Forms of Transition

“I Have Done My Very Best”,
Richard Nixon, August 09, 1974

The transition of Nixon as P.O.T.U.S. to a laid- back life in San Clemente must have been difficult to say the least. To go from sharing pleasantries with Chairman Mao in Beijing to listening to the California breakers splash up on his La Casa Pacifica estate a scant two years later begs the question of what’s involved in the transitions of life.

Transitions in careers and life in the securities business can be traumatic and always must be taken seriously.Just as in the business there are risk factors to be considered and it is the contemplation of success or failure which lies in the balance. Let’s take a look at a few of the more noteworthy forms of transitions in today’s broker world:

A) The Transition to an Independent Model

This is perhaps the most difficult form and it demands a very close look in the mirror. There are some serious attractions to this side of the market – higher payout, business ownership, flexible succession plans – but, the psychology of running your own business can and does pose as a major obstacle in making that decision for some IA’s. The art of counting pennies as in cost control will figure largely into profitability (read net payout), hiring/firing, paying and managing staff will test any skill sets an IA may or may not have in this area and convincing clients that their assets are safe and secure under a lesser known banner than that of a bank can be a daunting prospect.

Nonetheless, there is a soft but, present trend in this direction in this country and with the letterhead of some substantial firms next to yours the benefits are receiving a closer look. And running your business under an existing independent branch of a major IIROC firm takes away many of the cost and compliance factors.

B) The Transition to Fee-Based Business

There is nothing like a long, crappy down market that will take its toll on traditional and transactional business models. For those with long memories the years of 1972 and 1987 are stark reminders that there is always another big one (2008) waiting in the wings. So, after and in between those cited occasions a growing number of IA’s decided to move away from commission-based earnings to a model of fees-on-assets to provide a consistency of income on a year-to-year basis. Obviously, for the sponsoring firms the continuity of earnings was extremely attractive.

However, (there is always a however) there were and are a couple of major obstacles facing this transition:

1) Cash Flow

It takes a good year for the IA’s earnings to make the catch-up adjustment from transactional commissions to a yearly fee charge. The management of their own economies will play a pivotal role in some IA’s decision in the regard.

2) Improper Pricing

The standard(s) set for a fee structure still hovers around 1% and on a comparative basis to what is charged on MER’s, Hedge Funds and D.S.C.’s (still!) it’s just not practical. Many IA’s who are part-way into the transition begin to have second thoughts.

Still and without question the fee-based option is both best and reasonable for broker and client alike. Yet, the average transition factor in the business today is not much better than 35 / 40%

C) Transition to a P.M. Platform

The desirability of holding a Portfolio Manager designation has been a long time coming in our business. The qualifications for the title are not easy nor should they be but, the trend has been steadily growing over the past several years.

The need a/o desirability to transition to this practice lies in the efficiencies it offers. The designing of larger portfolios and transactional management therein is enhanced through a leaner and tighter offering of products. With lesser holdings to manage the system will bring a more efficient level of compliance oversight to the table. This all bodes well for the adviser, the client and their relationship – following a strict sense of rules and regulations under a P.M. platform will help keep all parties out of the courtroom.

The obstacles an advisor faces in implementing this management structure is minor. The portfolio management systems are fee-based and that really is the only push back factor given that there are clients who are truly fee-sensitive. As mentioned earlier the trend towards this transition has been steadily increasing over the past decade. More recently the transition has been growing at a more rapid rate given that the senior institutions (ie: banks) have been nudging their more senior and tenured advisors in this direction. The C.R.M. rules are changing as we all know. I’m sure we will see a significant increase in the holders of the P.M. destination (currently sits at approx. 15-20% of the population) within the next few years.

D) Transition to another Firm a.k.a. “Moving”

Obviously, this is the most common understanding of the word in the Securities Industry but, still warrants a serious examination of the obstacles facing the IA who is considering “the move”. The whys and wherefores involved in the reasons for moving have been dealt with in previous writings and are well established. So, let’s look at the obstacles:

1) First and foremost are the considerations for the client in joining the broker in the transition.

The inconvenience factor can be intimidating and there had better be a couple of solid benefits for the client. Also, the client must understand and appreciate the benefit to you, the IA as it relates to career and business style.

2) Following along with #1 is the risk of losing assets.

That happenstance can occur for a variety of reasons which will include:
– A down market taking its toll on client holdings
– A poor performance record regardless of market conditions
– Client does not buy into the reasons for the move
– Client does not approve of the new firm

3) Not to be forgotten in the mix are staffing issues.

If the sales aide is reluctant and worse the sales associate who services a decent portion of the book, the broker had better consider the consequences. This potential problem can easily increase with a larger number of team members.

4) Retention and the Attack Squad

Having strong client relationships should overcome nearly anything the firm being departed can throw in the way of a successful transition. But, historical record can be proven wrong and where the relationship factor is miscalculated the “slaughter syndrome” will come into play. When looking at a financial institution (i.e. bank) that has other ‘ties’ to the clientele the loss numbers will likely increase. For the IA who has doubts as to the forgoing or how many of his/her colleagues are ‘real’ friends after the departure, this obstacle will loom large in the decision.

Wow! All of the foregoing would seem to have at least some ominous tones buried in the text. But, as Bill Shakespeare once said — “opportunities (transitions) when taken at the flood lead on to victory”. Transitions in the securities industry are part of the fabric and change will always find obstacles. When that change is necessary, well thought out and well executed then life will the better for it.

Your thoughts and comments are invited in the comments below.

Written by: Brian L.Curry, CEO, Curry-Henry Group (Copyright 2014)

“It’s a simple business but, it’s not easy”.