For financial advisors going independent from wirehouses or switching between firms, offices of supervisory jurisdiction loom large as a potential partner for compliance and an array of other resources. Yet many advisors and industry professionals are unfamiliar with what they are and how they work, according to experts.
This live discussion with veteran industry recruiter Jodie Papike on how to understand and evaluate OSJs as a destination was recorded on Sept. 12. A transcript of the conversation is below.
Tobias Salinger (00:09):
Hi, I am Tobias Salinger. I'm the chief correspondent at Financial Planning. Our parent company is Aris, welcome to the Leaders Forum, where we bring together innovators and senior executives to share their experiences and perspectives on the most pressing topics. The subject of our discussion today is Offices of Supervisory Jurisdiction. We've got a great guest today, Jody Papa is the c e o and Managing partner of Cross Search, that's an independent brokerage advisor and executive placement firm. Welcome to Jody. Thank you so much for joining us.
Jodie Papike (00:49):
Thank you so much for having me.
Tobias Salinger (00:51):
Absolutely. And she spoke with FP for the cover story of our annual I B D elite issue on the largest independent broker dealers in the wealth management industry. The cover story came out yesterday and the full feature is live online today at our website financial planning.com. The title of the cover story is What the Heck is an O SS J. So that's what we're going to be discussing today. Just one quick programming note before we jump in. Please feel free to chime in with questions at any time. I'll be sure to pose some of them to Jody as we go. So why don't we get started with that foundational question for Jody. What is an O S J?
Jodie Papike (01:39):
Thank you so much. Yeah, I love the question. I think it's great because in what I do, which is helping financial advisors figure out what model makes the most sense for them, and in today's environment there are so many options for advisors and the way that they can affiliate with firms the way that they want to be independent, the way that they want to hold themselves out to the public. So I think it's a really good topic and I know for in my daily life and talking to advisors, it's definitely something that needs to be explained a little bit further because the word O S J Super O S J is thrown around a lot in recruiting and a lot of times advisors don't really know where that's coming from or what it really means. And to make it even more confusing, it means different things to different firms.
(02:27):
So if we can back up just a little bit and talk about O S J in general. Back let's say 20 years ago, an O S J was a license that advisors could get a series 24 license. It's only really used in the independent world and it stands for Office of Supervisory jurisdiction. And back in the day, independent firms really mandated that an advisor would get that license if they wanted to be in a remote location and have their own business. And essentially the supervisory license gave them the ability to supervise themselves. It has morphed quite a bit over time and what has happened is advisors realized, and firms did as well, that with that license, not only could they supervise themselves, they could supervise other advisors. So recruiting kind of came about through that process and now there are a lot of ojs out there that recruit to their branch. It's now so less about the supervision as it is other kind of value adds that those advisors provide, the advisors that tuck in underneath their branch. So it's kind high level what it means. There are a lot of different nuances of it and of course different firms kind of present it in a different way to advisors, but that's the foundation.
Tobias Salinger (03:55):
I think you're kind of getting into what makes this concept so complicated for readers, industry professionals, anyone sort of involved in the industry in one way or another. Why is this concept of offices of supervisory jurisdiction so complicated for everyone?
Jodie Papike (04:17):
I think it comes from the fact that every firm has a different idea of the way that they want to recruit, right? So some firms, they don't need you to have a series 24 at all. You affiliate direct with them. Other firms, they have minimum requirements in production that an advisor has to meet coming in the door. I'll give an example just to make it really real. Let's say a firm has a minimum requirement of 250,000. So if you don't hit 250,000 in production when you're joining the firm, they would say, you don't have enough production to join direct, but you could join one of our branches, join an O S J. Now at that point in time, that advisor might not even know what that really means, but they're kind of introduced to that topic. So that's one type of firm. There are, like I kind of mentioned earlier, there are other firms that they don't have that requirement.
(05:12):
They just have a minimum requirement. If you don't hit that minimum, there's really no way for you to affiliate and that part of the conversation would never even come up. There are also other scenarios where it really doesn't matter what a minimum requirement is. The recruiters at the individual firm may really like the model of ojs. They see a lot of value in those models, and they may encourage someone no matter what their production is, to join one of those branches. Because I'll give an example, maybe someone wants to tuck into a certain location, they need office space, or they need help with staffing, and that person may say, I have a perfect branch for you to join in San Diego. That would be perfect for you. So it's really about finding the right fit for someone. And if A O S J provides that value and the fit for them, then they're going to be encouraged to go that direction through the recruiting process.
Tobias Salinger (06:13):
And just one other angle of that complexity, what about these firms that are also hybrid RIAs? Is it possible for a firm to be both a hybrid R I A and an O S J?
