SAN ANTONIO – Independent broker-dealers face recruiting and retention challenges, many of which center on hybrid or dually registered RIAs edging toward greater autonomy. A pair of sessions at the FSI OneVoice conference focused on these issues.
"In the minds of advisors, they are truly independent only when they grow up and graduate to be an RIA," said Philip Palaveev, CEO of The Ensemble Practice, noting that the independent brokers had already "lost the PR battle with RIAs."
Here are some key points the panelists made:
1. The shift toward RIAs isn't going anywhere.
There are three things driving the shift, said Sanjiv Mirchandani, president of Fidelity's National Financial, who called it a "megatrend": Control, compensation and compliance.
Some advisors are choosing the RIA model because of a philosophical preference, he added. "But there is a perception that the SEC is a kinder, gentler regulator," he said – so, for some advisors, shifting to the RIA model is essentially "regulatory arbitrage." In a separate panel, however, Matt Lynch -- managing principal of consulting firm Strategy & Resources -- downplayed the role of compliance as advisors make the switch.
"It's not a regulatory issue," he said. "It is a complex issue that has to do with perception as much as economics ... It has to do with dreams and desires of advisors."
2. Hybrid RIAs are a challenge for IBDs.
And not every firm is getting it right, argued Tom Daley, CEO of the Advisor Center, a site that connects advisors with industry recruiters. "I think there are ways that B-Ds can enhance the hybrid offering," he said, citing one example of an advisor team working with his firm. "We have a large team evaluating moving out of an insurance B-D," he explained. "They're not looking to go to another B-D that will let them clear [trades] through, say, TD [Ameritrade] -- that's too big a stretch. But they want an open architecture ... that will let them open their own RIA."
3. Asset custody is a key issue.
There are countless variations on the hybrid model, said Palaveev -- with some advisors custodying assets at their own B-D, some using outside custodians and some using their RIA to create plans but not to manage assets. But there's one key question for B-D firms to focus on, he said: "Where are the assets?"
"The fork in the road is economics," he added. "If they're within the scope of the broker-dealer, you have the opportunity to participate in the economics of those assets."
Raymond James Financial Services President Scott Curtis noted during his panel that all advisors registered with either RJFS or Raymond James & Associates must custody assets within Raymond James -- something he characterized as a supervision issue. But other hybrid RIAs are welcome, he noted -- "provided your B-D registration isn't with Raymond James."
4. Corporate RIAs may offer a way station for advisors.
Curtis also highlighted one trend he said had emerged in the past two years: managers coming out of employee-model firms and establishing a firm to recruit other advisors. "They've had their expenses covered, their office managed -- to become an independent RIA, having to manage all that, is a bridge too far."
These business owners "find more comfort going with a corporate RIA," Curtis noted. Later, once they're established, "we'll help them if they want to set up their own RIA."
5. Added value can help set IBDs apart.
Noting the amount of outsourcing RIAs do, both Lynch and Palaveev suggested independent B-Ds have an opportunity to refocus conversations with advisors around the service the IBD provides.
"A large RIA could be spending as much as $100,000, $200,000 on technology," Palaveev said. "If you could replace that cost with centralized service, that has value."
Lynch went even further to highlight a potential weak spot for the IBDs. "If you're not helping them grow their business -- if you're not providing coaching, providing tools, constantly improving -- they're going to look elsewhere."
The real competition may not be a vague model but some very specific custodians, Palaveev suggested. "Most B-Ds don't have a relationship-management function," Palaveev said. "That's different from the way the custodians manage their business."
6. IBDs are emphasizing internal recruiters.
Raymond James, for example, has been expanding its own internal team, Curtis noted. "If 100% of our recruiting came from third-party recruiters, our costs would go way up. A high percentage [of new advisors] comes through our internal group."
Daley noted the increased number of staff recruiters at several IBDS but also highlighted the growing role of super-OSJs creating tuck-in opportunities. "It's a dual strategy," he said.
7. Women and millennials still pose a recruiting challenge.
Asked about the difficulty in finding women and millennials to recruit, Curtis replied, "There just aren't enough of them." He joked that, at dinner the night before, he recruited the waitstaff "because they were so sales-oriented."
The most difficult part, Mirchandani added, is giving new advisors a way to get started. "The hardest part of the business is getting the first 50 clients," he said. And the average millennial, he said, believes "that you're going to give them a fat phonebook and say, 'Go at it.'” "The reality is [that] we have to make it easier for them to build that first book of business," Mirchandani added, offering a few suggestions: "smaller accounts that can be referred, teaming opportunities … [and] practices focused on planning and guidance."
8. Advisor acquisition won't be enough to sustain the IBDs.
We are in a consolidating environment, noted Mirchandani. "And we all need to think about: What's our strategy?" Even consolidators who are willing to outlay capital to buy up more B-D firms "need an organic-growth strategy," he added. "You need a solid program around practice management and productivity." B-Ds also need to be "incredibly selective" about bringing on new advisory practices, he argued, rather than focusing on growth for growth's sake. Make sure you're bringing on the right advisors, he said: "You can drive a lot of organic growth that way."
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