We recently worked with an advisor at a large broker-dealer who wanted to join an RIA. His reason: “There is no connection between me and management nor connection between me and staff. I don’t know anyone, and they don’t know me, so now that a large percent of my business is advisory, cutting the cord with my broker-dealer is a no brainer.”

Advisors most often complain about their B-D’s automated phone menus, where they experience trade approval difficulties, as well as the amount of paperwork they have to do, the accuracy of the payments and poor business processing. In their complaints about the phone menu, they often express sentiments like these:

• “I’m on hold for long periods of time.”
• “I get different answers from different people, so I don’t know what to believe.”
• “The quality of back-office service staff is something we have to tolerate.”
• “There appears to be high turnover of back-office staff, so we are frequently talking to people that aren’t knowledgeable.”
• “They said they would get back with me with answers to my question(s), but it can take a week or more.”

Small and midsize firms have a clear service advantage, since their advisors don’t have to go through phone trees like these. The reps have key contacts to reach out to for quick answers, and have relationships not only with the staff but also with management. Turnover is typically low at small and midsize firms, so the staff members the advisors call on have been employed longer and thus know the answers to many of the day-to-day questions that come up. The staff at firms with higher turnover appear inept by contrast, because they are frequently on learning curves. Upper management at small and midsize broker-dealers know their employees well, and (as we’ve seen in Price’s law), the square rooters represent a larger percentage of the employees at smaller firms, so management knows who they are.

Since smaller firms have those advantages, what can larger broker-dealers do to counter? Here are some suggestions:

1. Companies must hire only “A” players. Management has to focus on hiring the best in order to skew the number of “square rooters” within a firm.

2. People should only do what they excel at. Employees are much more productive when performing those tasks they’re good at. That makes them more productive, and they find more meaning in what they are doing.

3. Companies should pay their square rooters more: Despite recent arguments to the contrary, merit-based society doesn’t treat everyone equally. The best gets more of everything.

4. Consider Frederick Reichheld’s words in his book Loyalty Effect. “Companies with profits in the upper quartile pay their employees in the upper quartile for their industry, and the inverse holds true with companies in the bottom quartile paying employees in the bottom quartile for their industry. If you pay in the upper quartile for your industry, you’ll see your retention of employees rise dramatically.” Reichheld adds, “Pay cuts and price increases can boost earnings, but they have a negative effect on employee and customer loyalty and so shorten the duration and worth of those assets. Since the only way a business can retain customer and employee loyalty is by delivering superior value, high loyalty is a certain sign of solid value creation. Be aware that getting your employees to stay with the company longer won’t necessarily produce superior economics. A lot of firms are loaded with dead wood.”