Go Big or Go Boutique! Moving off the Grid

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When I started in the financial services industry 20 years ago there were so many options for advisors to present their unique service offering. Today we have come full swing once again through the expansion of boutique firms creating value for clients and a better life for advisors.

First a little history…

The Disappearance of “Independents”

Many seasoned advisors refer to the nineties as “the good times” due to the wide variety of choices and ability to work in a creative and dynamic environment. We operated in an era with few barriers to entry, compliance regulation was still in its infancy while technology costs were relatively minimal. Dealer styles ranged greatly and provided advisors with an opportunity to partner with firms that mirrored their own values while complimenting their investment philosophies. Many did not realize how good we had it at the time.

Fast forward 20 years later and the dealer community in Canada has shrunk substantially with small MFDA and IIROC firms leaving the business or amalgamating into super dealers comprised of dozens of legacy firms. These super dealers are owned wholly or in part by either large manufacturing firms or Chartered Banks with the not so subtle intent of having a platform to distribute product. Similarly, many smaller advisors have been squeezed out of the industry only to have their practices absorbed by larger advisors while barriers to entry for new advisors have increased dramatically.

Having noted the consolidation that has taken place at the dealer and advisor level it should be noted that many advisors who prefer to work in a more structured environment are happy with the status quo citing a number of benefits that include national brand awareness, significant in-house resources and the corresponding stability that comes with scale.

However, there are other more entrepreneurial and business oriented advisors who have felt the adverse effects that come with the loss of independence and cite the following:

Fewer Options

As noted above, fewer options among the dealer community has equated to many advisors feeling they really only have one option; either “taking it or leaving it.” I remember one executive at a national dealership openly bragging “where are these people (advisors) going to go?” The ability to shop dealers based on grid, product selection, level of support or culture has diminished greatly. Joining a large firm and becoming an employee or being part of one of the few “independents” with uncertain futures are not appealing options. As a result of fewer options many advisors have experienced

Shrinking Net Revenue

One would think that the efficiencies of larger “super dealers”  would equate to cost savings for all involved. However, with larger compliance and technology mandates we all knew that grid levels would only go in one direction; and that direction is not in favor of the advisor. In fairness, much of the burden for these mandates has been passed from regulators to dealers and in turn to advisors who have lost a significant amount of bargaining power. As a result, grid levels have been reduced, charge backs to advisors have increased and with bank owned firms grids have even been replaced by salaried employees in many cases. As a result many advisors have simply exited the business to pursue more profitable ventures. For those that remained, they have found themselves with

Larger Client Bases

As a result of diminished revenue many advisors have had to increase their client bases to account for shrinking grids and costs that have been passed down to them. The clients from smaller advisors have had to go somewhere and they often found homes with already overworked advisors. The advice I used to give advisors is that it is very difficult to have more than 150 business relationships. Today I meet advisors that have individual practices in excess of 350 clients in order to replace lost revenue and absorb the practices of advisors who have departed the business. From a practice management point we have always encouraged advisors to trim smaller clients, but at what cost – cancelling the family vacation? As a result of larger client bases, many advisors have

Less Time For One’s Self, Family and Clients

With larger client bases and greater time demands for non client facing activity, it can be argued that client needs have taken a back seat in recent history. One advisor I recently spoke to mentioned that she now spends up to three hours per day completing forms that are not even compliance related but are internal requirements of her firm. As she states, “these forms provide accountability for her activity for a head office in another province as opposed to providing her with any real value.” Due to less autonomy, many advisors have complained about

A diluted and “one size fits all” service offering to clients

Many advisors have stated that their choices for unbiased and independent advice have been severely curtailed due to time constraints of dealing with a mass quantity of clients. Moreover, recent negative press regarding high pressure sales tactics for “inhouse” products at large Canadian Financial Institutions have negated the benefits of national brand awareness in some cases. Just like clients are different, so too are advisors. Not being unique and entrepreneurial has meant

This business just isn’t fun anymore!

I recently sat with one advisor that started in the mid 80’s who exclaimed that he no longer felt the joy he once did. As he stated much of his creativity had been replaced by policies and bureaucracy. As humans we have the innate need to be heard and to have our individuality respected. Many advisors feel that having fewer options to express their unique value propositions has simply taken the fun out of business and presented their clients with fewer choices.

Moving off the Grid – The Rise of Portfolio Management Offerings

Given the above, do independent minded advisors have a better option?

Yes.  The answer lies in a new paradigm shift which is, to transition their book to a discretionary managed offering under a boutique portfolio management firm. This solution has become increasingly popular with many advisors as it creates a pathway for greater autonomy and, in an environment of changing grids and fee compression, can put more money back in the advisor’s pocket.

Greater Income

Under this solution, Advisors are no longer on the hook for their dealer’s head office, compliance, operation and administrative costs.  They are also not on the hook for ensuring their firm earns a good profit.  In exchange for certain operating costs that can be significantly lower, it relieves the advisor from having to split commission revenue with their dealer and incur the head office charge backs.  An advisor can personally pocket these cost savings.  

Advisors also have freedom to raise or lower fees consistent with their marketing and sales strategy.  For example, Advisors who presently sell mutual fund and other structured products that carry high embedded fees, can now place their clients directly in underlying securities and share the cost savings with their clients.

Many clients are waking up to the high costs of investing in structured investment products.  A managed account arrangement provides greater transparency and efficiency.  Clients can even save taxes by deducting portfolio management fees from their taxable income.

Greater Autonomy and Tailored Services

Advisors who move to a discretionary management model can also leave behind the marketing, risk management and product constraints that many dealers are forced to impose on their pool of representatives.

Advisors have the freedom to create their own branding, design their own sales and marketing strategy, hire the folks they need and have final say on business expenses and budgets.

Advisors also have the freedom to review financial products their Dealer may be unwilling to consider either because, these are niche offerings or, offerings that conflict with funds/ financial products that the Dealer is connected to.

Advisors with substantial books of business may choose to provide a more holistic offering that includes, insurance advisory, tax, estate and financial planning by, hiring staff or contracting with third party service providers.  Such offerings have been known to create a happier and more loyal client base and, also provide a platform for marketing to high net worth investors.

Building equity and a better quality of life!

During the 1849 California Gold Rush, very few prospectors struck it rich. Most of the people who made money “sold shovels” or provided other services to the same miners who traveled far to live hard lives panning for gold.

For an established advisor, their dealer is the largest and most expensive service provider they will ever engage.  On retirement most advisors can look forward to a payout of 1 to 2 times trailer fees for their life’s work.  Most of the net worth of in the financial advisory industry continues to be captured by large national and regional dealers rather than individual advisors.

A discretionary management business provides a pathway for Advisors to own and benefit from the value of their financial advisory business.

Next Steps

At the end of the day, many advisors are very successful and happy working for mainstream institutions and are able to provide invaluable service to their clients. However, for those with both scale and ambition there are options. An Advisor can move to a discretionary management offering by joining or entering into a referral arrangement with portfolio management firms willing to work with the advisor.

Advisors who have or expect to have larger books and, who possess an entrepreneurial spirit, can create and operate their own registered portfolio manager.  This solution requires a bit more time and effort, but can be much more financially rewarding.

Your practice is one of your greatest assets and deserves respect and careful consideration. Jones Graham Consultants provides Growth and Transition Services to financial advisors seeking to navigate the complexities of platform migration and transformation.

We’d be pleased to have a private conversation to review your options.

Please contact me Nicole Graham / 403-827-6697


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