Jodie Papike (06:30):
I'm really glad that you brought that up because I was going to mention that. So that's another angle. Yes. To answer your question, absolutely. Someone could be their own R I A still having a broker dealer, therefore a hybrid. They could also be a recruiting O S J and honestly, the R I A could be a recruiting tool that they use. And what I mean by that is let's say a broker dealer clears through N F SS Fidelity's platform, but an advisor comes to the firm saying, I would really like to use Schwab. They may say to that recruit, you should join X Y Z O S J because they have their own R I a and you could clear through Schwab with them. And oh, by the way, we will do all of these other great things for you. So the facts, no, let me just back up for a second because again, this is very complex and I want to make sure that I'm representing all the different aspects of this.
(07:31):
Some firms would allow an O S J if they wanted to set up their own RA and be a hybrid. Others, they don't allow that. All of the advisory business would have to flow through the broker dealers R I A, which is kind of the old school way of things going. But as you know on the R I A side, that's a whole nother topic I know, but on the R I A side, that's evolved as well, and quite a few firms allow outside RIAs as well. So I guess to answer your question, it could be that that's kind of an added value to an O sjs recruiting, but it also could not be allowed at some firms as well.
Tobias Salinger (08:13):
So many different rules and permutations that are involved with this concept of an independent branch, an independent office of supervisory jurisdiction. One of the things that I really liked speaking with you about for this cover story is all of the complex financial relationships among independent advisors, brokerages and o sjs that really determine the nitty gritty of their relationships. So what is an override fee and what are some of the other aspects of that triangular business relationship?
Jodie Papike (08:54):
So I love this topic because I think it's so important and so valuable for advisors to consider, but it's also incredibly complicated and it could mean something different to every single situation. So really the override in a sense, just in its simplest form, is the value that that O S J is providing, whether it just be the supervision or whether it be they're providing office space or they're providing marketing support or an admin assistant. There's again, so many different things that an O S J could provide, and depending on that level of support is typically going to determine that level of override. So for example, if an advisor goes to a branch or joins a branch essentially, and they're only getting the supervisory or the compliance aspect of their business, then it's probably going to be a pretty small override. I've even seen it being a couple percentage points that's on the very, very low side if there's not much being done for that advisor.
(10:01):
But on the other side of the spectrum is the advisor that wants to join an actual physical location and use the staff and complete support of that O S J. And in that type of scenario, it could be that someone is getting around 60 to 70% payout. So that would mean the advisor gets to the 60 to 70, the O SS J is getting a percentage override, and then the firm is getting a percentage of the override on top of that. It all adds up to a hundred percent, but what the advisor needs to know is they're getting somewhere in that range. And now if they're not utilizing a lot of the services and then say it's somewhat around a two to 10% override, that advisor's probably getting somewhere around 80 to a 90% payout, sometimes even higher. The other thing to consider on this topic is that these ojs at most of the firms are receiving very high compensation levels because they have so much volume from the firm that they're with. A lot of them will get the very top line percentage payout available. So what they can do with that high payout is build in a little bit of a spread for themselves and sometimes create the same payout for that advisor that they would get. Joining direct doesn't always work out that way, but a lot of ojs will position their offering in saying that you could join direct and be on your own or you could join us, get the same payout with all the advantages of our offering.
Tobias Salinger (11:44):
I see. Yeah. It comes down to every single percentage point out of that pie of an advisory practices revenue. And just to make sure I'm understanding correctly and that our audience is, so then the O S J is negotiating with the brokerage for its payout rate, and the advisor identifies the value proposition of this particular O S J and says, my ultimate payout is something like 91%. The O SS J is getting a payout of 94%, so that means the override fee is about 3%. Did I explain that right?
Jodie Papike (12:26):
You explained it fantastic. The only thing that I would add is sometimes the recruit or the advisor doesn't know ultimately what the OS J'S compensation is. What's being negotiated is whatever that advisor's payout's going to be. So they're not getting in necessarily to the weeds that far and knowing what percent is going to the broker dealer, what percent is going to the O S J, and therefore, what am I getting? It's just really, here's your offer, you're going to be receiving a 90% payout, and then it's really between the O SS J and the broker dealer where they determine what that split is going to be.
Tobias Salinger (13:05):
Interesting, interesting. And that's where there are some dynamics of one O S J versus another at one particular brokerage and one O SS J versus another at different brokerages. And that layer of secrecy where not everyone knows exactly what the other person is getting out of the equation.
Jodie Papike (13:29):
Lemme complicate it even further, if you don't mind. Please,
Tobias Salinger (13:31):
Please, yes.
