Get Ready to be Squeezed by Your Broker/Dealer
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Considering the recent market activity, the squeeze is coming.
Are advisors changing firms to avoid the squeeze making rational decisions?
I’ve been asked of late whether changing firms or affiliation models is wise during such conditions.
Before I explain the squeeze, I’ll begin with a pet peeve about how this situation is frequently portrayed.
There are firms (primarily independent BDs) pointing out that during the last downturn in ’08-’09, they had record advisor recruiting. That implies a choppy market is not only a good time to be making a move, it’s when they’ve experienced the largest inflow of advisors.
I was at a large independent broker/dealer during that period and was in the trenches of the firm’s business development efforts. As with many of its peers, the firm I was at experienced record recruiting during that stretch.
My pet peeve is how some firms are now touting that track record as a parallel to today’s conditions.
In ’08-’09, advisors moved to independence for the same reasons they consider it now – better economics, flexibility, etc. However, an added variable in play was inconspicuously absent from today’s talking points – a variable that amplified results to record territory.
During the ’08-’09 downturn, there was fear of the unthinkable. Firms seemingly built from granite were suddenly teetering on the brink of insolvency. Many firms had to be rescued by better capitalized suiters, who sometimes became cause for concern.
There was the understandable desire of advisors to get off a potentially sinking ship before it met a Titanic fate. Thus, there was a record exodus of advisors to other firms.
The well-capitalized, well-run firms that received this migration deserve credit for being an attractive lifeboat. However, to remind advisors of record results during that period without acknowledging the additional forces at play is disingenuous.
On to the coming squeeze.
Should you be making a move in today’s choppy market? I’ll answer that by asking what happens if you don’t make a move.
Thankfully, it does not appear there are any firms (yet?) that are shouting, “Iceberg ahead!” Perhaps staying at your existing firm won’t be that bad.
If you are in a traditional W-2 broker/dealer model, your firm handles the profit and loss (P&L) of your branch. Put differently, your firm is not just responsible for it; your firm gets to dictate it.
The current down market is only a few months old. Firms are not making knee-jerk reactions to the volatility. Perhaps the market will come back up, and no meaningful changes will be needed.
Consider if that doesn’t occur. Consider if the market declines further – or the market flatlines as-is for the foreseeable future.
At some point, your firm’s shareholders will yearn for the good ole days before the downturn. They will not idly sit by and accept lower profit margins, revenues, and income.
While supportive of avoiding knee-jerk reactions in the short term, a return to the mean will be demanded.
What does this mean for you?
A squeeze is coming.
Management must make up for lost revenues. More cross-selling, anyone?
Management will need to lower expenses. It might come in payout changes, expanded sharing of sales assistants, less generous benefits, reduction in home office support, etc.
One way or another, historical profits will need to be reattained.
To be fair, broker/dealers have additional tailwinds to help soften the pain. Increased interest rates will lead to increased revenue on cash and lending balances. But that lifesaver will not shield advisors from the coming squeeze.
If you have your own independent firm (i.e., RIA), you are not immune to the macro effects of the downturn either.
You will be squeezed as well.
The difference, as an independent practitioner, is that you decide how to navigate the changing economics. You decide what adjustments to make. You decide what margins are acceptable.
If change is inevitable, would you rather manage it yourself, or rely on your broker/dealer to do it for you?
No amount of management word salad can negate the fact that the shareholder has the final say. Their interests are not always aligned with yours.
Is now a good time to transition your practice to independence? Do you believe someone else is better tasked with deciding your fate than you are?
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.