Should You Be a Big Fish in a Small or Large Pond?

This RIA takes a holistic approach to financial planning, offering numerous tools that appeal to large producers, including an in-house tax practice, insurance agency, 401(k) division, trust company, mergers and acquisitions support and employee benefits. Opportunities for growth abound.

Depth and breadth of services help large producers build efficiencies so they can grow their client base, have more time, and make clients stickier and a more reliable source of referrals.

Transition Notes

Larger firms’ scale allows them not only to provide many services but to offer advisors larger transition notes to join them.

When you are offered up to 100 basis points on your assets under management to join a firm, yes, you might use the transition money to buy a beach house or a new car, but many advisors use the proceeds to invest in the growth of their business.

Succession Planning

Beyond larger transition notes, larger firms also offer more succession/continuation opportunities and as a newer trend, direct purchases of books by larger broker-dealers.

While a smaller firm may only have a couple of other advisors in your state for potential succession opportunities, a large firm may have multiple candidates within a 20-minute drive of your office with younger advisors eager to be your succession plan.

FINRA Compliance

Large firms also give you increased assurances they will be able to survive the most difficult markets and the largest regulatory fines (substantial holders of junk-bond debt firms not included).

While many small firms have been brought down by fraudulent alternative investments and regulatory fines that became too much for them to handle, larger firms (those with $100 million or more in yearly revenue) are able to meet FINRA requirements and cover FINRA fines that come their way.

For smaller firms, especially those under $50 million of revenue, keeping up with FINRA requirements and compliance staffing needs while remaining profitable has become difficult.

Ponds vs. Rivers

When I fish for muskellunge (or muskie) in my home state of Minnesota, the type of body of water can determine the size of the muskie. Fish in lakes can be quite heavy, while river muskie tend to be thinner because they are fighting currents.

Financial advisors at IBDs are having to fight FINRA requirements, which often hurts the amount they earn.

Restricted ability to market themselves, more time spent on large volumes of paperwork to transact business and more convoluted policies and procedures act like currents on a fish, eating away at the ability to be more productive and over time dragging down production.

The RIA environment, free of FINRA, certainly puts you into a lake where you will have far fewer currents to swim against.

IBDs that have recently faced large FINRA fines may have requirements above and beyond what FINRA requires, so if considering this route, put a microscope up to compliance history, paperwork length, business flow procedures and company policies to gauge whether you will have currents to swim against.

The primary differences between the large and small ponds are the type of relationships, level of flexibility and the scale of services offered. Trade-offs need to bring what matters most to you in order to make the best match for long-term contentment.

Jon Henschen is president of Henschen & Associates, a firm that helps advisors find broker-dealer relationships.

Leave a Comment