Jodie Papike (13:32):
There can be a scenario where an advisor doesn't really know what direction they want to go, but they want to see a lot of options and they could be talking to a firm and request or suggest that they see what would my compensation look like if I joined you direct? And I would like to talk to a couple sjs as well to see what that relationship would look like. So I've actually been in situations and it's very complicated and it can get messy, but been in situations where an advisor is looking at three different offers, three different options, all within the same firm. So for broker dealers, it's incredibly difficult to keep everybody happy and feeling like there's kind of fair play, if you will, in the recruiting process when they're supporting recruiting o sjs.
Tobias Salinger (14:27):
Wow, wow. What are some other types of business that is exchanged? Types of fees that are paid among the three different parties in this relationship
Jodie Papike (14:40):
Relationship? So really for OSJ and their recruiting, it's mostly they're looking at their compensation as a percentage of the payout. Most expenses, there are a couple one-offs, but I'll say in general terms, most of the other compensation is going directly to the broker dealer. So that would be things like the advisors errors and emissions insurance, their technology costs. On the advisory side, there's typically an override, an admin fee or a platform fee for their advisory business where they're getting the ticket charges bundled in to their trading and things like that. But in most cases, the O S J isn't taking any kind of compensation on those expenses. It's really just negotiating the payout.
Tobias Salinger (15:26):
I see. I see. And what about everyone's favorite topic transition assistance, the bonus loans? Who picks those up?
Jodie Papike (15:37):
So that's also complicated.
(15:41):
So I'll say in most cases that transition assistance, those bonuses are coming directly from the firm. They're coming from the broker dealer. There are scenarios though, where the O SS J will participate in that and even match what the firm is providing. Now, what happens in that situation is then that advisor is actually signing a note with the O SS J. It could be five years, it could be six years I've seen up to nine years. Nine years is a very not normal scenario. It's usually as high as seven years. But when you think about that, the advisor really needs to be comfortable with not only the broker dealer that they're joining, but the O S J and group that they're joining. Because if they ever want to leave, they may be tied financially to that group or that person. And they need to really break that down and understand if it was worst case scenario and they did want to leave at some point, how would they unbundle that relationship?
Tobias Salinger (16:50):
And I've seen some litigation that played out over a number of years and involved hundreds of thousands of dollars in legal expenses relating to that question, which is interesting if you think about the independent channel and that being a factor, and I think it's certainly a factor that's brought up by brokerage firms that do not do offices of supervisory jurisdiction or other firms out there who are recruiting against some of these large O sjs. When advisors are thinking about going independent or thinking about changing firms in the independent channel, what are some of the main pros and cons of considering working with an O S J or just using the home office supervision from the corporate headquarters?
Jodie Papike (17:45):
So what I like to do in my process is really start on a foundational level with advisors and really get a good understanding of what an ideal structure looks like for them. If they can get really clear on that, they're going to be much better served once they get out into the marketplace and they're looking at different options. And what I mean by that is there are some great things about ojs, there are a lot of pros, there's a lot of value add out there, but there also are some comms. So I'll get a little bit more specific with what I'm saying here is that if an advisor is fiercely independent and they want to be completely on their own and they don't want another layer between them and the firm, then in O SS J, they may be reluctant to get into that type of relationship.
(18:37):
And just kind of sticking on that topic for a second, the cons could be in joining an O S J that if you ever wanted to leave an O S J, they do have quite a lot of power in that relationship. I spoke earlier a little bit about the compensation levels. At some of the bigger firms, they get higher comp and a lot of times get more attention from the firms because they are so big and the firm wants to keep these OSJ s happy, which makes sense. They don't want them to leave and then have the power to try to recruit advisors away from the firm. So broker dealers work really hard to keep OSJ s happy, but what that means for the individual advisor joining a branch is they need to be really, really clear in the courting phase before they get married, before they join that firm.
(19:29):
What would it look like if I ever wanted to unbundle? Is there a contract binding that advisor to that O S J? Is there any kind of behind the scenes background, financial structure that the advisor would have to pay something back in order to unbundle from that relationship or, I mean, worst case scenario, and I have to bring this up because I have worked with this type of advisor myself, is someone wants to leave an O SS J and the O S J says, no, you can't go direct. I won't allow it. Sometimes emotions ego gets in the way and someone just won't let the advisor stay with the same firm. So then that advisor is left with having to find another firm to go to, and it can get pretty messy. Now, luckily that's not normal, but I always encourage people to think about worst case scenario and walk through the steps of how that relationship would unbundle before you commit. Talk to advisors that are with that O SS J and find out how long have you've been there, what is the working relationship, how much do they support you? And have a really good idea going in because it all sounds fantastic and everything sounds like a positive in that courting phase, but it's not always perfect.
Tobias Salinger (20:55):
Yes, nothing is perfect, but we're all trying to get closer and closer to it each day. But I think these are really important points for advisors to consider. I liked how at the beginning you kind of traced the history of O Sjs. You went back a couple of decades. It's crazy how in this industry, a couple of decades feels like ancient history.
