Independent Broker-Dealers Increasingly Incentivized to Cease Recruiting Support for Super-OSJs That Don’t Add Meaningful Value to Financial Advisors
Warren Buffett once famously said of the markets, “Only when the tide goes out do you discover who’s been swimming naked.” For many large independent advisor groups – commonly known as super-OSJs – the tide has been ebbing for years as their relationships with broker-dealers and advisors have undergone subtle, but meaningful, shifts.
The question is whether these super-OSJs realize it.
For many of these groups, their recruiting pitch to advisors still largely comes down to their ability to use scale to squeeze large broker-dealers on their margins for custodian services and other key offerings. Some of them paper over this fact with difficult-to-verify claims (“We service you better!”) or by focusing on convenience (“We’re right in your back yard!”) – but the fundamental reason for their existence hasn’t changed in decades.
The problem is that both broker-dealers and advisors have been digging into this value proposition in more depth in recent years…and in 2021, it doesn’t hold up as well as it used to.
What Is It That…You Do Around Here?
For many years, large broker-dealers put up with margin compression driven by super-OSJs because those groups played a vital role in their own ability to service independent advisors. They served as geographic hubs around the country that could devote more time and resources to being immediately responsive to advisors’ needs, thereby making the large broker-dealers feel ‘smaller’ and more personal.
Toward that end, broker-dealers poured millions of dollars into recruiting super-OSJs and helping them scale up, providing them with massive amounts of assistance to recruit, transition and serve advisors.
What did they get for all this investment? Nearly two decades after they implemented this strategy, the answer is…not much.
While large broker-dealers were investing money in their super-OSJs, they were also building out their own service capabilities, exploring new areas where they could add value, and working to shrink the distance between themselves and the advisor. In other words, they were getting closer to the super-OSJs’ businesses.
Today, when an advisor affiliated with a super-OSJ has a problem, they don’t call the OSJ. They skip right over the intermediary that was supposed to be “servicing them better” and call the broker-dealer directly. This negates the super-OSJ’s value proposition and can actually turn them into a liability for the broker-dealer, since they are taking AUM off-platform – AUM that the broker-dealer paid for by helping the super-OSJ recruit those advisors in the first place.
Many broker-dealers have significantly strengthened their businesses (and their enterprise values) by taking note of this dynamic and establishing themselves as the main service chassis for the advisor’s service experience. From their perspective, it simply makes sense – if they are the recruiting juggernaut, they are servicing the business and they are now building the same tools that made some super-OSJs unique, why would they continue to recruit for and invest in their super-OSJs’ businesses?
We’re fast approaching a point where the old OSJ value proposition will wear out its welcome with advisors, as well. If an advisor is going to give up compensation that he or she is working day and night to earn – and if they already rely predominantly on the broker-dealer to service their business – then super-OSJs need to come up with a better sales pitch.
The Good News for Super-OSJs
On the positive side for super-OSJs is the fact that many of them have developed significant scale after years of partnering with larger broker-dealers. In order to survive, it’s time to examine new ways to leverage that scale to build new models that represent a significant value overlay on top of the broker-dealer’s service experience.
Over the next several years, super-OSJs will be well-served to focus on innovative ways to drive new, creative solutions from incubation to delivery, both in their advisor and client tool suites.
They should seek to deliver enough value to advisors through marketing services, lead generation, recruiting assistance for finding and training junior advisors and other growth-enhancing programs – even building and maintaining real estate – that advisors have no need to question the value they bring to the table. And if they can build agnostic service models across multiple broker-dealers and custodians… that’s even better!
Competing on Price is No Way to Compete
The landscape of the independent financial advice industry is shifting rapidly. For super-OSJs, it may have been compelling a few years ago to entice recruits with promises of delivering the lowest pricing, backed up by their ability to squeeze broker-dealers and other partners on margins.
In 2021, however, that is no longer the case. More innovative and forward-looking advisor groups across the industry will be coming for their business – and getting more aggressive by the month. What should really keep super-OSJ groups tossing and turning at night, though, is the fact that their own broker-dealers are coming for them, as well.
Conor Delaney is Chief Executive Officer of Good Life Companies, a family of firms that deliver maximum choice and flexibility to independent financial advisors in selecting among multiple broker-dealers, custodians, technologies and growth resources.