Meeting in Chicago on Aug. 7, executives from the four top broker-dealers traded views on everything from succession planning to fees, commissions, regulation, RIA issues and charitable giving. A significantly trimmed-down version of the animated dialogue follows. Their insights on other topics — such as technology trends and cybersecurity — and lengthier discussions from the meeting can be found online at ThinkAdvisor.com/tag/2017-broker-dealers-of-the-year.
Janet Levaux, Investment Advisor: What highly challenging issues are your firms and your advisors facing today?
Lon Dolber, American Portfolios Financial Services: We have a number of colleagues who have their own RIAs. When they find themselves being questioned by a regulator, maybe the SEC, and they need help and they need to get data, [it's a challenge]. It may not even be an outside RIA. It might be literally someone that has an arbitration. That's what we're really there for. They know they're not going it alone in that situation.
Amy Webber, Cambridge Investment Research: I would answer this question as it relates to … succession and acquisitions. We really hit that issue hard starting in 2010. … Many [advisors] believe they will live forever and/or leave while they're still at their desks. It isn't an easy issue to talk about and to tackle.
It starts by simply getting them to think about it and talk about it. We have an emergency plan that we've implemented where we will buy the practice — which is not ideal. We actually want a long-term plan, but at least there's something.
Over a third of our advisors are solos and ensembles. … It just becomes really difficult culturally to find someone that will take care of their clients as well as they did.
The biggest obstacle is valuations. Part of our consulting [work] is really helping the buyer and the seller think about the fact that on every end of a succession is an acquisition. What is a challenge for one becomes a huge opportunity for another. We have spent a lot of time marrying those two [dynamics] and helping them mitigate through the valuation questions and the difficult scenarios that may happen in that environment.
The next big obstacle is funding. We've funded over $20 million in loans for succession and acquisition since inception. I think that's just an industry issue that's going to continue.
John Burmeister, Lion Street Financial: Many of our owners have corporations as clients. We have a top-five benefits firm that specializes in corporate-owned life insurance and plan administration. We have taken what this firm has done and white-labeled it, so all of our other owners can tap into the resources that the firm has.
Just a couple weeks ago, I had a firm on the East Coast introduce this firm to one of their corporate clients and offer solutions that he wouldn't have been able to [find] on his own. It's a very specialized marketplace.
Ryan Diachok, Geneos Wealth Management: Succession and the next generation of advisors in our industry is probably the biggest macro challenge that we all face. The smaller the firm, you maybe don't have as many pockets of advisors to be able to marry together. Frankly, a lot of times that doesn't work.
We've been encouraging our advisors to really start thinking earlier and earlier about that junior advisor setup.
The lack of training in this industry is a real problem. The reality is the training is now at the advisor level. The training is for the seasoned independent advisors.
If you put that aside for a minute, just how do we take this industry out for the next 20 years? That's a problem. We need new advisors [flowing] into our industry.
Partnerships don't always work. As a broker-dealer, you have to sometimes get in the middle of helping dissolve a partnership. In the past 12 months, we had a long-term partnership with two very successful advisors very amicably decide to part ways because the long-term transition plan was not going to be each other. It created a pretty unique set of challenges.
They had an outside RIA that they jointly owned and managed. Divesting the partnership and the RIA and coming under the corporate RIA was a much better solution for them. … We were able to help [them] do that transition smoothly, amicably between the two of them and, from a high-level broker-dealer perspective, we were able to save the revenue and the asset base.
Webber: That's a great point because our retention of assets has run about 97%, whereas the retention of advisors is lower than that at 90%. That tells me that succession and acquisition is working, with retention of assets potentially being the key that we watch.
We also had a divorce occur, but it was with one of our largest offices. We wanted to utilize our expertise and funding to allow certain mechanics of the arrangement to make sense. Now we have two very successful $15 million branches instead of one with $30 million. But everybody was happy in the end and … came to the table in a very professional way because it was a transaction that we were all invested in.
Dolber: If you really dove deep at most independents, you would find that when it comes to succession planning, they may have programs, but it's a tough nut to crack. It may be more important to look at continuity planning. This might be the more important issue because you've got to maintain the integrity of the underlying accounts in the end. You have clients, and you're responsible for them and their well-being.
Webber: The complexity, I suppose, is who serves them in the interim. I don't know if your continuity-planning program actually keeps the assets within the home office for long. We have a SWAT team. Of course, we'll send the SWAT team out; not ideal because our ultimate goal is to then figure out … how to get the assets somewhere else to be served.
Dolber: To do a succession plan, typically, unless the company does it for you, you've got to find someone that you want to partner with. Partnerships are just tough.
Diachok: The industry as a whole recognizes [this], and there are avenues to get these deals done, but they are challenging.
Dolber: You know who does a good job of it? The P&C [property & casualty] firms. They have a thing called extended earnings. They don't wait for advisors to make deals with each other. They buy the book, they give the book to another advisor and they have an arrangement. They extend the earnings to the advisor who's leaving or retiring or, if the advisor has passed away, to the spouse. They take over. They take the book. They manage it, and they do a very good job of doing it.
Webber: Our super OSJs do that a lot, too.
