When skewed super-OSJ priorities raise red flags for retirement plan advisers
If a super-OSJ switches broker-dealers, overhauls its business model or ends up being acquired, that could be disruptive for the advisers that work with it.
Retirement plan-focused financial advisers have always been a natural fit for the super-office of supervisory jurisdiction model. The specialized nature and large scale of their practices mean that super-OSJs that understand the retirement plan advice space can add tremendous value by driving efficiencies and supporting best practices.
Unfortunately, the current environment of industry consolidation presents serious risks for these advisers. The industry today is witnessing super-OSJs abruptly switching broker-dealers to improve profit margins for their leadership teams; accepting up-front checks from custodial firms to launch their own broker-dealer platforms; or taking outside funding from private equity players that are more interested in profit growth than adviser service.
What are the key warning signs retirement plan advisers should look for to see if their super-OSJ’s priorities may have shifted?
1. Switching broker-dealers despite satisfaction among the super-OSJ’s advisers. Many super-OSJs and the retirement plan-focused advisers they support operate on relatively thin margins, so it can be tempting to believe that the grass may be greener at another broker-dealer. Shifting B-Ds, however, can be highly disruptive, with OSJs often underestimating the time it takes advisers to re-paper accounts, transition technology platforms and explain their move to clients.
Of course, there will be times when a B-D switch is the best option for super-OSJs and their advisers. But if an OSJ suddenly initiates a broker-dealer change despite general satisfaction among its advisers with the current B-D relationship, advisers should watch out — it could signal that their needs are no longer at the top of the OSJ’s priority list.
2. Overhauling the super-OSJ’s structure and business model. Some super-OSJs have decided over the last several years to reconfigure their businesses as stand-alone broker-dealers to take greater control of their direction and platforms, despite the vast regulatory and operating challenges this shift entails. With the DOL fiduciary rule now likely in the rearview mirror, this trend has started to accelerate.
Retirement plan-focused advisers should be wary of overly ambitious shifts in their super-OSJ’s business model that do not follow organically from the adviser community’s own needs and growth plans. This is especially true given that many midsize broker-dealers have gone in the opposite direction in recent years: They have seen what it takes to operate a B-D in today’s environment and — despite having years or even decades of experience with this model — have concluded that it would be better for their teams and advisers to reduce complexity and function as an OSJ, instead.
3. Displaying short-term thinking that could hurt advisers. Industry consolidation is not going away — if anything, it seems to be gaining speed. For retirement plan-focused advisers whose businesses rely on steady, consistent growth and stable relationships with their OSJ and broker-dealer, this creates two potential risks when a super-OSJ decides to switch B-Ds or change its operating structure.
The first is that the super-OSJ may transition to a new B-D that could become an acquisition target itself. If the OSJ joins a B-D that is not positioned to act as a consolidator, its leadership team may be showing signs of strategic myopia that could come back to haunt advisers if they are forced to go through multiple disruptive B-D transitions due to acquisition within a two- or three-year time frame.
The risk at the other end of the spectrum is just as worrisome: that the OSJ may be intentionally positioning itself to be acquired rather than thinking about its advisers’ long-term interests. This scenario would also put advisers in jeopardy of having to go through multiple B-D transitions, with the added downside that the OSJ management team could be trying to maximize their own short-term gains at the expense of what is best for their advisers and clients over the long haul.
While most super-OSJs will likely remain focused on the needs of the practices they support, advisers should be aware that incentives for super-OSJs in the current environment have become skewed in ways that may not always work in their best interests.
By keeping an eye on the factors above, advisers can continue to safeguard their practices and clients, and keep themselves on the path to steady growth. (More: Designing the Super OSJ of the future)
Rick Kent is president of Merit Financial Group, an independent hybrid RIA that operates Worksite Financial Wellness, a third-party financial wellness services provider.
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