Attention Portfolio Managers!

At a time of unprecedented global social-political uncertainty, ongoing market volatility and unyielding regulatory oversight, an increasing number of broker dealers are experiencing more trouble with organic growth, operational efficiencies and shrinking margins than ever before. 

There’s no doubt that these combined factors are wreaking havoc on the best of dealers. But for start – up or post start up dealers, it has become a recipe for an impending disaster. And it is their attempts to fix these anomalies that have become worrying. In fact, they really aren’t fixes at all!

Many broker dealers are attempting to fix their underlying existential challenges by simply injecting ‘growth capital’ or ‘retention bonuses’ to stem advisors exits and attract new advisors. But as we are about to see, this is merely a band aid solution to a long – term systemic problem. 

Let’s first understand exactly what these existential problems really are and the gravity of them-before we address how some broker dealers are attempting to ‘solve’ them:

• Broker dealers who have become product manufacturers are fast losing credibility in a populist advisor-investor driven agenda for ‘agnostic platforms and non – proprietary manufacturing environments. Advisors are increasingly relishing the need to be independent of internal biases. More advisors are demanding an open architecture platform for their clients. They believe that is what makes them a true fiduciary. 

• Investors are well – aware of these conflicts. Banks remain the biggest culprits of conflicts of interests and consequently, when it comes to advisor recruitment, they are the biggest net losers to independent firms that best showcase these open architecture platforms. 

• How do we know? Very simple. Go look on the website of any independent dealer. Some 80% of advisors originated from bank dealers. That tells you everything you need to know about which dealers are losing advisors and which ones are the net beneficiaries. Ask them the reasons why they departed!

• Dealers promoting private shareholding models for long term liquidity simply fall short of the growing realities of today’s economic-market uncertainties. Given the after – effects of Covid19 together with the collage of regional conflicts, high interest / inflationary environment and social unrest – all these calamities have resulted in real economic decline and the erosion of consumer spending power. 

• Holding private shares doesn’t solve consumer inflation or rising mortgage interest rates: It doesn’t relieve the advisor of the same maladies that his fellow consumers are suffering. And Wealth Advisors are all part of consumer society. Most advisors often can’t wait for a 5 – year liquidity event. And there’s no certainty that the liquidity event will even take place when planned. The economic decline is happening now. This is especially relevant when many dealers don’t pay annual distributions! Such is the fickle nature of private shareholding!

Private shareholding models provide no economic certainty. The valuations are relative to the Owner-Authors who create them. And they always carry questionable liquidity. With many being small independents, we are not dealing with public companies! 

In comparison to cash – based compensation, Shareholding models often become an ongoing source of distraction: they always seem to fluctuate depending on time and circumstance. Rather than allowing the advisor to focus on his/her client, they become too preoccupied with their own stake in a very private, changing structure. And as most will tell you, ‘Cashing Out’ is always the problem.

The lack of real succession planning at Broker Dealer firms is a prelude to failure. It is a disaster waiting to happen. The massive void of next gen advisors to inherit existing assets spells imminent disaster. For many broker dealers, it can destroy a dealer within 12-24 months. Only the effective early implementation of a succession plan can prevent this incoming disaster and ensure the smooth future continuity of the business. 

An effective proactive plan entails hiring young advisors, with a focus on women, various ethnic groups, an effective social media campaign and building strong business partnerships. This, together with the clear willingness to implement a targeted 3 – 5 year transition timeline for a new generation of advisors to succeed: and that client – asset transition is a must – have requirement, if the new generation of Advisors are going to have any serious interest.  

For many broker dealers, the single focus on M&A activity as an easy fix to long term challenges do nothing to remedy the underlying issues. Like any other chronic disease, by the time a dealer has engaged an M&A firm to begin discussions, it is often too late. Like a cancer that has spread at the cellular level, the situation has metastasized to such a point that chances of survival are grim. 

We often find 2 equally desperate firms merging because each party needs to survive. But that probably means both firms are already suffering the same malady! 

That is why they came together in the first place. They say misery loves company. 

 But are two miserable people together really any better off? Or have they just assumed a bigger problem together?

If neither firm found a solution prior to merging, why would the new entity suddenly discover it together? In many cases, they are only delaying the inevitable. Corporate Death will quickly follow!

