Broker-dealers in the independent space have often been owned by the shareholders of large, publicly traded companies, diversified financial product companies or private equity firms. Each approach has its own strengths, but if the experience of the independent advisors in the field means anything, all of the above ownership models appear to have serious limitations as well.

Publicly traded independent broker-dealers (IBDs), for instance, are obligated to place the needs of shareholders above the needs of their advisors. At the same time, there is also risk—whether real or perceived—that proprietary investment solutions are prioritized over objective advice when it comes to IBDs owned by diversified financial product companies.

Yet, for the independent advisor, these risks can pale in comparison to the risks of having your IBD owned by a private equity firm. Private equity firms usually will not hold any portfolio company for longer than a three- to seven-year period, at the most. A private equity firm's typical goal for its investors is to maximize the value of the IBD it owns through a profitable sale of the entity at the earliest feasible opportunity. 

And recent industry history has shown that private equity exit transactions simply may not result in optimal outcomes for either the IBD or the advisors it supports.

So what’s an independent advisor, disillusioned by the current options, to do? A less frequently discussed model within the independent space that may soon gain more traction is the privately-held firm that is wholly or significantly owned by the very advisors it supports: In addition to owning their independent practices, a relatively broad base of the independent advisors supported by such a privately-held IBD ideally also have an equity ownership stake in the broker-dealer itself. 

In theory, this provides both a reasonably stable capital structure for the IBD, while aligning the interests of the most important groups within the financial advice process—from the broker-dealer, to the advisor, to the advisor's end clients—provided there are proper controls in place.

In an environment seemingly rife with conflicts of interest, it's easy to see the potential allure with this kind of IBD model.

Here are seven key factors for advisors to evaluate when considering their options within this small but potentially high growth sub-set of the independent financial advice industry:

1) How stable and long-term has the broker-dealer ownership structure been until now? This is an important factor any time an advisor thinks about changing broker-dealers. It always makes sense, therefore, to seriously consider an experienced player that has an established and stable history of delivering a top quality experience to advisors, including during difficult economic and regulatory time periods.

This is a vitally important point, because every advisor has his or her own way of doing business, frequently relying on specific products, technologies and other services that meet the specialized needs of their clients. Continuity of ownership of the IBD enhances the probability that these platforms and services will remain unchanged over the long term.

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