In recent years, we’ve seen tremendous growth for both newly launched super OSJs and the independent advisors joining their ranks. We’ve also seen smaller broker-dealers choosing to wind down their broker-dealer platform, while remaining together under the same brand, leadership and advisor community as a super-OSJ—either through a sale of themselves to a larger broker-dealer network, or by transitioning themselves to an independent broker-dealer (IBD) that supports independent branches. 

Lately, we’ve even seen reports of a large super OSJ planning to leave one of the nation’s largest IBDs, in order to become a broker-dealer in its own right.

There’s no denying that super OSJs are under pressure from pricing wars and margin compression, which intensified over the past two years as the Department of Labor fiduciary rule took shape, even as multiple independent broker-dealers became increasingly hesitant about the extent to which supporting super-OSJs should be central to their forward strategies.

Indeed, before the recent court ruling overturning the DOL rule, much of the talk among industry pundits had been about how most, if not all, super OSJs are destined to go extinct in danger as certain of the largest independent broker-dealers began to aggressively revisit the economic terms of their arrangement with many of their affiliated super OSJs. Industry experts wondered if the super-OSJ model was doomed as a pure “margin play” under a post-DOL rule future.

But as is often the case, the industry punditry proved to be incorrect in its prophecies. Yes, super OSJs are evolving at a rapid pace. And as is always the case with any broad evolutionary trend, there will be winners and losers.

However, forecasting the future of the super-OSJ model’s viability requires assessing the present state of the super-OSJ space.

Payout Structure

Let’s start with a recognition that, no matter what industry commentators and certain senior home office executives might say publicly, super OSJs are fairly common at most IBDs, and many IBDs provide to their super OSJs a payout as high as 98 percent.

It’s also not uncommon for these same IBDs to give the average advisor who affiliates directly under its home office a much lower payout of 90 percent. If this advisor works through a super OSJ, then the IBD may keep only 2 percent of the advisor’s revenue instead of 10 percent. Meanwhile, the advisor might get a 92 percent payout from the super OSJ, which keeps just 6 percent of the advisor’s revenue. From the advisor’s perspective, what sounds like the better deal?

This example, based on fairly common numbers across the industry, highlights the profitability conflict for IBDs.

Based on these numbers alone, the IBD would be far more profitable if the advisor affiliated directly with the IBD directly instead of through the super OSJ. Yet, there’s another factor to consider—super OSJs are typically advisor-recruiting machines for IBDs.

The high number of new advisors, and therefore new revenue from clients, that super OSJs attract come with net new profit for IBDs that otherwise would struggle to meet their targets.

Value-Add

Once we accept that super-OSJs continue to deliver a compelling payout story relative to direct home office affiliation for most advisors, let’s look at the broader value-add issue.

Under the current trajectory of the post-DOL-rule regulatory landscape, it seems very clear that, contrary to the industry doomsayers, super OSJs will continue to add value. And the simple reason why is because most super-OSJs that are strong and growing enjoy their present circumstances because they provide services most IBDs simply can’t provide to advisors on their own.

In fact, beyond payouts-based margin considerations, there are three main value-add benefits that strong and growing super OSJs continue to deliver to advisors, that IBDs continue to experience challenges in replicating on their own for all of their potential recruits:

• Super-OSJs are generally regionally based, providing face-to-face camaraderie among advisors in what can feel like an isolating business. 

• Many super OSJs offer support for administrative, operations, onboarding, marketing and research teams that advisors leverage as part of their own services to clients. 

• The size of a super OSJ grants their advisors better access to senior leadership at the IBD. This accelerates problem solving and minimizes bureaucratic confusion for advisors.

Decision Time

Super OSJs and their advisors should approach future strategy by acknowledging that, to be sure, not all super OSJs will thrive in the future, but the most successful organizations in this space will be those that actively build the best possible infrastructure to create sustained value-add to advisors. Training programs, succession planning and access to third-party vendors at more competitive price points are a good place to start.

At the same time, this is a good time for super-OSJ groups to recognize that mere “recruiting” campaigns fail to produce the best long-term fit in many cases. Super OSJs fixated on adding as many advisors as possible tend to overlook the specific personality, book of business and career goals of each recruit. This could ultimately result in a high churn rate that vexes the IBD and hurts the super OSJ’s broader reputation. A more consultative approach that focuses on compatibility and a smooth onboarding process that sets the advisors up for success could mark the real difference between success and failure in the future for super OSJs.

Is a significant shakeout going to happen in the foreseeable future for super OSJs? 

Yes, but only in the sense that the industry is heading for a broader shakeout for many firms of all business models across the board — not just super OSJs.

The bottom line needs to be about more than the bottom line. Super OSJs, IBDs and any other kind of business in the independent financial advice needs to offer more than a pure margin play for experienced and successful advisors to grow and succeed over the long run.

Jeff Nash is the CEO of BridgeMark Strategies, a strategy consultancy providing advisor transition solutions, executive recruiting and M&A advisory services for the independent financial advice industry.