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Brokers breaking away from their current firms to join smaller practices or branching out on their own is becoming a popular trend. As a broker, once you have made a final decision to either change firms or go independent, you need to carefully review the impact your move will have on your current practice and on your book of business. While your excitement can drive you to move forward quickly, be conscious of the need for due diligence and consider the impact of the change on your clients, your career and your compensation.
Financial professionals transitioning their practice typically have three concerns:
- Client retention – How many clients will move with me? Will I lose any top clients?
- Asset retention – Are all of my assets portable to the new firm?
- Revenue stream resumption – How quickly will the assets be moved over and settled?
The Protocol
For many firms, the first two of these are governed by the Protocol for Broker Recruiting, which was created by three major wirehouses to address clients’ privacy and interests when their financial advisors move between firms. Since its 2005 introduction, over 1,300 financial services firms have adopted the Protocol to address broker moves.
The Protocol states that if the departing representative, and the new firm, follow the Protocol, the departing broker and the new firm do not have any monetary liability to the representative’s former firm. In exchange, the broker “may take only the following account information: client name, address, phone number, email address, and account title of the clients that they serviced while at the firm” and is prohibited from taking any other documents or information. Furthermore, the departing broker cannot solicit former clients until after joining the new firm.
Determining whether the firm you are leaving and the firm to which you are going are governed by the Protocol is a critical first step. Lists of signature firms can be found online; getting that information will help you plan for transitioning clients and their accounts without creating legal and financial liabilities.
Client retention
The news that Pacific Investment Management Co. clients withdrew $23.5 billion after bond manager Bill Gross left in 2014 created fantasies for movers and nightmares for firms about client retention. Research shows that clients are generally more loyal to their broker than to the broker’s firm. As a result, the firms for which brokers work often face a challenge when employees leave. Conversely, a broker who was valued by his or her clients has an advantage in a battle for client retention.
The overall client retention rates for broker in 2013 was 94%. A survey performed by Spectrum Group, which looked at people who changed advisors, reported that 60% of high- and ultra-high-net worth respondents switched advisors at some point, while only half of the less wealthy did. So, while client/advisor loyalty is strong, higher-income clients typically need more and are more difficult to retain.
There are two primary factors that drive client retention: length of time with the broker and amount of assets. PriceMetrix reported that clients who have been with a financial advisor for at least five years would generally remain for the long term, as would older clients who presumably are loyal to you, not your firm.
Asset retention
Most brokers who develop excellent working relationships with their clients have moved the overwhelming majority of their assets within the first two months of moving, and nearly 100% by the ninth month. On average, only 20% of assets remain at the old firm, sometimes because they are illiquid or tied to loans.
As you plan your move, work with your new firm to determine if any of your old accounts are currently immovable due to the products they are using. Your new firm likely uncovered this information during its due-diligence process. But, if you are using any product or product lines of which you are unsure of its continued use, ask. You do not want to move firms only to find out that you cannot use a vendor critical to your practice.
Revenue stream resumption
Moving client accounts takes time, paperwork and patience. For clients who move a 401(k) or other retirement account to your brokerage, it may take at least one to two months to get the assets moved and settled. Unfortunately, the same can be true for moving between brokerages, particularly for those going to an independent broker-dealer without an experienced support system. As noted above, most clients who are going to move with you will do so within the first two months. Assume revenue streams will take one to two months longer to resume.
While the idea of moving firms to a smaller practice or branching out to go independent in order to gain greater freedom sounds appealing, there are a lot of considerations to keep in mind. Make sure to review your firm’s protocol first and foremost before switching your firm over. Discovering your protocol will then determine on whether your clients, assets and revenue stream will follow.
Trent Gain is the chief operating officer of The Independent Grid , a turn-key, advisor-centric platform that provides back office operational, marketing and compliance solutions to financial advisors who desire a true, independent platform. Follow Trent on Twitter at @theindgrid.
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