Diachok: It's those isolated silos. Our business, our independent nature and the independent nature of the advisors just make [for] … legacy issues. A lot of advisors don't want to just hand it off to somebody. They want it to go to somebody that they know and trust. There's ego issues, and, frankly, the hardest part of any of these transactions is getting that price to one that they both agree on.
Burmeister: If you know that you're looking for somebody who has a succession plan [then] you can go out and recruit someone into your firm to help with that succession planning.
Webber: It depends. Usually the broker-dealer that wins is the broker-dealer that the retiring advisor is at because the retiring advisor does not want to move as the last option. It can be a double-edged sword.
It is a recruiting opportunity. If you [have] younger advisors hungry for the business, we win them — but we have to work a lot harder to convince the retiring advisor that it's a good idea.
Diachok: We had an advisor unexpectedly die about a year ago and, classic story, had no [succession] plan. We sent in the SWAT team. With a local advisor who had worked with this gentleman before, we put together an after-the-fact transition plan so that the clients had people that they knew … to step right in. But those are also things that we have really started to encourage our advisors to have — at the very least, that contingency plan in place because you hear of too many of those examples.
The DOL Fiduciary Rule
Levaux: We don't exactly know what will happen with the Department of Labor's new fiduciary rule, but in general, what's your take on the rule? Is there more uncertainty or less? (On Aug. 9, two days after this discussion, the DOL requested an 18-month delay of the fiduciary rule's Jan. 1 applicability date.)
Diachok: We think as a firm that there will be additional delays to the full implementation date. Geneos is in favor of a fiduciary standard. The problem with this Department of Labor rule is you can put — as we probably will do for the next 45 minutes — 20 securities attorneys or 20 broker-dealer executives into a room, and you'll get probably 20 different interpretations.
Webber: I agree with that. That said, I don't believe we are un-ringing the bell. What we've found … is that advisors are going through what we refer to as the five stages of grief, but when they come out the other end … of those five stages, it's not so bad. There is a lot of benefit potentially to the transparency part of what [the rule] is bringing to the table in terms of … the total internal expenses of a model portfolio.
What I have seen is, in the end, either clients are coming out the same or they are paying slightly more. It's just that revenue is moving into different pockets.
As the internal expense issue is spotlighted, the only thing that's going to happen is the custodians, the product manufacturers and the solutions firms like ours are going to be adjusting other pricing to offset that and make it more transparent.
Dolber: I laid out what I thought we had to do [to comply with the rule], and it started with transparency. For us, it was easier because all our technology is proprietary. I don't use anybody else's technology. We are prepared, come Jan. 1, to do exactly what the rule says. The advisors have to understand there is going to be change. They need to embrace this change or be a victim of the change.
Webber: One of the most productive things we've found, honestly, is boots on the ground. Last month, we had about 10 of our associates — the experts in this environment — go out and do face-to-face roadshows across the country. We did four in each region.
Those advisors that showed up came in freaking out — and that's a technical term — but by the time they left, a day and a half later, they had calmed down. They accepted what you are describing, Lon, which is that this is an opportunity. For those that survive, it is a huge opportunity. That said, they have to make behavioral and psychological shifts to the way that they think about this.
Dolber: Are [advisors] prepared to walk away from a revenue source? There's a book called "The Third Way" written by [AOL co-founder Steve] Case. They had a subscription-based model. It was generally, what, $25 million a month? How do you walk away from that?
Advisors are thinking, "How do I walk away from big, fat commissions?" We're facing a different model, and we need to help our advisors see that and start making the changes they need to make to be relevant going forward so they can survive. I'm hoping some of that layers into DOL. I definitely feel it's the wrong rule, the wrong remedy and the wrong regulator.
Diachok: If you look at how some of the larger networks, and maybe private equity firms, [have prepared] for DOL, I think some have gone four steps further than the rule even takes it.
Webber: Don't you think they are using this as an excuse to make decisions that they would have made anyway?
Diachok: I think there is a lot of that going on. Geneos took a measured approach as this thing evolved, and come Jan. 1 or whenever that final applicability date is, we're going to comply with the rule. We're going to take the least disruptive approach as possible for our advisors.
Burmeister: We're doing exactly the same thing. Where I differ from most of the people in this room is we have no proprietary technology. It's actually been more of a minimal expense because we haven't had to invest in any proprietary technology. We had to operationalize the rule and put the right forms and the right policies in place, but to us, it hasn't been that expensive.
Webber: Wish I could say the same — $20 million later …
Dolber: A big part of our budget is systems technology.
Webber: We would have spent that $20 million anyway on tech, it's just disturbing that we're spending a fair amount of it [to comply with the rule]. It is distracting us from other productive innovation, in my opinion.
Diachok: One thing I find interesting is some of the technology companies jumped on DOL as a chance to get huge contracts with some of the larger BDs for, let's call it "financial planning software lite," and they renamed it a DOL tool, which causes all kinds of other conflicts.
In some regards, firms are trying to use technology to get every piece of a client's financial picture [in order] to comply [with the best-interest regulation]; that creates a whole other set of potential pitfalls if you're rolling it out across every client.
Levaux: How are you adjusting to DOL and any possible lost revenue and/or changes to investment products, fees, etc.?
