Over the course of the last year, fraudulent alternative investments have brought down not only small broker-dealers but also midsized firms such as QA3. With press coverage skewed in their favor, larger broker-dealers continue to chant the mantra of "scale gives advisors an advantage."
As a recruiting firm, we've found that midsized firms can be somewhat of a sweet spot in the industry—large enough to be financially viable, but not so large that they become a cookie cutter platform saddled with cumbersome bureaucracy. With the pendulum swinging so far in the direction of larger broker-dealers, I thought it only fair to give the medium-sized firms an opportunity to have the spotlight shine on their value proposition.
Flexibility is a Major Differentiator
FINRA categorizes midsized firms as those having between 150 and 500 reps. While this is one measure, a more reliable indicator is gross dealer concession (GDC) in the neighborhood of $15 million to $50 million.
One such midsized firm, Geneos Wealth Management of Denver, has 250 reps. Geneos believes that a major differentiator for midsized firms is flexibility. Dean Rager, senior vice president for Geneos, is adamant that smaller firms have greater ability to deal with the advisor as an individual versus just a member of a cabal. Says Rager, "This flexibility in dealing with the individual breeds trust, where in a large corporate environment they indeed look at you as if you are trying to 'overthrow' the current regime if you do not conform. In practical terms, it means the right firm, deploying the right technology will be able to take the lead in servicing the advisor, the way the advisor wants to be serviced."
Midsized Firms Give Independents a Voice
Rager continued, "Larger, more experienced advisors run efficient independent businesses and are looking for a broker-dealer that can provide a meaningful relationship with the home office staff and senior officers; high-end technology to allow their business to run efficiently; and balanced compliance support to keep them in line with all the regulations while letting them run their business at competitive payouts. A smaller firm that can provide all of this will generally be more attractive to the successful independent advisor as they feel they truly have a voice and know they have people standing behind them to solve problems as they arise."
Setting a High Bar Brings Compliance Advantages
Prospera Financial, the smallest of the firms we interviewed with 110 advisors based out of Dallas, sets a high bar for their reps' production. An advisor needs to do at least $300,000 of GDC to join Prospera, which puts their overall GDC well into the midsized broker-dealer level. It's the high bar that brings compliance advantages, explains Tim Edwards, senior vice president of Prospera, "We don't have to manage to the lowest denominator because we don't have a lower denominator."
Edwards' point rings true. During the last three years, our recruiting firm has seen a growing tendency for larger firms to manage to the lowest denominator, creating an environment that is often 60% company policy and 40% regulatory requirements. They often experience:
- Difficulty in marketing themselves
- Excessive paperwork filled with difficult-to-understand legalese
- Restrictive on adding product
- Slow compliance approvals that disallow much of the content
- Compliance audit excesses, e.g., go through your spouse's checkbook
This "lowest denominator" management style often evolves from paying out large arbitration fines. In response to this, the company creates policies to prevent future arbitrations—many suffer for the sins of a few!
