Survival of the Fittest – Evaluating the Broker-Dealer Market and the New Financial Services Frontier

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The financial services industry is facing a contraction within itself based on both an economic and systemic evolution that will necessarily change how business is done. As with every evolution, it is the smallest and weakest which get eliminated, which is certainly a harbinger of things to come in the broker-dealer space. 

Take first the economic evolution of financial services. The current crisis has spun the market into a carnival ride of chaos. Both the broker-dealer, advisor, and client suffer in equal measure in the current market scenario as market volatility impacts client portfolios, advisor compensation, and broker-dealer rep revenue simultaneously. Further, when considering the broker-dealer, the zero interest rate policies are hitting their revenue streams with a double negative as they are no longer in a position to make money on money market funds. 

Then there is the systemic evolution. This goes to the heart of how the financial services industry, in totality, needs to operate now. Gone are times when the client can just be a name in a CRM. Client-centric outreach is imperative, a subject I cover in both the “Interview Series” and “Talk to Me” episodes of my podcast, ‘Advisor Talk With Frank LaRosa‘. Advisors need to be on their phones talking to each and every customer about their individual situation and the broker-dealers they represent need to be investing in the scalable resources an advisor needs to carry out a more dynamic and client-focused approach, among them internal staffing support, technology assistance, marketing capacity, and integrated asset management platforms 

Thus, the fall out of these economic and systemic shifts in the broker-dealer market can easily be deduced. Smaller broker-dealers will be unable to handle the ongoing reduction in revenue. When revenues decrease, operational spend decreases and the ability of the broker-dealer to adequately support their advisor begins to deteriorate and trickles down to the advisor-client relationship, which is ultimately what suffers most. In the end, as with any evolution, the smaller broker-dealers, unable to withstand the changes we are experiencing, will be washed away – a reality which is important for their advisors to be evaluating and considering now as they ponder what is the next right move for their practice and their clients. 

It can be assured that as smaller broker-dealers get weeded out of the market, mergers as a survival tool mechanism will become a stand part of their playbook. This story is nothing new and one we were already seeing play-out in late 2019 as the largest broker-dealers were seemingly merger-crazed in order to create behemoth-sized industry influence, something I evaluate in the podcast episode “Merger Monopoly“. The impact of broker-dealer mergers on advisors is a very real one as they have the potential to result in changes as fundamental changes as how advisors are compensated and the construct by which advisors service their clients now and grow their own practices in the future.

It behooves every financial advisor to take a hard look at how their broker-dealer is fairing in the current market – not the market we hope we still had but the very real and very hard market we face today. Does your broker-dealer have the revenue and operational capacity to withstand the current market turmoil? Do you have everything you need from a support perspective to conduct business in the conscious and customer-focused manner required given the current situation? Is your gut telling you your broker-dealer partner is not in a position to survive this evolution? If you answer less than positively to any of these questions, then it is time to consider your options.

Advisors should not fall into the trap of letting the current market situation scare them away from making the next right move for their practice. If your broker-dealer partner is  not in a position during the crisis to allow you to maintain your practice, they most certainly will not be in a position to help you grow your practice after the crisis passes. Further, if your affiliation is with a smaller broker-dealer, can you even be assured they will still be in the game? Taking control of your own fate is the hallmark of every good business  professional, and this is certainly true for advisors. 

Decide now whether a new firm partner would be a better fit. Or, if you are an older advisor, evaluate your succession strategy. Consider what path will lead you to the most successful monetization of your book of business. It may be through an existing program with your firm partner. Or, you may want to explore the use of a unique and potentially lucrative strategy called dual-monetization(TM) to capitalize on both transition and succession bonuses, a subject I evaluate in the Industry Perspectives article “Line of Succession“. Whatever you choose to do, what is most important is that you do choose and determine for yourself what is best for you, your practice, and your customer.

Every evolution in history has brought both negatives and positives. While in the midst of the change itself it is hard to see through to the positives that have yet to materialize, but they will most certainly come. Today, each financial advisor should consider themselves a pioneer of a new frontier as they evaluate not just the market landscape, but the relational landscape they have with their broker-dealer. Thus the question becomes for every advisor, when the dust settles and the new landscape is certain – where do you want to be?

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