7 Areas to Investigate When Your Broker/Dealer Contract is Renewing

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1 7 Areas to Investigate When Your Broker/Dealer Contract is Renewing Authored by: Christine M. Strickland, Managing Director 1 P age

2 Introduction Whether you re about to renew your contract with your current broker/dealer or if you re starting the process of looking for a new one, it s critical to ask the right questions. After working on contract negotiations and conversions for over 10 years, we ve seen too many financial institutions make assumptions, sign a contract, and then realize they hadn t asked us about some critical components to reaching their desired goals. Don t wait until after you ve signed a contract to get into the details. Seems like common sense..but not everyone asks the right fundamental questions. It starts with knowing what is important to your financial institution. Then you can prioritize the information you collect and assure that your current or future broker/dealer can meet your needs for many years to come. Our advice, save yourself some time and trouble by asking the right questions up front to get through a preliminary review before you get to a detailed RFP. The primary areas you ll want to review include: 1. NET payout 2. Client experience 3. The firm s financial condition and key areas of focus for the coming year 4. Tactical support for financial institution program growth 5. Technology 6. Reporting 7. Conversion support Stepping back from the day to day business and asking these simple questions will allow program executives to quickly evaluate the broker/dealer s ability, responsiveness, and value. 2 P age

3 Area #1: NET Payout The conversation around payout is a natural part of any contract conversation, but only one piece of the pie. An attractive revenue share arrangement may only look good on the surface. You should take time to thoroughly analyze all of the fees and expenses that are deducted from gross revenue. What are the big fees that are charged and how do they compare to your gross revenue? The economic challenges of the past several years have led to many changes in fee structures. Make sure you have a clear picture of what is impacting your NET revenue by looking at fees such as: Technology fees many times these are variable based on the tools and services your program has elected to purchase. Many times a program has made blanket purchase decisions for technology services when only a few are actively using the service. o Savings Tip: Beyond the fees being charged by the Broker/Dealer, think about your firm s utilization of the services. Are your advisors truly using all of the technology you have purchased on their behalf? Trading fees how are these being assessed. Are they passed through or absorbed? o Savings Tip: Are individual representative s abusing the ability to waive/reduce fees that clients should be paying? E&O insurance there are wide discrepancies between policies and what is being charged to the financial institution. Are your rates competitive? o Savings Tip: Are you being billed only for current employees? Training/conference fees What does it cost to attend all the various types of conferences? Are there qualification guidelines that allow discounts or waiver of fees? Licensing and registration fees Annual association fees Look at all the fees on an individual and program level to make sure you re only paying for things your current staff needs and not for things the broker/dealer assumes you need. Ask about aggregating fees for discounts, waiving or reducing fees for a trial period, or lowering fees for certain rep types. Use this worksheet to analyze and compare revenue share and fee structures between different broker/dealers. 3 P age

4 Area #2: Clients Experience Talking to current and former clients can provide you a great deal of insight into how the broker dealer and their staff perform on a day in and day out basis. Ask the broker/dealer for contact information on three programs that meet the following criteria: Financial Institutions of similar asset size Financial Institutions with a similar number of representatives Programs that represent the business mix that you are trying to achieve Financial Institutions who have also recently converted from your current broker/dealer During the conversations, learn as much as possible about: Conversion experience Customer service/support Escalation management Sales/Marketing support Questions to ask the other clients: 1. Why did you choose this service provider? 2. Can you describe how they ve helped you become more efficient, effective, and/or profitable? 3. Can we continue to dialogue and share ideas on a regular basis? Area #3: The firm s financial condition and key areas of focus for the coming year Some industry experts believe that significant consolidation will continue to be the trend in the financial services industry over the coming years. Is your current (or prospective) broker/dealer stable and continuing to grow or are they on the list of most likely to be acquired in the next 3 5 years? One telltale sign ask them about their five year vision. Are they willing to support their long term vision by amending your contract to include a change of control clause? This will ensure that you have control should their strategy, ownership, or direction change. 4 P age

