Quant vs Traditional Investors

How Smaller Broker Dealers Offer Greater Flexibility

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Q1 hedge fund letters, conference, scoops etc

Quant vs Traditional Investors

By Andyhill8 (Andy Hill) [Public domain], via Wikimedia Commons

As the financial services industry continues to evolve in the face of regulatory changes, fee compression and shrinking margins, the consolidation amongst independent broker-dealers (IBDs) will continue. Many industry experts predict that within 10 years, most mid-size firms will disappear, leaving larger IBDs and some select small IBDs with specialized focuses.

For those advisors who find themselves in the middle of one of these consolidations, a small broker-dealer is an attractive option. Smaller broker-dealers are more willing to work with different types of advisors who may not otherwise adapt at larger broker-dealers. Smaller broker-dealers also offer more flexibility in allowing advisors to build a book of business more suited to their lifestyles, while promoting a more accessible work environment.

There are three key benefits to smaller broker-dealers.

Greater understanding

Small broker-dealers are more willing to accept an advisor with past credit issues or more than one disclosure. While many large broker-dealers turn away anyone with more than three disclosures, smaller broker-dealers will review the entire situation. At smaller BDs, senior management is more likely to consider everything the person brings to the table, as opposed to turning someone away because of what they read on paper.

Smaller BDs are also generally more flexible in allowing their advisors to engage in outside business activities away from their normal practice. Whether it be real estate, a mortgage business, a tax practice, a property and casualty business, or other venture, smaller BDs are more understanding of advisors wanting to be involved in other business opportunities.

Flexible infrastructure

Most large IBDs use one or both of the big clearing firms – Pershing or Fidelity. Very few allow for institutional custodians like TD Ameritrade and Schwab, unless the advisor has their own RIA. Small firms more often allow their broker-dealer IARs to use outside custodians. The main benefit is that the IAR and their staff get direct access to the best service teams of the institutional custodians. They no longer have to wait for a call center representative from Pershing or Fidelity to get back to the broker-dealer’s operations representative, who then has to call the advisor back and perhaps relay misunderstood information.

Additionally, smaller BDs are usually more willing to approve a wider range of specialized, or alternative investments that can offer tax mitigation strategies so their advisors can attract higher net worth individuals.

Smaller broker-dealers are also more likely to turn around fast compliance approval for marketing material. Approvals that may take seven to 14 days at an IBD may only take 24 to 72 hours at small broker-dealers.

Read the full article here by Dan Meehan, Advisor Perspectives


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