Net growth in advisor affiliations has been a challenge for many broker/dealers (B/Ds) as increased competition from alternative affiliation options such as independent and hybrid registered investment advisor (RIA) affiliations gain popularity among financial advisors.
This is according to findings from The Cerulli Report: U.S. Broker/Dealer Marketplace 2022: Evolving Approaches to Advisor Recruitment and Affiliation.
In fact, wirehouse firms appear to be most at risk of losing advisors, with their advisors most frequently identifying as being undecided about remaining affiliated with their firms over the next 12 months, the report notes. Among the top challenges of operating at wirehouse firms identified by these advisors were insufficient staffing support, changes to compensation, and imposed minimums for new clients.
“These frustrations all relate to the extent to which an advisor is able to control how they operate their practice and are common motivating factors for breaking away,” says Michael Rose, Associate Director at Cerulli.
On average, 71% of all advisors identify a preference for independent affiliation—including independent broker/dealer (IBD), hybrid RIA and independent RIA affiliation—in the event that they were to change firms, compared to only 44% of advisors who are currently independently affiliated.
“This suggests that there is still an excess demand for independent affiliation among advisors, which will likely drive the growth of the independent channels over the foreseeable future,” Rose further observes.
According to the firm’s data, the rate of growth in the number of advisors who affiliate with independent and hybrid RIAs has grown on an annualized basis by 4.4% and 2%, respectively, over the last five years. Most employee B/D advisors identify greater autonomy (62%), a higher payout (57%), and the ability to build financial value in an independent business (54%) as the top major reasons for their preference for independence.
Meanwhile, hybrid RIA (15.7%) and independent RIAs (14.8%) registered as the fastest growing advisor channels by advisor-managed asset growth when looking at the five-year compound annual growth rate, as well as the 10-year CAGR (13.6% and 12.9%, respectively).
Affiliation Changes
That said, additional findings show that 61% of advisor affiliation changes expected to occur in 2022 were expected to be transitions between firms within the same channel. “These affiliation changes represent significant opportunities gained and lost by firms respectively, as these advisor affiliation changes are generally driven by satisfaction with the products, services, support, and economics being offered to them by their firms, and are less frequently driven by a strategic change in how advisors want to operate their practice,” the report notes.
Cerulli further explains that many of the largest B/Ds share similar cultures and capabilities, but a select group, including wirehouses, have achieved “unrivaled scale and resources to support affluent and high-net-worth (HNW) families.” Additionally, many other B/Ds are equally focused on advisor productivity, technology, teaming and specialization, but not all are equipped to move far upmarket.
To mitigate potential affiliation changes, Cerulli recommends that both wirehouse firms and other traditional B/Ds tread carefully when making changes to their payout grids and consider more closely the return on investment associated with the hiring of support staff, which can result in improved retention rates and new recruitment of advisor teams.
The research also finds that technology has a tremendous impact on advisor recruiting and retention. Technology (56%) and the level of autonomy/control over how they serve their clients (50%) are the most frequently identified factors that would influence an advisor’s decision to choose to affiliate with a B/D.
“Technology remains the most frequently cited factor that would influence an advisor’s decision to join a given B/D if they were to change affiliation—it stands out as one of the most significant differentiating factors among B/Ds in the minds of many advisors,” emphasizes Rose. “Firms that are laser-focused on maximizing the quality of the resources they offer to advisors in terms of their products, services, and support, along with those that offer flexibility in affiliation options, are most likely to succeed in recruiting and retaining top advisor talent,” he concludes.
