

Back in the 1980s and 1990s it was easier for B-Ds to make revenue. In those years B-Ds created programs for product manufacturers that gave a select group special access to their financial advisors and charged a fee accordingly. There were many names for these programs and it was considered marketing cost, but in essence they were charging the product manufacturers basis points on new business and AUM for having access to their field of financial advisors. The truth of the matter is that it’s still going on today, but like any commodity the product manufacturers are pressuring the fees down. So the B-Ds are adding more fees onto advisory platforms and other services they require thiir field to use.

Also, interest rates were much higher back in the 1980s and 1990s, which most B-Ds made 25 basis points up to 100 basis points on money market balances in their brokerage accounts. As interest rates slowly declined over that 20-year period, it became more and more difficult for B-Ds to make money off their typical 10% to 15% spread that was paid by their independent financial advisors.

Consider that as the B-D community flourished, but pricing became more competitive. There were and are today B-Ds that payout 92%, 95% 97% and up to 98% in some cases in order to lure independent offices to their platform. But let’s be candid; a B-D can’t make enough money to hire back-office staff, compliance staff, administrative staff, rent or buy office space, and all the other expenses surrounding running a fully licensed broker-dealer, from a 5% spread. So, obviously they have created many "user" and other fees that you may not be aware of.

So where does the revenue come from?

In all fairness, there are so many different revenue sources; it’s hard to cover the B-D community’s income resources. So as not to be accused of being misleading or inaccurate, this information will be classified as “general guidelines.

Hopefully you have figured out why this is imperative for you to know, not only how much your B-D makes from your practice but in what categories. Any business must know their overhead costs in order to understand how it can improve it’s bottom-line.

Let’s start with the basics. Here is a general example of an independent office outlining the revenue they make and the revenue their broker-dealer makes. Keep in mind, that each B-D is different and that we are merely showing you a broad example for illustration purposes only. We can do a much more in-depth analysis for you if you contact us.

Here is a “general” list of ways B-Ds make money off of your branch/operation:

  1. All B-Ds that we are aware of take an override percentage from your gross commissions/fees. This override can be anywhere from 15% to 5%, correlating to an 85% to 95% payout respectively. This spread is universally charged by most B-Ds, and usually comes off the top.

  2. Then there are ticket charges depending on the type of trade that is passed along from the clearing firm, whether self-clearing or utilizing a firm like Pershing, Fidelity, etc. It is fair to note that some broker-dealers mark-up their ticket charges in order to create another profit center.

  3. If you utilize your B-Ds advisory platform, they charge all sorts of platform fees either to your clients or you. Platform fees can be anywhere from five basis points up to 20 basis points in most cases, but add up and why many B-Ds want you to use their platform versus Fidelity, TD, Schwab, etc.

  4. Many B-Ds also charge ticket charges on their advisory platform on top of their platform fees. In turn many B-Ds make additional money from these ticket charges as well.

  5. Product sponsor revenue is another way broker-dealers make money off of your business. Most of the primary product manufacturers pay the larger B-Ds a fee (they call a marketing fee) for new business and assets under management (AUM) that was generated from their financial advisor’s sales to clients.

  6. B-Ds make a small spread from assets parked in their brokerage money market accounts. This revenue is obviously been reduced due to the interest rate markets but still worth considering.

  7. There are all sorts of other fees that are charged like a technology fee, monthly user fees, E&O fees, and client fees that are disclossed but commonly never noticed. Most are market up in some manner. The point in all this is that your payout is only a small part of how B-Ds make money.

Here is a typical branch office with 12 financial advisors grossing $5,000,000 in commissions and fees:

Product Mix:

  • 35% Advisory Fees
  • 18% Mutual Funds (12b1 fees)
  • 15% Variable Annuity Trails
  • 10% Variable Annuities
  • 10% Mutual Funds
  • 7% General Securities
  • 2% DPP
  • 2% Insurance
  • 1% Equity Index Annuities
  • 100%

When we analyze an individual or a branch office, we take into consideration the number of trades, gross and net revenue, net branch payout, ticket charges, top 5 mutual funds AUM, top 5 variable annuity AUM, advisory fees and ticket charges, B-D financial advisor and/or technology fees, E&O fees, administrative fees, and any other fees that might be levied by one B-D.

By the time we get all the data we can tell you within a reasonable variance how much your broker-dealer is making on your branch.

This is powerful information to have since we can assist in negotiating a better financial arrangement for your branch office and your business. We can also assist you in finding a new broker-dealer if your relationship is stagnant or dysfunctional.

Many broker-dealers offer a recruiting package that we can negotiate to your benefit to move your practice to a new B-D. We act as your agent, just like a professional athlete uses an agent to negotiate with their team. Knowing all the B-Ds profit centers and your operation costs helps us find you the right fit or the ability to renegotiate your financial arrangement with your current broker-dealer.

Contact us today to have a confidential discussion about your situation and we will look at your business in a manner that you will be empowered and can make an informed decision about your future.

Tim O’Rourke
FINSERV Consulting Group

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We are always eager to hear from both existing and potential clients. Contact us today to find out the many ways Finserv Consulting Group can both help you operate with greater efficiency and expand your market share…while improving profitability.

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