Jodie Papike (21:21):
Couple days does now, right? Yeah.
Tobias Salinger (21:24):
But probably half the firms that were big names then have been swallowed up and consolidated into larger players that are the dominant ones in the industry today. But there is, like we were saying, a lot of variation between firms here. How did this question of OSS and the stature of osj, how did this all become so important to independent brokerages businesses?
Jodie Papike (21:54):
That's a really good question. So when you look back on it, I think it was just a function of ease. It was a function of we need to recruit. It's really competitive. We can only have so many recruiters out in the field helping our business development needs. If an O S J is out there in a different part of the state, or I should say a different part of the country, then the back office of the broker dealer is, and they're willing to put their resources into recruiting, we better back them up so that they can bring us new advisors. And there are firms out there that is their main focus is supporting the O sjs that are out in the field recruiting so that they don't have to pay for internal recruiters and all the expense of running a recruiting department. Their ojs do most of that. So it makes sense in that way that it was really just a function of every firm is trying to figure out the best way to recruit. And some of them decided that that was the best way to do it.
Tobias Salinger (23:00):
Well, in terms of recruiting, what are some of the osj, the successful sjs doing to recruit financial advisors and really provide a value proposition that draws, in some cases several hundreds of advisors to the same firm within a larger brokerage? What are they doing to be successful?
Jodie Papike (23:26):
Well, first of all, they're very aggressive, meaning they've put a lot of resources and time into the process. In this environment that we're in today, it is just way too competitive. And there are too many options for advisors for any firm, whether it's an O S J, an R I a broker dealer. If they don't enough focus on recruiting every single day, they're not going to have the success that they're looking for. It has to be a 24 7 type outlook when it comes to recruiting. So the most successful ojs they have usually a person or a team of people that that's all they do is business development. So that's the first thing. The second thing is they are incredibly clear on what their value proposition is, and they could explain it to an advisor in a couple minutes or less. They're not trying to be everything to everyone, but they're trying to be laser focused on whatever their specific niche and value proposition is.
(24:26):
So to give you some examples, there are ojs that they are a marketing machine and they have more leads than they know what to do with. So their entire pitch to an advisor is, Hey, you're up and coming, or you've hit a plateau in your business. We're going to take you to the next level. We're going to help you grow your business. You're not going to be out there on your own trying to drum up new business. We're going to help do that for you. So that's a huge value add. There's also a lot of advisors that want to be fiercely independent, but not completely on their own. They don't want to feel like they're an island every single day. So they want to join an actual branch, kind of give that comradery and that family feeling, this feeling of intimacy that maybe they're joining a very large broker dealer and feel like a number, but they're joining an O SS J where they feel like they really matter and they're going into the branch.
(25:18):
And it's kind of the old wirehouse feeling where you go in the coffee's brewed and your assistance's there and you feel like you're part of something. There are so many different things that os JS provide. I could go on and on and on. So I do kind of want to end on a happy, positive note that there are wonderful things happening in ojs and a lot to be provided. It's really just important for advisors to do a lot of due diligence and know really what are the pros and what are the cons, and is this the right solution for me and my practice?
Tobias Salinger (25:57):
Yeah, yeah. Well, and since we do have just a couple of minutes, I thought it was important to, there were a couple of other areas that stood out to me in the interviews for the cover story. What about product discounts and technology? Have you seen a lot of OSJ s talking about that to find discounts for various services or even types of investment products and to have the best technology platform possible?
Jodie Papike (26:32):
So really the offering is typically more so about best practices. And because there is potentially a network of advisors that are using technology and have the experience of what is the most up and coming type of technology, it's less about the discounts that come along with choosing technology and more so about here's the tech stack that we use, or here are the money managers that we use, or even here are the models that we use in advisory and looking at, there are so many options when it comes to tech and money managers and the way that an advisor can build their business. So if an O S J comes to the table with, here's the best of the best, that can be a huge value add.
Tobias Salinger (27:21):
I see. Well, I think it's a great note to end on. Everyone. Please give another virtual round of applause to our guest, Jody Papa of Cross Search. And if you haven't already, don't forget to check financial-planning.com for the I B D Elite feature in all of FPS Wealth Management news. Stay tuned for the October one print issue where the I B D Elite will have the cover, and we'll have all of those rankings and data that the firm's provided right there for every independent advisor and future independent advisor to check out and make their own decision about what's best for their clients and their teams and their practices. And if you're there, if you're on the website, why don't you just go ahead and subscribe while you're there. And for financial planning, I'm Tobias Salinger. Thanks again to our panelists and everyone have a great afternoon. I.
