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How Would I Improve The Wirehouse Brokerage Model?
I put out a lot of commentary in my episodes, and in articles, contrasting the wirehouse model and the RIA model. It might be easy for me to sit back and criticize, “Wirehouses should do this better,” or, “Look how bad they do this, and how it’s better in the RIA model,” which it generally is. I think it’s only fair though that I in turn answer the question, “What could be done with the wirehouse model to make it better for the advisors that are there currently?” And related, does management at the wirehouse firms have the appetite to make these sorts of changes? Accordingly, I have eight suggestions of things the wirehouse firms could do to make their offering more attractive for their own advisors.
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How would I improve the wirehouse brokerage model?
That is today’s question on the Transition To RIA question & answer series. It is episode #67.
Hi, I’m Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition to the RIA model.
If you’re not already there, head over to TransitionToRIA.com where you’ll find the resources I make available to advisors. I have this entire series in video format, podcast format. I have articles, I have whitepapers. Again, TransitionToRIA.com.
And if you’re not already listening to this in podcast form, and you like podcasts, search for the “Transition To RIA Podcast” on all major podcasting platforms.
On today’s episode, we’re going to be talking about the wirehouse model and what I would do to improve it.
The reason I wanted to do this episode is because I put out a lot of commentary in my episodes, in articles, contrasting the wirehouse model and the RIA model. It might be easy for me to sit back and criticize, “They should do this better,” or, “Look how bad they do this, and how it’s better in the RIA model,” which it generally is.
I think it’s only fair that I in turn answer the question, “What could be done with the wirehouse model to make it better for the advisors that are there currently?” And related, does management at the wirehouse firms have the appetite to make these sorts of changes? As it will ultimately be up to them.
I have eight suggestions of things the wirehouse firms could do to make their offering more attractive for their own advisors.
The reason I know a lot of these improvements are needed is because the lack of them currently is what’s causing advisors to move to the RIA model. From the conversations I have with advisors, I hear the frustrations, the motivations, of why advisors want to make a change.
So, again, we’re going to talk about eight ways you could improve the wirehouse brokerage model. These are in no particular order.
#1 – Think of your advisors as your clients.
The first one is that wirehouses should think of their advisors as their clients.
The wirehouse brokerage model is a wonderful business model, at least in theory on paper. It’s a very leveraged model. The wirehouse brokerage firms must go out and attract and retain a few thousand advisors who in turn those advisors go out and attract and retain a few million end investor clients.
That’s a wonderfully leveraged business. At a wirehouse, the advisors are doing all the heavy lifting. They’re the ones spending possibly years building relationships to earn a new client’s trust. The advisor is the one that must pick up the phone and call clients when the market is volatile. It is the advisor that must be there through the ups and downs and the challenges that that client has along the way.
The advisors do all the heavy. Wirehouses just need to keep the advisors happy. That is not their mindset at all though. They think the end “client” is the client of the wirehouse. The advisors are just middlemen servicing them.
Every advisor knows, that’s not the case at all.
Imagine if wirehouses instead changed their attitude and said, “We are going to think of the advisor as our client. What can we do differently? What steps can we initiate that will make our offering more appealing for advisors to want to join our firm and just as important stay at our firm? Every decision we make from a management perspective, compliance perspective, whatever the case it should be through the lens of our advisors are our clients.”
That is not their mindset. Currently, they think of it as the advisor is simply servicing the end client and the end client belongs to the wirehouse firm.
In the RIA world, it is different. Custodians think of the RIAs that use their services as their “clients” because that is the case. The custodian is essentially a solution provider, a vendor for the advisor.
You’ll hear custodians refer to RIAs as their clients. Every decision they make they want to do it through the lens of, “Is this going to help us attract and retain the RIAs that use our services?” Again, wirehouses should be doing the same thing. They should think of the advisor as the client.
#2 – Tell your advisor “clients” they are all free agents.
If wirehouses could get past #1, they should then tell their advisor “clients,” “You are all free agents. If you ever want to leave, you are free to do so, we will not get in the way. And you are free to take your clients with you.”
Clearly, that’s not the case now. They put up all kinds of roadblocks, they drop out of the protocol, they put in non-solicitation agreements, etc.
Think of how powerful it would be though for a wirehouse to say, “We think of you as our clients, and to the degree we never fulfill what you need to be able to service your clients, and we are not bringing good value to you compared to the competition, you are free to leave. So, guess what? We know we must work day after day to continue to earn your business, to continue to have you stay with us because we know you are effectively a free agent. If you ever wanted to leave, you could.”
