Pershing study: Why the IBD talent market is headed for trouble and what might reverse the trend
As broker-dealers lose reps, they all have the same strategy for replacement: poaching each other
4 min read- IBDs face a talent crunch due to advisor cannibalization and Boomer retirements.
- Pershing advocates for IBDs to prioritize talent development over advisor poaching.
- Culture, independence, and support are key to advisor retention, not just income.
- Recruiting costs have quadrupled, underscoring the need for better retention strategies.
Brooke’s Note: So many RIAs start life by getting trained as brokers. But what happens to the talent pool — already slim as Baby Boomers retire — if brokers slam on the brakes and stop doing that? This article elucidates the issue.
The labor market at independent broker-dealers has the makings of a minor train wreck according to a report issued last month by Pershing.
The problem is a vast cannibalization of talent from one broker-dealer to the next with very little production of new talent, according to the Race for Top Talent II white paper published by the Jersey City N.J.-based clearing giant.
The solution to this mega-problem may only be solved by a macro-shift in culture by the leaders of those firms toward a mindset of retaining and developing people, instead of poaching them from each other, according to Dan Inveen, author of the study and managing principal of FA Insight in Tacoma, Wash.
Rooted in sales
“The broker-dealer industry is rooted in a sales culture. This has translated into a typically myopic growth strategy for most firms that centers on 'selling’ an experienced advisor to jump ship and join your firm.
“Like the shift we have seen in how the industry services end clients, broker-dealers need to shift focus from 'sales’ to developing long term-relationships with advisors and being a vital business-building partner that supports growth of advisor practices. Making this shift will assure the IBD stays relevant and competitive in relation to independent RIAs,” he said in response to an emailed query.
RIAs are hiring like crazy in 2011 but sticker shock, picked-over talent pool may await laggards
Here is the grim scenario as outlined by the study: Right now there are about 290,000 advisors working for broker-dealers. The retention ratio — the number that stick around year to year — averages 84%. That means that broker-dealers will have to collectively add 46,000 advisors annually.
See: RIAs are hiring like crazy in 2011 but sticker shock, picked-over talent pool may await laggards
The problem is that IBDs share the strategy of robbing Peter to pay Paul. The average broker-dealer in 2010 expected 68% of its recruits to come from other IBDs and 8% to come from full service brokers.
Some firms are beginning to focus on the problem. https://www.riabiz.com/a/5802196:“How MetLife Securities may use one new Philly rep to boost talent retention and development”
Pershing, which has about 900 broker-dealers that use its clearing services, is taking steps to move its customers in the right direction, according to Jim Roth, managing director.
Income is not the key factor
Story Timeline
He points to the need for a cultural shift away from buying the solution to developing one. “Income is a factor but it’s not the key factor.”
Roth believes his company is in a position to facilitate the exchange of information between broker-dealers to learn how to develop talent and he believes that there are a number of broker-dealers that are on the right track.
There are some tried and true ways to attract and retain talent, according to the report.
How MetLife Securities may use one new Philly rep to boost talent retention and development
“In rank order, independence, firm brand, and services and support are the top reasons that drive an investment professional to join a particular broker-dealer. The top three reasons investment professionals decide to stay with a broker-dealer in order of importance include services and support, culture and independence. Providing investment professionals with the freedom to offer products and services that are in the best interests of their clients can strengthen both recruiting and retention.”
”With just a one percentage point improvement in annual retention, the typical broker-dealer extends the expected tenure of its average investment professional by five months,” the report says.
Little choice
Firms have little choice but to start paying attention, with recruiting costs rising fast.
Because of increased demand, the per-professional cost of a recruit has nearly quadrupled from $2,569 in 2007 to $9,873 in 2009, the report states.
There are also significant costs of transition and onboarding that inflate that bogey.
Given an average annual profit of $3,200 per professional for an IBD, it takes three years to recover the recruiting costs. Given that the average tenure of an advisor is 6.4 years, the broker dealer may never recover its upfront costs for many recruited advisors, the Pershing report says.
Leasing talent
“Firms paying out large sums of money are only leasing the investment professional for a specified period of time as money will never buy loyalty,” it adds.
The number of broker-dealers dropped from 5,392 in 2003 to 4,663 as of July 2010, a decline of 14%.
Rely on RIABiz? Tell Google.
Naming us a preferred source puts our reporting first in your Top Stories and AI Overviews. Takes one click, and only you see the difference.