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What Broker/Dealers Need to Do

What do I think broker/dealers should be doing? Let me tell you.

David J. Drucker, 12/20/2007

Pershing, which we all know from its hiring of Mark Tibergien as CEO of Pershing Advisor Solutions wants to increase its presence and influence with independent advisors, asked me to participate in their study--a study to find out what they (and presumably all broker/dealers) should be doing.

There are a number of ways to answer that question, but if you have the right compass, you'll never forget what the answer should be: Broker/dealers need to do what's good for the end client. And the end client may not know exactly what he wants, but he's certainly much better informed than the client of 20 years ago.

Through education from organizations like the National Association of Personal Financial Advisors and journalists like Jane Bryant Quinn, who has over the years authored her fair share of "how to select a financial advisor" articles, consumers are now inclined to ask for the following from their advisors:

1) Service paid for by fees
2) Willingness to accept a fiduciary obligation
3) Credentials earned from substantive courses of study
4) An appropriate blend of strategic and product-based solutions.

If advisors can maximize profits by giving clients these things, then broker/dealers can, in turn, maximize their profits by helping advisors do so. The problem is defining profitability. Wirehouses, from the standpoint of the end-client, have long sought short term profitability as evidenced by products designed to capture large, up-front commissions with little regard to establishing ongoing, advisory-based relationships with clients. As brokers have begun migrating away from the wirehouse model to the independent broker/dealer channel, the broker/dealers either continue to encourage this myopic approach, earning the bulk of their revenues from commissions, or they help these reps unlearn the short-term thinking taught by their former employers, encouraging fee-based revenues.

The most successful independent broker/dealers, therefore, are the ones whose fee-based revenues are growing as their reps create their own RIAs, learn true business management skills (which their independent broker/dealers assist them in doing through a variety of training and networking opportunities), and move away from the product-sales business model to a professional, advice-based business model more in concert with consumers' needs and desires. This is a long-term view of profitability that stresses a continuing income stream from a combination of advice and suitable, fairly-priced investment and insurance vehicles along with a relationship nurtured by the rep through his/her continuous communication with and service to the client.

Although this prescription may sound theoretical, top broker/dealers are already demonstrating its reality. Financial Planning magazine's annual ranking of broker-dealers for 2007 showed:

 * Securities America rose from the number six to the number four position during 2006;
 * Cambridge Investment Research climbed 21 positions since 2003 to number 18;
 * Cambridge and Commonwealth Financial Network (ranked seventh) are both at or close to deriving more than 50% of their revenues from fees.

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