Think about how this would impact every meeting at the home office. If every decision was considered through the lens of “the advisor is our client,” and “will this cause some of our clients to leave because they are free agents?”
If that flexibility is there for advisors to leave, they (management) must be much more sensitive to making decisions. Whereas now they purposely put up this wall around the castle to try to keep advisors in. When they make decisions, they don’t have to be as sensitive to how it impacts the advisor.
If they change their mindset to the advisor as a free agent, the advisor can leave, we need to make decisions with the advisor’s interests in mind. And, yes, I know you still must balance to a degree, your shareholders, your employees. But it is not at all balanced right now (with the advisor in mind.)
So wirehouses, you should consider your advisors as free agents. They can leave if they want to. They can take their clients if they want to. You in turn need to do everything you can to provide them a reason to not want to leave. That’s just business 101. That should not be a hard thing to get your mind around of why that would be the best way to keep your advisors satisfied.
#3 – No gimmicks with the payout.
Next, number three, no more gimmicks with the payout. Don’t claim that a certain production level advisor gets a certain payout (ex: 45%), but then in the next 20, 30 pages of the comp plan are all kinds of gimmicks to whittle that down to, say, 40%. It’s not really 45% if they’re not going to hit all those hurdles. Call it what it is. If it’s 40%, call it 40%.
An example I often give is with hotel room rates. Assume you need a hotel. You look online, you find a hotel you like, you see the room rate and it compares favorably to other options, so you book it. That is the figure that is on your mind regarding what you’re going to pay for the room night.
But then, it turns out there’s a “mandatory” daily resort fee that’s on top of that room rate. Which by the way, provides services you’d expect to come with the room rate anyway. You don’t have any option, you must pay this daily resort fee, and that effectively increases the room rate.
It’s the same thing with payouts. Wirehouses will list a payout rate of say 45%, but after all the gimmicks, it’s only 40%. That doesn’t create satisfaction with advisors. It doesn’t create satisfaction from hotels when they do it.
So, again, no more gimmicks with the payout. Make it very simple, very transparent. If it’s 40%, call it 40%. Don’t try to claim it’s something that it’s not.
#4 – Better yet, invert your payout.
Next, and this is related to what I just said about payouts, is not only make your payouts non-gimmicky, more simple, more transparent – and wow, maybe your advisor “clients” will like that. That would keep them more satisfied if you did that. You shouldn’t make them read 30 pages of a comp plan to understand how they’re going to be paid.
So, let’s say you did simplify it, my next suggestion is take it one step further and invert the payout.
Let’s say there’s an advisor, and let’s say it’s simplified, the advisor is going to get 40% payout. What that effectively means, and I’ve talked about this in a lot of articles I’ve written or episodes on the show here, is you need to take the opposite of that, the inversion of that.
What that’s saying is, “As an advisor, I’m out there, I’m working with my clients, I’m attracting new clients, I’m retaining my clients year after year after year. Those clients are generating the commissions or fees for the solutions that I’ve helped them with.”
Think of it as 100% of those fees and commissions coming to you. And by the way, that’s how it works in the RIA model. 100% of it comes to you.
However, there are support services you need as an advisor to be able to provide those services for your end clients. Those are things that your wirehouse provides for you like an office space, technology, for better or worse compliance support, etc.
You pay for that because your firm has hard costs associated with providing those services to you. And as a for-profit business, they deserve to be able to make a margin on their business.
That is where the payout comes in. What I challenge wirehouse to do is invert that. If an advisor has a 40% payout, what they’re really saying is, “Advisor, you’re out there doing the hard work, your generating the fees and commissions, and we’re charging you 60% of what you’re bringing in for the tools and services we provide for you so that you can service your clients.”
And by the way, you should convert that into dollars, don’t just think of that as a percent. Whatever your production was for the past 12 months, take the inversion of your payout, convert that into dollars. That is what your firm charges you for the services they provide you, such as an office, maybe staff, health benefits, those sorts of things.
Is the value of those services worth the dollar amount of that 60% that you’re paying to your firm? Opposed to saying, “You get to keep 40%,” wirehouses should say, “We charge you 60% of your production for the services we provide you.”
If it was done that way, both the advisor and the firm would put a lot more focus on the value that’s being provided. The firm would have to justify that amount of expense year each year.
The dollar amount you’re paying them each year might be a very large number. That’s okay, as long as they are providing you a lot of value. There’s nothing wrong with that, but make it transparent. Say, “You are the advisor. You are the one out there generating the fees and commissions. You keep 100% of that. Here’s the services we provide for you and here’s what we charge you for it.”
Again, that’s the inversion of the payout. It’s a clearer way to think about payouts.
#5 – Eliminate deferred compensation.
