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.

2) How well represented are the advisors on the broker-dealer's board? To truly have influence, advisors must have some representation on the company’s board, helping to set goals, offering strategic direction and providing input on major decisions, whether it relates to the composition of the senior leadership team, the company’s long-term plans or scope of operations.

At the same time, there’s a delicate balance in having advisors take on too great a role in this respect. Running an independent financial advisory practice and working with retail clients, though rewarding, is time consuming. Having a board that is substantially or solely comprised of advisors trying to take on more responsibility at the firm level can lead to a lack of focus for the IBD and the advisors, which serves the interests of neither particularly well, and potentially short-changes the end client.

3) How accessible is the broker-dealer CEO as well as the senior leadership team? Because there are no public company shareholders or private equity partners under this model, management exists to serve the needs of the company, which are aligned with the needs of the advisors. As such, they should be extremely accessible and hyper-responsive to advisor concerns. Advisors looking at such IBDs should ask how frequently the CEO and other key members of the IBD management meet with advisors as a group and, more importantly, one-on-one. 

It's also worth diving deeply into whether the IBD has created institutionalized forums and a council that allow advisors to regularly interact with members of the senior management team and provide feedback on important matters. If so, how often do these forums and councils meet? What members of the management team of the IBD are required to attend on a regular basis? And what is the process of translating advisor feedback from these structures into actionable strategies by the IBD?

4) How strong are the firm’s financials? Any business, regardless of size or focus, needs to be properly capitalized to satisfy its mission. While we often read articles and hear self-serving statements that only large firms can survive the latest compliance requirements, we have heard the same claims for decades. And yet smaller firms continue to be formed and thrive. While the costs of operating a business in the investment and wealth management world have risen dramatically, all firms should have carefully-planned reserves and operating margins to survive. Smaller firms may be the obvious targets for being at risk, but we have seen large businesses unable to survive as standalone businesses over the past decade. We have even seen large firms having to file for bankruptcy protection. Such results should cause the financial advisors reviewing an IBD to perform appropriate and thorough due diligence, just as they would do when selecting a product to recommend to a client.

5) Are there proper controls in place to ensure balance, transparency and an alignment of interests? The overarching question of proper controls to address the question of conflicts of interest must be directly considered. The areas of ownership of the firm, management of the business, service of the advisors to their clients and board representation are critical to achieving balance and transparency. With good systems, appropriate disclosure, and the inability of any one group to dominate the others, the optimal results have the best chance of being achieved, both for the advisor and, most particularly, for the client of that advisor.

6) Does the broker-dealer have a durable and transparent framework for addressing potential disagreements between the management and advisors, should any arise? Disagreements can potentially happen at any company across any industry. With independent broker-dealers, potential disagreements between the firm and the advisor can run the gamut from what types of financial products (proprietary or open architecture-based) should be available on the platform, to what kinds of new practice management tools should be embraced. Advisors should ascertain whether there are clear venues to express their perspectives when they are divergent from the views of management. 

Whether this happens through advisor representation on the broker-dealer's board of directors, or in other institutionalized vehicles—such as advisor councils—or through other channels, the important thing is to ensure that there are sufficient venues provided for to reasonably discuss and resolve potential disagreements between the broker-dealer and the advisor if and when they arise.

7) Is there a clear path forward if the advisor ever seeks to depart from the broker-dealer? It's also important for the advisor to understand what the path forward will be if he or she affiliates with the broker-dealer and, over time, obtains a significant equity stake in the entity only to decide to depart from the broker-dealer further down the line—either because of a planned exit from the business altogether, or to transition to a different broker-dealer platform. Is there a mandatory buy-back provision of the advisor's shares, and what valuation process will be used? Alternatively, can the departing advisor retain his or her shares in the broker-dealer and choose to sell at will at a later date, if at all? There is no right formula for this, but it is crucial to understand whether there is a clear process in place that provides for such an eventuality.

All in all, an IBD that offers advisors ownership creates an alignment of interests between the broker-dealer, the advisor and the end client.

By now, the most recent wave of industry-roiling consolidation has come and is in a lull. It has left many successful and independent advisors wondering if there is any place left where they can find a greater level of satisfaction, comfort and certainty in their businesses. Industry watchers and advisors would do well to monitor those broker-dealers aligned with advisors which could be an explosive new sub-sector of growth within the independent space in the coming years.

Clive Slovin is president and CEO of The Strategic Financial Alliance, a privately owned independent broker-dealer and registered investment adviser based in Atlanta.