Choosing a Broker/Dealer:A 60-Point Checklist
By Katherine Vessenes, JD, CFP
Picking the best broker/dealer for your business requires some due diligence on your part. Here are 14 major areas to consider when selecting someone you can work with for the long term.
A few years ago I got out my trench coat and fedora and went undercover. My mission: to scope out the inside workings of broker/dealers. I wanted to get an up-close look at how they ticked, their policies, and what they really thought about the advisors out there being their reps.
Let's call this one firm I observed ABC Securities, just to protect the guilty and the innocent. Before I had completed my first two months, ABC was summarily shut down by the NASD for violating net capital rules after an investor defrauded the firm! One day it was in business, making money, and preparing for an IPO. The next day, it was out of business.
If you want to see ugly, picture what happens when you can't trade for your clients. You can't even liquidate their positions. You are locked into a firm and can't switch to another broker/dealer. You have no income and lots of unhappy investors. In short, you're living your worst nightmare.
The experience made me think I could save a lot of reps a great deal of money and stress just by telling them to follow a few simple rules when choosing broker/dealer. So here it is: a checklist of 14 things to consider as you choose your next B/D.
Payout. Actually, this is not the most important thing on my list; I just included it first because it is the most important thing to many financial advisors. One of the surprising things I learned undercover was just how narrow the margins are in this business for broker/dealers.
This is a labor- and technology-intensive business that costs a lot of capital to maintain. That eats into profits. It is not unusual for a B/D to be operating at break-even or even a small loss.
Its biggest expense is commissions. High commissions can actually be a sign of trouble. It may mean the B/D doesn't have the resources to provide you with the service you want
Be careful when you start comparing payouts. There can be a bit of smoke and mirrors in how some firms advertise them. It is not unusual to see an ad for a 90% payout, or even more. But if you look at broker/dealer surveys, you will notice the actual payout can be less than advertised. Why the discrepancy? It's due to the extra fees many firms may charge reps.
A while back, I got a call from a rep who was furious with his B/D and wanted me to create a new B/D for him. The reason: He had ticket charges of $20,000 on total gross commissions of $120,000! I understood his anger but advised him it would be far cheaper for him to just find another firm with a different payout schedule.
Before you choose a new B/D, create your own spreadsheet of all the costs you could incur in the relationship. Compare at least three firms, and include any extra fees like technology charges, Web fees, and E&O insurance.
You might be surprised to find out that at B/D X, even with lower payouts, you are actually making more money than you would at B/D Y with higher payouts. This was the situation of a well-known B/D up until recently. For many years, it had a very complicated payout schedule. On the surface, it looked as if the reps were making significantly less than they would at another firm. In actuality, the reps' gross was so much higher, they were actually taking home more...
Katherine Vessenes, JD, CFP, a nationally known author and speaker, has the best job in the world. She turns average producers into stars by focusing on sales, marketing, compliance, and practice management issues for broker-dealers and advisors. You can contact Katherine at (952) 401-1045 or at firstname.lastname@example.org. (download this complete report at:http://www.mediafire.com/?bdnlj8y93fy.
For more help choosing a broker dealer- use the free "matchmaker" service offered by Broker-Dealer finder.com.