Next up, number five, eliminate deferred compensation. Set aside the invert-the-payout suggestion for a moment. This relates to the payout gimmicks I mentioned.
Consider the scenario of an advisor allegedly getting a (for example) 45% payout, but of that, perhaps 5% is going to be set aside and paid to you in the future. That doesn’t lead to satisfaction for any advisor!
If they take your compensation, that you have earned today, and they arbitrarily defer it into the future, you need to think long and hard about how that has any value to you as the advisor, or is that solely a handcuff method by your wirehouse firm?
That sort of arrangement is the exact opposite of them thinking of you as free agents and making decisions with your interests in mind as free agents. Instead, they’re saying, “We’re going to artificially put handcuffs on you by taking some of your compensation that you’ve earned today and arbitrarily pushing that into the future.”
Such deferment can sometimes come in two different forms.
First, it can be deferred into company stock. The firms say, “We defer it. We put it in company stock. Now we are aligned as the growth of the company and hopefully, the value of that stock goes up over years.” Which by the way, that doesn’t always happen. The stock price can surely go down as well.
Such an arrangement is effectively the exact same as handing out restricted stock units, RSUs. A lot of companies of any stripe will incentivize their employees by saying, “We’re going to pay you a salary of X. We are also on top of that going to give you restricted stock units so that we are aligned, and we can both hopefully benefit from the growth of the company going forward.”
If that’s what the wirehouse brokerage firms want to do is defer and put into equity, call it what it is. You’re handing out RSU. As opposed to saying, “You get a 45% payout, but then we’re going to take some of it and lock it up in stock,” say “We’re giving you a 40% payout, but we’re going to give you an extra 5% in RSUs, restricted stock units.” At least then it’s going to be more sincere about what you’re doing.
Now, when compensation is deferred and held in cash – which sometimes you might be able to invest in certain investment choices – I can’t come up with any viable reason a firm can say with a straight face why that’s in your best interest. They’re saying, “You’ve already earned the money, but we’re going to lock some of it up, and arbitrarily not let you access it for years into the future.”
If you’re an advisor, you need to think long and hard about if that’s in your best interest and compare that to how it’s done in other models where that’s not done at all. Deferred comp arrangements are the exact opposite of the free-agent mindset that I keep talking about.
#6 – No forced cross-selling.
Next, number six, no forced cross-selling of banking products or things like that.
I’ve never met an advisor that got into the profession because they like hawking checking accounts, or credit cards, or maybe even mortgages. Maybe they don’t mind helping their clients solve for those needs in their life, but they didn’t sign up to be a salesperson for a credit card or anything like that.
Yet the wirehouses are saying things like, “If you don’t refer enough clients each year for banking solutions, we’re going to dock your payout.”
Now, I get why the wirehouses are doing it. They’re part of a bigger conglomerate with a bank, and the cross-selling will generate revenue. I get why they’re doing it. But don’t force the advisor to do it, don’t penalize them if they don’t want to do it.
If the banking solutions are so valuable, if the credit card, the perks of the card, and the options of the card, or the checking account, if that’s so valuable, just make it known to your advisors that it’s there for them to utilize with their clients if they want.
If it’s truly valuable, advisors will be happy to say, “Mr or Mrs Client, if you need a new credit card, we have a wonderful solution, or we have a wonderful checking account, or a wonderful mortgage team,” or whatever the case is. But don’t force advisors to do it. If they don’t want to do it, they shouldn’t have to.
If your products are as good as you claim they are, then advisors will naturally want to suggest them to their clients as part of the planning they do with them. If you as a firm are forcing or penalizing your advisors to use the products, then you need to think about, “Are the products good enough?
Either way, no advisor wants to be forced to cross-sell or penalized if they don’t. None of that adds to advisor satisfaction. That needs to go.
#7 – Tier your approach to compliance.
Next is #7. Which with this item I acknowledge it is not an easy thing to implement. The suggestion is to tier your compliance program.
A big frustration regarding the large wirehouse firms is they must “manage to the lowest common denominator.” If you are at a firm with, let’s say, 15,000 advisors, you have some very experienced advisors, and also lesser experienced advisors. Which is ok, as that’s naturally going to happen as you bring on younger advisors.
You also have some bad apples buried in there somewhere. But you don’t know who they are just yet.
Firms in turn establish compliance programs that manage to the lowest common denominator. They are forced to manage to the lessor experienced, or maybe the less ethical advisors, etc. The result is a dumbing down of compliance and added restrictions that are applied to all advisors equally.
What I challenge wirehouse firms to do is establish two tiers of compliance.
