Time For A Move? What You Need To Know About Changing Broker/dealers

by Jon Henschen

Published on this site: April 12th, 2005 - See more articles from this month...

Why do advisors change broker/dealers? The reasons are as varied as the advisors themselves, but here’s the short list:

Advisors are unhappy with their current relationship. This is largely because of things like the consolidation of insurance companies and banks where significant management changes have altered firms’ relationships with buyers.

Insurance companies that had been buying up broker/dealers for the past 20 years are starting to divorce themselves of these relationships. That kind of uncertainty is not too relaxing.

Management changes resulting from the consolidation of insurance companies and banks have altered these firms' relationship with buyers.

Advisors want increasingly better business support and marketing services, better product offerings, higher payouts and state-of-the-art technology from their broker/dealer.

Broker/dealers are paying much more attention to E&O complaints and will simply tell advisors who receive them to pack up and leave without a second chance or appeal.

And yet another disturbing trend comes from the World of Compliance. Attorneys have discovered profitability in mass mediations against financial advisors over market losses to client accounts. We've seen advisors with as many as 22 arbitrations stacked up against them. In some instances, broker/dealers and their E&O carriers are simply rolling over and paying off these cases outside of arbitration--without even consulting the advisors!

As a result--guilty or not--these advisors now have black marks on their compliance history.

Now for some good news! Some broker/dealers are targeting producer groups doing $1 million or more in gross dealer concessions. Benefits to these high-grossing groups can include very attractive payouts, transition loans, marketing assistance and business-planning services, recruiting support, and increasingly higher levels of advisor services.

Whatever the reason for the move may be, however, changing broker/dealers can be a major business disruption, costly in time, money and client confidence. How long this disruption lasts and what it ends up costing directly relates to the amount and type of planning done beforehand.

Advance planning--and the basics described here--can smooth your transition, cut your costs, eliminate aggravation (for advisors and clients), and shorten the process from months to weeks.

Types of Transfers

Several types of book transfers are available. Though all types of transfers may not be appropriate for all advisors, they are:

Block Transfers – *Note, as of October 2004, NASD has eliminated block transfers until further notice. The easiest type of transfer, block transfers enable advisors to change the broker/dealer of record for all client accounts held by product companies without obtaining client signatures. This is done using a block transfer approval letter signed by the releasing and accepting broker/dealers, and with New Account forms signed by the advisor’s clients.

Standard processing times for product changes vary. For mutual funds it is normally two-to-three weeks; for variable annuities it is normally five weeks. Insurance product changes take longer because advisors must be re-appointed with each carrier before block transfer requests can be completed.

Broker/dealers typically allow advisors up to six months for New Account forms to be completed, signed and submitted for each block transfer client; new business with these clients requires New Account forms signed at the time of purchase.

Individual Client Changes – For advisors unable to make block transfers for directly held investments, individual client changes are an alternative.

Advisors making individual client changes must complete the following:

New Account forms with client signatures for each account, submitted to the advisor’s new broker/dealer.

Individual Client Change of Broker/Dealer forms for all accounts with each product sponsor, signed by each account holder and submitted to each product sponsor.

Processing times for individual account changes are typically one-to-five days following receipt of the necessary forms by product sponsors. Advisors keep copies of these forms as a record of account transfers, using them to follow up with clients switched to the new broker/dealer.

Automated Customer Account Transfers (ACATS) – This method consolidates and transfers client accounts from one clearing house to another.

ACATS require the following to be completed and signed by the advisor’s clients:

ACAT forms.

Applicable IRA transfer forms.

New Account forms.

Typical processing times for ACAT transfers are five-to-ten days for transferring accounts within the same clearing firm (example: Pershing to Pershing); 10-to-20 days for transferring accounts to different clearing firms (example: Pershing to Bear Sterns).

In addition to faster processing times, advantages of staying with the same clearing firm include:

Clients receive familiar statements.

Some clearing firms charge exit fees for account transfers.

Some broker/dealers add their own transfer charges to clearing
firm exit fees.

Changing Broker/Dealers -- Do’s and Don’ts

Advance planning is critical in any transfer, but so are the competence of your new broker/dealer’s transfer department and the cooperation of your former firm. The following tips will make your transition smoother and easier:

Don’t burn your bridges when leaving a broker/dealer. They can make your life miserable by not completing block transfers, inflicting U-5 defamation or withholding commissions.

Don’t owe money to your former firm or leave behind unresolved customer or criminal complaints.

Do confirm if your contract with your former broker/dealer specifies a time period (typically, 30 days) during which you will continue to receive trails and commissions.

Do discuss your compliance history or other concerns with us. We know which firms are more forgiving.

Don’t expect all firms to make block transfers. In fact, a growing movement among broker/dealers is not to make block transfers on direct business.

What Transition Help is Available from Broker/ Dealers?

Different firms offer different levels of transition help to independent advisors. However, the following are typical:

Onsite transition teams to help with paperwork, operating guidance, technology training and Website design, and to assist with office staffing.

Home office training for advisors and office staff.

Funding assistance with stationery, business cards, client mailings and other transfer expenses. Typical compensation is 1% – 3% of trailing 12-months’ production paid when you transfer to the new firm.

Some independent broker/dealers offer forgivable loans. These are typically 10% of trailing 12-months’ production paid when you transfer to the new firm, and are forgiven over five-to-six years. If your production drops substantially, the broker/dealer can call the note and request the balance owed.

Some firms offer low-interest or no-interest loans up to 20% of trailing 12-months’ gross production. These loans are repaid through reduced payouts. Once loans are paid off, payouts return to normal levels.

Jonathan Henschen, CFS, President of Henschen & Associates Jon has worked in both the wire-house and independent broker/dealer channels for over fifteen years and has extensive contacts in the broker/dealer marketplace. Mr. Henschen is also a regular contributor to the publications On Wall Street and Investment News. Contact us at Henschen & Associates, Independent Advisor Recruitment, (888) 820-8107, (651) 433-3501, http://www.henschenassoc.com