by Brad Shepherd — I’ve spent nearly 25 years working with independent financial advisors. The work our industry does to help people, families, and communities is astounding — all driven by independent financial advisors and their commitment to the relationships they serve. However, when I take a step back and look at the relationship between advisors and their broker-dealers, it’s clear that the relationship is currently flawed and needs to move in a new direction.
The Need for Real Relationships
In order to effectively serve as an independent advisor, one must intimately understand the needs of each and every client. It is our belief that so must a broker-dealer understand the needs of each advisor they are blessed to serve and not just an understanding of production, marketing, operations, and compliance. Rather, there should be a focus on developing a real relationship, anchored on who the independent financial advisor is, their matters of importance, and their dream for their enterprise. It is a universal rule: one can only truly serve another when the proper time is taken to deeply understand the most important needs of that individual.
Unfortunately, few broker-dealers have this as a requirement in their relationships with independent financial advisors. The numbers don’t lie. This deficiency in relationship helps to explain why thousands of independent financial advisors seek a new broker-dealer relationship each year. Why do so many independent financial advisors feel the need to move away from their broker-dealer? Why do so many leave the ‘business partner’ so many broker-dealers purport to be? And why do frustration and wariness run rampant through traditional independent broker-dealers?
A New Standard
The answers to these questions reside in the fact that our industry is focused on the wrong outcomes and defines success by many of the wrong measurements. This, in turn, forces advisors to do the same. Our industry celebrates, rewards, and awards advisors based on their gross dealer concession, their assets under management, and the profit they deliver to their broker-dealer. I humbly submit that the majority of independent broker-dealers within our industry are unable to truly build a trusted relationship with an advisor.
Our industry makes decisions that focus on how to increase thebroker-dealer’smargins by 1/10th of one percent without asking “for what purpose?” or “at who’s cost?” This problem or conflict is evident each time a large “economies of scale” independent broker-dealer gobbles up a smaller firm or sells to private equity, promoting that the strategy is good for all parties involved. In reality, it is obvious the acquisition is fueled by a desire to obtain additional volume, margin, and profitability for the broker-dealer…not build or enhance a relationship with theindependent financial advisor. What, then, is left in the wake of this blind grab for growth? The evidence suggests that it is quality advisors and the clients that they serve who are left behind.
Competing Based on Mission and Values
The standard needs to change.The better standard is that the advisor is a means to the client’s end, and the broker-dealer is the means to the advisor’s end, not the other way around. I am proud to say that this is the standard we uphold at Founders Financial. Our industry should promote to advisors that true “success” lies in achieving the goals and dreams of their clients under their leadership. This is where our true calling lies as independent financial advisors. Fulfillment of this calling certainly yields “success” for both the advisor and their client, which then feeds upon itself…ultimately providing more reward than any independent financial advisor will ever truly need.
Further evidence of the industry’s misguided approach can be seen in the way broker-dealers compete based on nothing more than a price or a platform. They try to differentiate themselves by offering up their “unique” toolbox as a means to help an advisor manage their business more effectively. On top of that, many broker-dealers provide “capital” to move an advisor’s book of business because they see their transition as nothing more than a financial exchange. Period!
Let’s compete based on mission! Let’s compete based on our values proposition! Let’s compete based on the true impact we have on the lives of the independent financial advisors we are blessed to serve, as evidenced by their testimony.
Conclusion
The state of the independent advisor and broker-dealer relationship needs improvement. The focus should be on building real relationships, promoting a new standard, and competing based on mission and values. The industry needs to shift its focus from traditional measures of production and profitability to achieving the goals and dreams of its clients. Let’s work together to make the independent financial advisor and broker-dealer relationship truly valuable and effective.
If you’re interested in learning more about our perspective, we encourage you to download our whitepaper, “As Good As It Gets”. This whitepaper delves deeper into the flaws in the current independent advisor and broker-dealer relationship and offers solutions for improvement.Download the “As Good As It Gets” whitepaper today!
Copyright © 2023 Founders Financial. Member FINRA/SIPC and Registered Investment Adviser. All Rights Reserved.
FAQs
Independent broker-dealers function as full-service brokerage firms but remain free from the constraints and demands of a large Wall Street company. RIAs are independent fiduciaries who may associate with several broker-dealers, selling a range of products and services.
What is the difference between a financial advisor and a broker-dealer? ›
An investment adviser cannot sell securities but acts more like a consultant, giving advice on what securities a person should invest in. In addition, a broker-dealer/agent is typically paid a commission based on each buy or sell transaction for a security.
