Should You Be a Big Fish in a Small or Large Pond?
What You Need to Know
Changing your broker-dealer is a situation where there is no perfect outcome but rather, a give-and-take of trade-offs.
Small firms can mold to an advisor’s individual needs and provide them with greater flexibility and opportunities for recognition.
Larger firms have the advantage of scale, not to mention depth and breadth of services.
“There are no solutions, there are only trade-offs; and you try to get the best trade-off you can get, that’s all you can hope for,” wrote economist Thomas Sowell.
It is especially fitting to quote Sowell on this topic because changing your broker-dealer is clearly a situation where there is no perfect outcome but rather, a give-and-take of trade-offs.
The primary voices in our industry would lean toward the side of larger firms, noting their scale offers efficiencies and pricing advantages. Certainly, one area large firms bring advantages is in the flargsize of the transition dollars they provide, and for some, that is enough to hook them.
Small Pond Advantages
Large independent broker-dealers and RIAs have their downside as increasing size forces them to morph into a cookie-cutter, “fit into our box” mentality.
Small firms can mold to an advisor’s individual needs in areas such as marketing, outside business activities, product max investment restrictions or age restrictions on investments.
Flexibility
We once experienced an outside business activity (OBA) conflict with a large broker-dealer when an advisor took a transition note amount they couldn’t turn down. Coming from a smaller firm, they had grown accustomed to a greater degree of flexibility and easier access to management.
The advisor found that in multiple compliance situations, they never seemed to get clear answers, and the lack of resolution became burdensome. Relationship with upper management at their prior firm, which they had taken for granted, was sorely missed, and the frustrations with their new firm grew to the point they had to pull the plug and leave after two years.
They ended up joining a midsize broker-dealer, which provided a level of communication and flexibility more akin to what they were accustomed to. Besides flexibility and relationship, being a big fish in a smaller pond is also appealing when you have a high ranking in production.
Recognition
In a recent discussion with a large producer, we went through a couple of firm options with one we felt certain would be compelling. The option was with a larger RIA that had an unusually high average production per advisor.
Even though this RIA checked off much of the criteria they sought, the larger size and high production average turned them off. At small and midsized firms, a large producer can command more attention and feel more significant.
Defined Identity
Easy access to upper management and ranking high in the top 50 advisors at a firm can be highly sought out. Smaller firms also have more defined identities as you can see clearer delineations as to their focus.
Larger firms struggle to have a defined identity, tending to be generalists to appeal to everyone.
Midsized broker-dealers that are generalists have been getting sold in recent years because they are competing on the same level as the large firms that have scale advantages.
Large Pond Advantages
Regarding the rejection of the advisor wanted to be a bigger fish in a smaller pond, the RIA firm responded to me, saying, “Advisors don’t get better and attract larger clients with fewer resources; you don’t get better if you don’t have people around you that are better producers than you.”
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.