With several notable Canadian independent dealers, we have already seen the steady loss of advisors on a weekly basis. These are not accidents. They didn’t just happen in isolation. Due to systemic internal issues, back- office conversions, shareholding valuations and lack of real succession planning – they all spell the impending collapse or early sale of the dealer firm. Faced with these existential threats, ownership often seek external investment capital to hire new advisors and / or offer retention bonuses to prevent more advisors from leaving. ie, to prevent the impending asset collapse of the firm. If the dealer cannot a) stem the rash of existing advisor departures and b) attract new advisors, then a firehouse sale of the firm becomes inevitable. 

For most businesses, securing growth capital and retention bonuses are usually a very positive thing and the essential part of corporate growth. It forms the very function of capital raising (through equity/debt financing) to fuel company growth. Indeed, it is the foundation of capital markets. 

Why do some dealer firms publicize retention bonuses amidst advisor departures?

The reasons for why some companies raise capital are not always so apparent. And this is especially true for private companies. Once again, although a broker dealer may well put on a full court press with what they self – characterize as “massive injections” of ‘growth capital’ or ‘retention bonuses’: the real agenda behind it are often murkier. It is often a false show of bravado. And looking deeper under the microscope, we can quickly put the puzzle pieces together. 

Companies never voluntarily offer transition payments or retention bonuses without self -preservation. Unlike standard bonuses, ‘Retention Bonuses’ are usually paid out to prevent employee exits. It locks Advisors in for a contracted period. Retention bonuses are not just paid as rewards for loyalty. There are other reasons why retention bonuses are paid. And they often explain why firms offer retention bonuses in the first place. 

When we witness a steady flow of advisor departures from some broker dealers, we see a firm that has declining revenues – it is often the result of other deeper internal problems. And when we uncover what these problems are (hence the actual reasons for their exits), it reveals the real deficiencies that form a major part of why advisors are leaving. And unless those underlying problems are fixed, merely offering retention bonuses doesn’t solve anything. And they also won’t stem the tide of further advisor departures. (for the same reason) 

Any Advisor-Portfolio Manager walking into a troubled dealership won’t have his / her new set of problems resolved with a signing bonus. The Advisor is simply swapping a Loonie for Four Quarters! If anything, this is really considered danger pay for taking on such risk and the dealer’s existing set of problems. And that’s assuming that he/she even knows what they really are!

After all, an advisor can get a signing bonus anywhere. But not every dealer has serious structural problems. An advisor can easily get the benefit of one without having the baggage of the other! The Advisor-Portfolio Manager needs to ask the question: Exactly what am I really signing up for?

While capital injections / retention bonuses are often a great source of growth; they may also hide a far more sinister motive for others. And that is the attempt to put a brave mask on a problem that lurks deep in the corporate bowels of the broker dealer. While some firms may offer retention bonuses to tempt advisors to stay amidst all these unresolved troubles, the fact that an increasing number of advisors continue departing for greener pastures, reveals just how damaging these corporate wounds really are.

In many cases, dealer problems are either beyond fixing or else management simply have no intention of fixing them. The result remains the same. We have now reached a crisis of no confidence: Advisor credibility in the dealer and its leadership is gone. 

Like government ministers resigning their posts: once it has reached the stage where a trail of well – respected advisors have already left and continue leaving – It is ‘too little, too late’. The warning bells have already rung: ‘If something is essentially broken, there’s nothing to fix’. It spells the collapse of the institution: The only remedy left for the advisor, is to simply ‘Get Out’.

Getting a signing bonus is relatively easy. But looking under the hood is always the tricky part. Like the client expects from his / her own Portfolio Manager, there’s no substitute for strong due diligence on any company the Portfolio Manager chooses to hold in his portfolio. Why would it be any different for the dealer he wants to join?

If an Advisor makes the decision to undergo a successful advisor transition; it is incumbent upon him/her to invest the same time and care in themselves (as they do with their clients).

The message is clear: Beware of tempting public offers of signing / retention bonuses. Like assets, they are not all the same. 

For broker dealers already experiencing high turnover, it often signifies troubled waters within. It’s a revolving door syndrome. The waters may appear still. But what lies beneath?

In this all too familiar scenario, the advisor is simply walking into a hornet’s nest of trouble. Neither the advisor nor his client wins. And he’s sure to get stung twice: Once when he goes inside and again trying to get out!

Mark Toren

Managing Director

Toren & Associates

www.torenassociates.com