Practice Management

Don't get stuck with a B-D lemon

Choosing a broker-dealer is critical, and so are the questions that must be asked ahead of time

Jun 29, 2014 @ 12:01 am

When it's time to buy a new car, most people follow similar steps. We read Consumer Reports, perform research online, take test drives and negotiate the best price. No one wants to buy a lemon. No one wants to have issues with a car they drive every day.

We do due diligence before we buy that car because it gives us peace of mind that we are getting what we are paying for. The same can be said for an adviser choosing a broker-dealer. And while most advisers know to investigate the more obvious broker-dealer characteristics such as payout, product availability and technology, the broker-dealer landscape has changed.


Asking the traditional questions when shopping for a broker-dealer is no longer enough. Now more than ever, broker-dealers are selling, going out of business or experiencing financial or regulatory problems at a very high rate. This makes it crucial to investigate a broker-dealer's background and long-term plans before making a move.

The following are some of the areas that, if explored thoroughly, can mitigate a bad broker-dealer partnership that may leave you feeling blindsided or unhappy.

1. Who holds the power? It's very important to understand who makes decisions and how those decisions may affect you. For example, if you are interested in moving to a firm with a large parent company, try to understand how that relationship affects the broker-dealer. Does the parent company have long-term plans that will result in changes for the broker-dealer, or do they plan to keep things status quo? This may be hard to explore, as most firms will tell you only positive things about their broker-dealer's ownership. This is where I encourage you to speak with advisers who are currently affiliated with the broker-dealer. Have they seen changes? Do they feel decisions are made for the benefit of the advisers or do they feel a squeeze?

2. What does Finra reveal? Within seconds, you can access a broker-dealer's background. Visit Under BrokerCheck, look up the firm. You'll find insight into regulatory history and any pending liability. If you see a pattern of regulator fines or settled arbitrations, this should be a red flag.

3. Deep pockets? No adviser wants to experience what it's like to be with a broker-dealer that goes out of business. The ripple effect is massive. Yet assessing the financial soundness of a broker-dealer can be challenging. Ask potential broker-dealers for a copy of their financials, including their excess net capital. Compare these reserves to any potential liability. Does the firm have a pending arbitration that could affect this number and cause problems down the road?

4. Compliance tone. Culture is the semi-intangible component that is one of the most important factors to consider when looking at broker-dealers. There is no doubt that the culture within a compliance department can set the tone for your experience with a firm. Assessing the style of a compliance department is difficult. This is where I encourage advisers to ask tough questions about critical situations that you don't expect to happen. For example, what is the process for handling a customer complaint? Their response to this question should give you a better indication of the way they interact with their advisers. Find out if what they say is realistic by talking to existing advisers about their experiences.

5. Crystal ball. It may seem like you may never get a straight answer as to the long-term plans of a broker-dealer, but you may be surprised. For example, if you are looking to join a firm that is independently owned, ask the tough questions. Have you entertained offers from potential buyers? Where do you see your firm five, 10, 15 years from now? I am not suggesting that broker-dealers will always be candid if they do have plans to sell their firm, but getting an idea of their long-term intentions is always a good idea.

I am a big believer in the benefits a strong broker-dealer partnership can have on an adviser's practice. Those partnerships do exist, and I see them every day. Yet, at the same time, I have seen way too many advisers affected negatively by decisions made by their broker-dealer. Before you take the leap and move your practice to a new broker-dealer, take your time, do your due diligence and ask the hard questions so that you don't get stuck with a lemon.

Jodie Papike is the executive vice president of Cross-Search, a third-party, independent broker-dealer recruiting firm. Visit


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