Any broker entertaining thoughts of leaving a wirehouse always looks to see how green the grass is on the independent side before hopping the fence. For years, it seemed that even the technology enthusiasts among the indie adviser wannabes focused more on the payout at potential firms than anything else. That's not the case anymore.
“These days, it is usually quite the opposite,” said Danny Sarch, founder of Leitner Sarch Consultants Ltd., an industry recruiter.
Mr. Sarch, a regular contributor to InvestmentNews, explained that today, technology is inextricably tied to operations and client service levels in the minds of brokers contemplating a jump to independence.
When high-end teams want to leave, Mr. Sarch said, they first ask themselves if they can conduct their business at a level of service and technology comparable with what they are running at the wirehouse.
“They are not as skeptical as they used to be. Sure, they are still going to say, "Show me what you can do for me [in terms of payout],' but they are less likely to rule an independent broker-dealer out of hand,” Mr. Sarch said, explaining that the days when brokers simply assumed that indie firms were less technologically capable than wirehouses have passed.
Darren Tedesco, managing principal of innovation and strategy at Commonwealth Financial Network, built his career on developing Commonwealth's technology prowess and was recognized for that in December by the outside technology world when he was named to the 2013 Premier 100 IT Leaders list by the editors of Computerworld magazine.
While the firm's overall 2011 revenue of $646.5 million put it in fifth position behind No. 1 LPL Financial LLC, which had $3.3 billion, Commonwealth's average annual payout per representative was the industry's highest at $377,861 — a little more than double that of LPL.
As important as technology has been to attracting top advisers to his firm, Mr. Tedesco acknowledges that it is not the most important aspect when it comes to persuading a candidate to join.
“Technology remains as one of the top two factors that advisers cite for joining Commonwealth, but service remains hands-down the top priority,” he said, citing feedback from advisers three months after they joined the firm.
Even so, technology was crucial to landing most of them, whether it was from a wirehouse, another broker-dealer or a custodian.
“In a recent survey, when we asked what percentage of advisers would not have joined Commonwealth if we did not have our integrated technology in place, that number was a whopping 57%,” Mr. Tedesco said.
Mr. Sarch and others agree that Commonwealth is highly regarded for its technology. But what about the nation's largest independent broker-dealer, LPL?
In December, the firm hired Victor Fetter, former head of online operations at Dell Inc., as chief information officer and more recently brought on board a former high-level executive from a management consulting firm. LPL has several dozen open technology positions to fill in 2013 and has noted plans to update, enhance and expand its adviser platform.
If the firm's technology spending, which amounted to about $50 million in 2011, $28 million in 2010 and $12 million in 2009, continues growing, LPL will have an advantage when it comes to attracting new advisers.
Betsy Weinberger, head of LPL media relations, said although the firm's year-end financials aren't due out until February, “it is safe to say that we are on pace to maintain an increased level of technology spending in 2012 over the prior years.”
While that may be true, the company's sheer size in terms of the number of representatives it serves — 12,000 — is a formidable workforce to keep satisfied.
“Don't get me wrong — [LPL's] top thousand guys are as good as anybody's,” Mr. Sarch said. “But if you are building a platform for the masses, you are simply not going to be able to give the attention to detail and level of service you would to top advisers — that model simply cannot scale,” he said.
In his estimation, that is why many smaller broker-dealers, including Commonwealth, which has 1,500 advisers, have been so successful.
“Over the past two years, Commonwealth has spent approximately $25,000 per adviser per year in technology,” Mr. Tedesco said. “But I'm a firm believer that it's not how much you spend but how wisely you spend it.”
Mr. Tedesco said Commonwealth spent $33.4 million on technology in 2011, and while the number for 2012 has not yet been finalized, it should amount to $39.6 million.
Alois Pirker, research director of Aite Group LLC, points out that it is difficult to compare technology among independent broker-dealers based strictly on spending.
“It is hard to separate out operations from technology support when you are getting down to specifics,” he said, explaining that firms simply do not provide enough detail in their reported data to draw truly apples-to-apples comparisons or meaningful conclusions.
Technology isn't at the top of the list of broker motivations for leaving a firm, but it is an important factor, Mr. Pirker said. Citing a small survey he conducted in March 2012 among 40 advisers who had made a change, one-third reported dissatisfaction with their old firm in general (much of it driven by interpersonal relations or culture), one-third cited operations, and only one in six complained specifically about poor technology.
Douglas Dannemiller, principal of Dannemiller Analytics & Consulting LLC, argues that technology should be viewed as the glue that binds everything together. His firm serves broker-dealers, clearing firms and product companies with research needs.
“It is not just about assessing the level of freedom they will have [at an IBD] but also how penalizing it is going to be when they cannot match what the wirehouse was providing them,” Mr. Dannemiller said.
For example, most indie firms cannot provide sophisticated investment product options, in-house analysts and tight integration of both customer management and financial information.
Technological efficiency appears to be the key. Broker-dealers that can deliver this and high levels of client service, yet still afford to give an adviser their freedom and high payouts, are going to be most successful.
“Beyond that, the devil is in the details — it becomes more of a philosophical and business model decision,” Mr. Dannemiller said.
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