What are the disadvantages of an independent financial advisor? ›
Independent financial advisors do not necessarily have the same safety nets as those working for banks or large investment companies. This means that clients do not have as much protection if something goes wrong with their investments.
What is the difference between a broker-dealer and an independent broker-dealer? ›
While the first two types of broker-dealers generally assert more control, independent broker-dealers (IBDs) often provide those who work for them—registered representatives, financial advisors, and so on—with greater freedom in how they do their business.
What is the major difference between the broker and the dealer? ›
Brokers and dealers both provide useful financial information about investments to their clients but differ in how they operate. Brokers help clients buy and sell securities while overseeing their brokerage accounts, while dealers are individuals or firms that buy and sell securities for their own accounts.
What is the purpose of a broker-dealer? ›
Key Takeaways
A broker-dealer is a financial entity that is engaged with trading securities on behalf of clients, but which may also trade for itself. A broker-dealer is acting as a broker or agent when it executes orders on behalf of its clients, and as a dealer or principal when it trades for its own account.
What is the difference between a financial agent and advisor? ›
A financial advisor can offer comprehensive advice on different areas of financial planning, including insurance. An agent, meanwhile, can help you buy an insurance policy. You might get advice from your advisor first, before reaching out to an agent to take the next step.
How does broker-dealer make money? ›
A broker-dealer buys securities, such as bonds and stocks. They then sell the securities to another investor at a price higher than the buying price. The difference between the two prices is known as the dealer's spread, and it represents the profit that the broker-dealer makes on the transactions.
Is a broker the same as an advisor? ›
Key Takeaways. Investment advisers are paid a flat fee or percentage of AUM to advise clients on securities and/or manage portfolios. Brokers are paid commissions to execute trades or buy and sell assets for clients.
Who is the most trustworthy financial advisor? ›
You have money questions.
- Vanguard.
- Charles Schwab.
- Fidelity Investments.
- Facet.
- J.P. Morgan Private Client Advisor.
- Edward Jones.
- Alternative option: Robo-advisors.
- Financial advisor FAQs.
Here are seven mistakes to avoid when hiring a financial advisor.
- Consulting with a “captive” advisor instead of an independent advisor. ...
- Hiring an individual instead of a team. ...
- Choosing an advisor who focuses on just one area of planning. ...
- Not understanding how an advisor is paid. ...
- Failing to get referrals.
All financial advisers should be registered with the FCA. This means they meet the right standards and you get more protection if you're not happy with the service. For example, you can complain to the Financial Services Ombudsman and may be able to claim compensation if things go wrong.
What is the difference between a broker-dealer and a financial advisor? ›
Investment advisors may be ideal for investors who want someone else to manage their investments, or for investors who want assistance with planning for taxes, an estate, or a mortgage. In contrast, a broker-dealer is a person or firm that can buy and sell securities on its own account as well as on behalf of clients.
Who is the largest independent broker-dealer? ›
As of March 2023, LPL Financial was the largest independent broker-dealer by gross revenue, with margins of roughly 8.6 billion U.S. dollars roughly 2.4 billion U.S. dollars more than the second largest independent broker in the United States which was Ameriprise Financial.
What is a broker-dealer relationship? ›
A broker is any person engaged in the business of buying or selling securities for the account of others. A dealer is any person engaged in the business of buying or selling securities, but for their own account.
What is the difference between RIA and broker-dealer and wirehouse? ›
In a wirehouse structure, financial advisors are considered employees of the firm. At independent broker-dealers and RIAs, on the other hand, advisors are considered owners of their own advisory business. They have the freedom to independently establish their own location and client culture.
Is Edward Jones a broker-dealer or RIA? ›
Acting in the capacity of a broker-dealer is different from acting as an investment adviser. Edward Jones is a registered broker- dealer and investment adviser.
What is the difference between a broker-dealer and a transfer agent? ›
Brokers typically earn a commission for each trade. Transfer agents usually charge a fee for their services. Brokers may also provide advice on investment strategies and financial planning. Transfer agents are also responsible for maintaining communication with shareholders and issuing dividend payments.
What is the difference between a broker-dealer and a fiduciary? ›
Legally, a fiduciary cannot act out of self-interest. If their advice carries any potential conflicts of interest, they'll raise the issue with you as their client. In contrast, brokers act out of inherent self-interest. For example, investment brokers often only sell products that are available on their own platform.
by Brad Shepherd — I’ve spent nearly 25 years working with independent financial advisors. The work our industry does to help people, families, and communities is astounding — all driven by independent financial advisors and their commitment to the relationships they serve. However, when I take a step back and look at the relationship between advisors and their broker-dealers, it’s clear that the relationship is currently flawed and needs to move in a new direction.
