BD Deals: When Do Advisors Win, Lose?

Jon Henschen, president of Henschen & Associates

When one broker-dealer is bought by another, advisors at the acquired firm hope for the best but wait for what will change. The acquiring broker-dealer will most always start off with a statement such as, “Everything will stay the same.” This may be the case for a month or two; over time, though, this statement often proves to be untrue. 

The size of the firm being sold and the size of the acquiring firm can make a big difference in the retention of advisors over the first two years. Potential points of conflict tend to be service, compliance and culture misalignment. 

Why BD Size Matters

Here are the main merger scenarios and their likely outcomes:

Small BD being sold to another small BD: very favorable to advisors/high retention;
Small BD being sold to a medium-size BD: favorable;
Small BD being sold to a large BD: unfavorable/low retention;
Medium-size BD being sold to another medium-size BD: favorable;
Medium-size BD being sold to a large BD: less favorable; and
Large BD being sold to another large BD: very favorable.

The Financial Industry Regulatory Authority defines small firms as those with up to 150 advisors. It’s less clear what constitutes midsize and large firms, so I’ve categorized them as having 150-2,500 advisors and more than 2,500, respectively. 

At the 2,500 mark, broker-dealers start to adopt compliance that caters to the lowest denominator, greater restrictions in marketing and less personal service. It is also at 2,500 advisors that BD management often becomes more isolated from advisors, except when it comes to the highest producers or producer groups. These are generalities, of course; there are always exceptions, but these characterizations largely hold true.  

What constitutes high or low retention largely depends on changes in the advisor experiences within the first two years after an acquisition. Advisors at small and midsize firms, often with up to 750 advisors, frequently have close relationships with management and staff.  

Small and midsize firms are able to customize compliance and marketing needs to each advisor, while larger firms require advisors to fit into the compliance/marketing boxes they have created.  

Going from a smaller firm to a large firm, the advisor is rarely able to speak directly with management, typically talks to different people via a phone tree or service team, and has longer wait times for service. Flexibility on outside business activities or marketing methods that include more than generic topics are much more rigid at larger firms. 

This is because when a BD is large, it becomes impossible for it to track and supervise aspects that may differ from advisor to advisor. Thus, these BDs need to create compliance and marketing boundaries that all of their advisors must conform within.

If an advisor wants to create his own content for Facebook or YouTube, for instance, or write articles, compliance hurdles can be cumbersome at best at the larger firms, while smaller firms are more flexible and accommodating.  

A good illustration of acquisition retention is the 2007 move of Pacific Life’s broker-dealers to LPL Financial. This group of BDs consisted of Mutual Securities Corp. (MSC) with 1,300 representatives, Waterstone Financial Group with 620 reps, and Associated Securities with 250 reps. 

Two years after the sale, some former managers at Waterstone told me that they estimated the three BDs may have each lost between about 30% and up to roughly 60% of their reps. These firms had two waves of advisor outflows: after the purchase announcement and, two years later, when the three firms were merged into LPL.