Anyone looking for evidence of America’s growing shortage of financial advisors might point out the growing competition to recruit advisors among independent broker-dealers.
There is no shortage of B-Ds that would enthusiastically court quality firms in today’s market, according to Jason Diamond, vice president of Diamond Consultants, a financial consulting firm based in Morristown, N.J.
Moreover, the number of advisors who wish to retain their brokerage business isn’t growing like it once did, and Covid accelerated the retirement of older brokers who were getting ready to leave the business anyway.
These forces have tilted the supply and demand equation in favor of reps, intensifying the recruiting competition. “All broker-dealers want advisory firms for their assets. Broker-dealers want to grow their assets and they want to increase their share of fee-based firms,” Diamond says. “If someone has a quality advisory firm, there will be a home for it. Broker-dealers want to recruit, but there are not enough quality firms out there, so it is an advisor’s market.”
Broker-dealers aren’t just competing for reps but for assets, something that prompts them to offer bigger payouts and more transition dollars for advisors bringing those assets over. Deals are trending higher. It’s not unusual now to see five-year forgivable loans for advisors reaching up to 40% of their trailing-12-months revenues; 30% used to be the average.
“In some selective cases, the loans can even be north of 100% of the trailing-12-months revenue,” Diamond adds. But it could be that even ridiculously high financial incentives aren’t enough. “What advisory firms are really looking for is better access to financial solutions for their clients, for lending and banking products, and technology support,” Diamond says.
Broker-dealers’ desire to expand their footprint in the advisory universe is prompting some to buy up firms in the competing world of RIAs and hybrid advisors. And in some cases, they are even acquiring advisor books and firms outright.
Earlier this year, LPL Financial turned heads when it announced it would buy partial books of business from its advisors. A decade ago that move might have drawn consternation from members of its advisor network, since advisors are famous for zealously guarding their client lists. Today, however, reps hearing about generous buyout offers from broker-dealers backed by private equity firms are a lot more receptive after realizing they’d be the recipients of a large check.
And broker-dealers may have financial advantages bidding against PE-backed aggregators that took on a lot of debt acquiring RIAs at top-dollar prices during the pandemic. Firms like Raymond James and LPL can boast more conservative balance sheets and more acquisition resources as public companies.
But there’s still a great incentive for broker-dealers to have a growing RIA presence.
Consider the multiples for advisors who want to sell their business. Those reps taking commissions have seen the multiples for that part of the business get discounted. But multiples haven’t come down for RIA firms with “long runways”—i.e., lots of mid-career advisors still in the game and boasting clients still in their accumulation phases. (The “long runway” is how Neil Turner, co-CEO of New Edge Advisors, a hybrid firm affiliated with LPL, puts it.)
The demand for quality firms is evident throughout the industry, according to Vern Coates, owner of Henschen & Associates, a consulting firm based in Cedar Rapids, Iowa. He says competition among broker-dealers is only going to increase. “It is worth noting how aggressive the big firms have gotten over advisory assets. It wouldn’t be unheard of for an advisor to receive 100 basis points on their assets,” Coates says. “There is more competition than ever in the RIA space. The landscape has changed somewhat as the industry has more ways to cater to advisors.”
Smaller broker-dealers are not being shut out of the acquisitions, Coates says. But to compete they have to offer different incentives, say shorter loan times. They also emphasize the closer relationships an advisor can achieve at a smaller firm, where he or she can reach out to executives, count on participating on advisor panels and have a voice in the broker-dealer’s policies.
Much has been made of the talent shortage in the financial industry, but Coates maintains it’s really an awareness shortage. “The perception that financial services has to look like The Wolf of Wall Street or a boiler room or some other Hollywood interpretation is a big miss. Wealth management is highly rewarding with a relatively low barrier to entry,” Coates explains.
He adds that the aging advisor force often needs help getting younger advisors onboard to help them and prepare to take over business. “There is still a significant percentage of advisors who don’t have a succession plan in place,” he says. “Broker-dealers who can assist in the practice acquisition and mergers are getting more attention from advisors considering a move.”
Bells And Whistles
In such a competitive market, all broker-dealers have to roll out new technology and services to both meet advisor needs and stand out.
Austin, Texas-based Kestra Financial is introducing technology that will make it more efficient to open accounts for advisors, says Daniel Schwamb, the firm’s executive vice president of business development. The firm is also adding more branding and marketing assistance, he says. He declined to get into the firm’s financial incentives for advisors, though he notes it’s competitive.
He says advisors need help to make their businesses more efficient. While many of them are successful as advisors, they need a different skill set to run a business, he says, and that’s where a broker-dealer can help.
Meanwhile, Osaic, a national network of wealth management professionals formerly known as Advisor Group, has never been busier at onboarding firms, according to Kristen Kimmell, the company’s head of business development.