As a baseline, there are regulations where it doesn’t matter how long you’ve been in the industry, those regulations are black and white. You can’t do it. It’s one way or the other. There’s no flexibility even if the firms wanted to have flexibility. I get that. There are baseline rules everyone must play by.
From there, segment your advisors into perhaps two buckets. I don’t know what the best tenure dividing line might be offhand, maybe it’s 10 years, 15 years, 20 years, whatever. But if you have more than that amount of experience the firm segments you into the more experienced bucket. Advisors with less experience are in the other bucket.
An advisor with 20 years’ experience is probably less of a risk to the firm than an advisor with 2 years’ experience. Now, everyone had to start somewhere, so that’s not a knock on the advisors with two years’ experience.
For advisors with a longer tenure, and/or that have been with the firm a long time, or maybe who have no blemishes, the policies and procedures should arguably be less restrictive than the requirements set on the other set of advisors.
With the more restrictive bucket, that’s not a step backward for those advisors. That’s the same “managed to the lowest common denominator” policies in place currently. I’m suggesting that when warranted, there is a path to achieve less restrictive policies.
The goal then for any advisor in the more restrictive bucket is to “graduate” to the less restrictive bucket. This tiering is needed, as the RIA model has far more flexibility than the current wirehouse framework. Wirehouses need to provide a path to move closer to that level of flexibility.
I could give numerous examples of what advisors can’t do at wirehouses that they can do in the RIA world. Not because there’s necessarily regulations that don’t allow them to do it at the wirehouse model, it’s because their firms are managing to the lowest common denominator.
If wirehouses could find a way to provide more flexibility to advisors that have demonstrated a good track record, there’d be less dissatisfaction and less interest of advisors transitioning to the RIA model.
#8 – Acknowledge the advisor owns the client relationship.
The final item, wirehouses should explicitly acknowledge that their advisors own the end client relationship.
“If you ever wanted to leave, and by the way, we know you’re a free agent, so we work hard every day to give you reasons to not ever want to leave, but if that circumstance ever came to be, we acknowledge the end clients are your clients. We’re not going to get in the way of that. We’re not going to try to steal them from you or retain them against your wishes.”
And here’s the thing wirehouses, I don’t care if you disagree with me on this. Advisors at your firms already feel that their clients are their clients. They don’t think of it as, “Those are the firm’s clients and I’m just some middle person servicing the relationship along the way.”
So, your advisors already feel this way. You might as well get credit for acknowledging it and saying, “What can we do, advisor, to make you even more satisfied, so you stay with us and you keep your clients on our platform?”
If that was the mindset of a wirehouse, and they truly practiced it, they’d have far higher levels of satisfaction amongst their advisors.
There’s something important to keep in mind with these suggestions.
I’ll give the example of an employee at a company that is paid salaried or hourly. No such employee ever gets a raise without asking. If you’re an hourly employee, your employer is not going to magically walk up to you one day proactively and say, “Congratulations, we’re giving you a raise.” You usually always must ask for one. It doesn’t happen on its own.
Likewise, wirehouses are not going to implement any of these eight items I just talked about unless there is pushback, unless there is a request for it, unless your voice is heard.
If any of these resonate with you, ask your firm why it can’t be done this way? They’re not going to change unless you raise these issues and express your voice.
Now, I’m not holding out hope that a lot of this is going to change. I think wirehouses will feel, “Nope, this is how we do it. Even if that stuff makes sense, that’s not how we do it, and we want to lock our advisors in.”
They’ll come up with some word salad explanation of why all of these things are not correct, and how they’re already aligned with the interests of their advisors. So, I don’t think a lot of these changes are going to occur. But if you don’t ask, they’ll never occur.
Because wirehouses aren’t making such changes, is why there’s such a big migration to the RIA model. Its why advisors are unsatisfied and are leaving for the better economics, the better flexibility that the RIA model provides.
I encourage you to think about today’s topics. Express your voice to your current firm. If that falls on deaf ears, consider if a different path would be better for you, your practice, and your clients.
With that, like I said, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors with all the time. Perhaps you’re at a wirehouse and you want to understand how it compares to how things are done in the RIA model. How the flexibility is different, would you have better economics, etc. I help you understand the contrast.
To the degree that it makes sense for you to consider an RIA approach, I then walk you through the steps of what transitioning to the model looks like. How to move your practice, how to move your clients, how it all works.
If you head to TransitionToRIA.com, you can find all my videos, my podcast, my articles, my whitepapers. The easiest thing to do is at the top of every page is a contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me to go over today’s topic, or anything else RIA related. I’m happy to have that conversation with you. Again, TransitionToRIA.com.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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