Broker-Dealer of the Future: Seven Insights to Help You Prosper

Independent broker-dealers are racing to adapt to a changing industry. Innovations in technology are streamlining business processes. Shifts in demographics have made traditional methods of competition obsolete. Timeworn business models no longer work. The question is, what is the model for the broker-dealer of the future?

To answer that question, Pershing LLC, member FINRA, NYSE, SIPC will release Broker-Dealer of the Future II later this year. This research-driven report spotlights the emerging best practices among the leading firms that are pioneering the operating models of the future.

As the report reveals, the “New Model Broker-Dealer” will focus on creating a new value proposition for its advisors. To overcome competition, broker-dealers will have to offer more than regulatory oversight and product distribution in order to provide true value to their advisors. They will need to offer a solution to advisors’ rising operational costs by using their own economies of scale and centralized resources. Advisors will expect them to help grow their practices through cutting-edge practice management solutions, and act as central clearinghouses for client services solutions and best practices. At a time of heightened sensitivity to reputational risk, independent broker-dealers must also promote a culture of which advisors can be proud. The broker-dealers of the future need to be profitable organizations that provide advisors and clients with stability, while at the same time managing compliance risks to ensure the longevity of their businesses.

Broker-Dealer of the Future II reports on best practices among the firms that are leading the way for the industry, moving farther and faster than their peers to prepare their operating models for the future. As a preview of the upcoming report, Pershing can share seven insights from these successful firms:

1. Identify ways your firm can deliver value to advisors and their clients. Independent broker-dealers can provide investment knowledge, research, technology, business-building methods, branding and compliance consulting. The broker-dealer of the future uses this understanding to build more profitable and longer-lasting relationships with advisors. By aligning your firm’s offerings with the services that advisors value most, you can avoid “commoditization.”
2. Foster and favor organic growth of existing relationships. Historically, independent broker-dealers have devoted much of their budget and energy to acquisitions. However, our research shows that a primary driver of growth in the future may be through the development of existing relationships rather than recruitment. Organic growth may contribute twice as much as recruitment to a typical firm’s revenue — at a much higher rate of return on investment.
3. Establish a sound economic model that includes investments in value-added services. In 2011, the median profit margin was just 2.9% for independent contractor broker-dealers. To be successful, broker-dealers must manage their pricing and promote their value-added services effectively.
4. Avoid the winner’s curse of high-cost recruitment. Recruitment-related expenditures for the typical broker-dealer rose 13.6% in 2011, and the cost-per-recruit similarly increased.1 These costs are led by growing expenditures for recruiters, referral bonuses and transition assistance.
5. Espouse advisory services. Profitable service models are blurring the historical line between a “brokerage” and “advisory” businesses. The broker-dealer of the future is a holistic investment center with both advisory and financial solutions.
6. Create alignment with advisors and investors by building your business around solutions rather than products. Broker-Dealer of the Future II identifies critical perception gaps between what advisors think investors need from the relationship, and what investors actually want. For example, many advisors think that commissions and transaction services will drive their businesses. However, investors really want comprehensive wealth management. As a result, fees and wealth management may be a key to growth.
7. Demonstrate stability and longevity to advisors and investors through sound financial decisions and compliance practices. The financial crisis taught both investors and advisors a critical lesson on the value of stability in their financial services partners. Stability comes from two sources: sound compliance practices that give investors and advisors protection, and sound financial management that ensures the firm is well-capitalized and can operate and invest over the long term.

The financial services industry today is thriving, with more advisors, more clients and more assets under management than ever before. However, our research shows that investor needs and preferences continue to evolve. The independent broker-dealer of the future embraces that change, finding new opportunities in the evolution of the industry. Pershing also looks forward to the future with optimism, offering guidance and support to help its customers transform into the broker-dealers of the future.

James T. Crowley is the Chief Relationship Officer and a Managing Director for Pershing LLC, a BNY Mellon company.