When the independent advice business began to gain serious traction more than two decades ago, it was supported by the growth of independent broker-dealers bringing together like-minded advisers who could focus on serving clients with a true sense of ownership. The primary focus then was to be free of the quotas, competing agendas and bureaucracy that had come to define life at wirehouses.
Over the past decade, the commentary among “experts” has transitioned to how independent broker-dealers must move toward amassing scale under monolithic organizations, as operating costs and regulatory requirements have escalated and independent advisers seek more sophisticated tools to help them build their businesses. Despite all the changes that have occurred, the industry hasn't finished evolving, and the prophets of massive scale likely will be proved wrong. In fact, I believe another major step in the process is right around the corner, and it will define the next decade for independent broker-dealers.
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For independent broker-dealers and financial advisers to successfully connect with investors over the next 10 years, we need to fundamentally rethink the industry's approach to scale in a way that balances the competitive imperatives and economic realities of today's independent financial advice landscape with the personal elements — the connections between broker-dealers and advisers, as well as those between advisers and their clients — that make this such a great business in the first place.
If we can't find a way to deliver benefits of scale while providing a framework that nurtures personal relationships, unique cultures and uncluttered objectivity, we will have lost the distinctive elements that distinguish us from the wirehouses.
Without question, there are benefits for independent advisers in working with broker-dealers that have the resources to give them access to cutting-edge technology, practice management tools and other critical infrastructure. But it's important not to allow the pendulum to swing too far toward the consolidated nationwide model, with all its attendant bureaucracy. For advisers, that means the emotional engagement with their broker-dealer must not be allowed to fade, along with the level of personalized service they can expect.
Moreover, for many investors, “scale” still sounds a lot like “too big to fail.” With the trauma of the financial crisis still fresh in investors' minds — even six years later — the thought of working with an adviser who is subject to the directives of a monolithic, far-away brokerage that doesn't actually know the adviser on a personal level remains problematic for many potential clients.
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At the same time, Main Street Americans' need for financial guidance has never been more pronounced. Approximately a 250,000 Americans are turning 65 every month, while the percentage of private sector workers participating in defined benefit plans has fallen to 14% in 2011 from 38% in 1979, according to the Employee Benefit Research Institute. Although many of these investors know they are unprepared for retirement, they remain on the sidelines, unconvinced they will be able to find the right adviser or the right institution to help them achieve their goals.
These two trends — acute and widespread need for customized financial guidance from an experienced professional, and ongoing investor skepticism toward large national financial firms — are coming together to create a significant tipping point for our industry. The challenge we face is building a framework that more effectively closes the divide between our vibrant and experienced community of financial advisers and the enormous population of workers who face the end of their careers and need expert advice.
Where do we start? The first step is to return to the basic principal that culture and personalized support matter, even for the largest players in the industry, because these ingredients build emotional connections among advisers, and between advisers and their broker-dealer.
While these emotional connections may be difficult to quantify or define, maintaining and fostering them is absolutely crucial to our business. When advisers are part of a supportive and trusted community of like-minded professionals, their focus and commitment to the success of the organization grows stronger. Culture matters to clients, as well: Main Street investors want to work with “real people” whose values they recognize and understand. Wherever it makes strategic sense, broker-dealers should work to maintain the leadership structures and unique cultures of the various advisory practices and smaller firms that make up their larger organizations.
Broker-dealers can also revise their approach to the resources provided to advisers. Too often, a centralized platform becomes a way to steamroll advisers into accepting a small menu of supported business and service models, rather than to empower them to forge their own path. Broker-dealers can certainly help advisers become more competitive by providing them with access to centralized services, including technology, turnkey wealth management tools, practice management consulting and adviser-level marketing services, in addition to the familiar back-office and compliance functions.
But firms that serve and partner with independent advisers should realize that every adviser will use these services in their own way, and that they want to do so with a broker-dealer brand that seeks to complement rather than displace or compete against the independent adviser's brand. The direction of the practice and the integrity of the brand under which it operates should always be left to advisers and their clients to determine, with these centralized services available to use as the adviser sees fit.
For our business to continue to grow and serve investors over the next 10 years, we must realize that the supposed dichotomy between scale and personalization is a false choice. Businesses that lean too far toward either side of this spectrum will be poorly positioned to serve advisers and their clients. Instead, our industry should focus on delivering the benefits of scale while shielding advisers and their clients from its downsides.
By providing advisers with a secure environment in which they feel their relationships and culture will be protected as well as the tools to tap into the remarkable range of opportunities to expand their businesses, broker-dealers can more effectively bridge the gap between our industry and the Main Street investors who need our help. The result will be rejuvenated advisers, better-prepared clients and an industry that is ready to meet the challenges of the next 10 years.
Larry Roth is CEO of Cetera Financial Group, a network of independent broker-dealer firms.