“Advisors are seeking more than a platform; they are looking for a partner that goes beyond the transaction to help in their growth and development. We do regular assessments of firms to see how they can become more efficient and how they can grow,” Kimmell says.
Two aspects of the assistance that large broker-dealers can provide revolve around technology and marketing, according to Scott Curtis, private client group president at Raymond James, based in St. Petersburg, Fla.
He says that if an advisor is just looking for a financial incentive to move, Raymond James is probably not a good fit for them. But if they want to grow, it is. “For us for financials, there is a consistent chassis, but each deal is customized.”
Firms that affiliate with Raymond James can be employees or remain independent. “But we want to look at the reason they want to move,” Curtis adds. “Typically, they feel like their current broker-dealer is not focusing on them.”
Relationships with advisors are important for all broker-dealers. Many advisors are afraid of getting lost at a broker-dealer that wants to grow for growth’s sake, says Tarah Williams, president and chief operating officer at Prospera Financial Services.
“As a boutique broker-dealer, we provide commitment and agility to entrepreneurial financial advisors who emphasize independence, flexibility and support,” Williams says. “This is not an intangible asset.”
Prospera maintains panels of advisors to give feedback to the firm. Again, succession planning is on a lot of advisors’ minds. Prospera’s Apex program helps with that: Prospera will buy the advisor’s book of business if they cannot find a suitable successor, Williams says.
LaSalle St. Securities, a small broker-dealer based in the Chicago area, also has seen an active pipeline of incoming advisors in recent months and is growing at a rate of 10% to 12% a year, the company claims. “We are as busy as we were pre-Covid,” says Mark Contey, senior vice president of business development. The firm’s flexibility in the way advisors affiliate is one of its big selling points, he says. “There is not a business model out there that we do not support.”
The firm provides back-office support, compliance, business development and succession planning. “We also provide financial assistance in tranches as they bring assets on board,” he says. The firm also asks relocating advisors why they want to move, and uses that information to address needs.
Commonwealth Financial Network is another firm that’s been offering different affiliation models, and it has even said recently that it is starting to eschew the “broker-dealer” label. The firm offers advisory firms a home whether they are outgrowing their existing broker-dealer, embarking on a fee-only path or looking to explore independence, says Becca Hajjar, managing principal and chief business development officer.
She says Commonwealth can provide product solutions, tailored business strategies, marketing support, technology, research and succession planning, among other things. The firm also offers a ratio of 2.1 advisors to each Commonwealth staff member.
“But our biggest value may be the coaching programs and research we provide to advisors,” Hajjar says. “Our advanced planning team works with advisors of any size, and that is different from other firms. We also have a deep bench of practice management assistance.”
Commonwealth has also rolled out an entrepreneurial capital program, through which the firm buys a stake in an advisor’s practice to make capital available to them when needed.
“We don’t see ourselves as a broker-dealer, but as a large RIA because of the multiple offerings we have and the support we provide for the fee-only model advisory firms. That is the area where we are seeing the most growth,” she says. “We have a glide path for firms to become fee only and to help with that transition.”
The transition dollars are almost irrelevant at this point. Advisors want someone to help with compliance and to help provide great customer service for their clients, according to Derrick Friedman, president and founder of Broker Dealer Change, a consulting firm based in St. Petersburg, Fla.
“Support is where it is at for the advisory firms,” Friedman says. “Smaller broker-dealers may be having a hard time providing that support because they do not have the deep pockets that the larger firms have.”
Firm owners often start the transition process just because they want to see what else is available in the marketplace, not because they have a burning desire to move, says Jeff Nash, CEO and co-founder of BridgeMark Strategies, a recruiting and mergers and acquisitions firm based in Charlotte, N.C.
“We tell firms that are thinking of moving to look for the ‘feel, fit and financials’ in a new broker-dealer relationship,” Nash says. “The feel is the likeability of the firm, but it is more than that, too. The fit is the product line the B-D provides, and the financials are whether the new B-D can provide a better payout. But we think the feel is the crucial thing.”
The feel of the firm and broker-dealer involves whether they match culturally. “One broker-dealer may have become more of an anchor for the advisory firm, while a new one may be a sail that promotes growth,” Nash explains.
Another factor that has influenced the industry is the availability of private equity to provide influxes of cash to firms, which has increased their value, Nash says.
Although it is an advisor’s market now, broker-dealers also have requirements. “Recruiters do not like job-hoppers. They want stability and consistency” in the advisors they recruit, says Ali Stanton, founder and lead recruiter at Financial Planner Recruiting, based in Athens, Ga. “At the same time, I am seeing a lot of opportunity for advisors to enter the field with a strong broker-dealer. B-Ds are offering to pay for credentials and for education. B-D firms are willing to pay for the advisory firms they want. In return, they want ambitious advisors and in some cases they want client-facing experience.”