5 As part of any sound due diligence review (annual review), you should always ask about two things: 1. Review financials to get a sense of the current financial state (comparing income statements and balance sheets). They should be prepared to accommodate this request at the blink of an eye. 2. Review the upcoming strategic initiatives. Where are they investing management time and technology development dollars? Gather information on three levels: If applicable, the parent company The service provider itself Their growth and success with financial institutions are they committed to serving banks and credit unions with dedicated resources? Area #4: Tactical Support for Financial Institution Program Growth One of the biggest benefits to partnering with a third party broker/dealer is the ability to leverage resources and tap into subject matter experts to help you maintain, run, and grow your program. You want to make sure that you and your representative are taking full advantage of the support available. You also want to continually assess your broker/dealer s ability to help you continue to grow. Ask the broker/dealer to describe the support available to reps and managers in the areas of compliance, technology, operations, account support, product, and relationship management. Also understand any costs associated with accessing different levels of support. Do they: a. Leave it to you technology can be a great efficiency tool that allows you to self serve your needs, but what happens when you need more? b. Have reactive support teams many broker/dealers offer some level of reactive support in all of the areas we described which is a good fit for managers and advisors who can generally handle things on their own but periodically need assistance. Again, you want to explore how you get in contact with these support areas. c. Offer proactive support commonly referred to as relationship managers this level of support typically helps managers and advisors navigate their way through tools, products, and services available through the broker/dealer. Do the relationship managers understand financial institutions? Do you get a dedicated relationship manager? How many other financial institutions is your relationship manager responsible for helping? 5 P age

6 d. Consultative support on the high end of the spectrum, some broker/dealers also have resources available that can provide consultative support to help managers and advisors improve their business. Questions to ask: Tell me about your planned initiatives for the coming year to support financial institutions. What are some ways that you see that we could improve our program s results in the coming 12 months? What do you see as our biggest opportunity? Based on your recommendations, how are you specifically going to help us execute on opportunities for improvement and growth? Can you/will you help us outline and execute on a priority plan for leveraging your resources over the coming 12 months? What educational and developmental programs (conferences, webinars, workshops, conference calls, etc.) have my representatives been taking advantage of? Are there others that we should consider? Are there any regulatory changes, issues, trends, policies, or challenges that you foresee impacting our success in the near future? Area #5: Technology Every broker/dealer has ways to deliver product, information, materials, resources, and client tools through technology. Again, the challenge is matching their tools to your needs, the tools your representatives use most often, and the technology infrastructure constraints of your financial institution. Ask questions such as: a. What are the best advisors/programs doing to really leverage technology? b. Are the technology tools simple to use? In a technology demonstration, walk through the systems as if you were servicing a client. Does the process make sense? Were the systems designed to truly make a rep more efficient? c. Is the technology compatible with your financial institution s technology? The best technology demonstration is a live demonstration using your equipment on your network. The broker/dealer s technology platform is going to run faster on their servers than 6 P age

7 anywhere else. You need to know how it functions with your infrastructure, your firewalls, and your technology protocols. d. Is the technology integrated? Do the systems talk to each other (i.e. if you update information in one system does it transfer that data to the other systems?) e. Is the technology (and the data stored and transmitted via the technology) secured? Have their systems ever been breached? Has client PII ever been accessed, corrupted, or disclosed to sources it shouldn t have been? What are their standards for encrypting equipment that is used to access their systems? Area #6: Reporting The broker/dealers reporting suite is one of the best ways to gain insight into performance, productivity, and potential opportunities. Can we review the reports that are available on demand? Can reports be pushed to me on a regular basis? What reports are available on a recurring basis? What factors do you recommend we regularly analyze and how will the reporting help me? Can you provide relevant and current benchmarking data for peer analysis/comparison? Will you help me leverage it? Will you support us in a quarterly review of priorities and reporting? Does the reporting system offer the ability to match our financial institution s reporting hierarchy? How can representatives leverage the reports for prospecting and/or servicing? Area #7: Conversion Support If you ve made it through the first six areas and the decision to move to a new broker/dealer still seems like the right one, there s one last area to explore. The process of actually going through a conversion is seldom an easy one, so you need to quickly gauge how prepared the broker/dealer is to make the process as smooth as possible and a positive experience for advisors, staff, and clients. Ask questions such as: Will you have a dedicated conversion team with a dedicated person who will OWN the conversion project from your side? 7 P age

8 What financial support is provided to cover fees associated with disconnecting from the old broker/dealer, covering client account termination fees, etc.? Can you describe, in detail, the process you went through to convert a program similar to ours? Can you provide a sample project plan that demonstrates how you manage the details? Conclusion The decision to change broker/dealers is not one to be taken lightly. The broker/dealer you choose should be the right fit to help you execute your strategy for years to come. Investing the time to thoroughly understand the answers to these questions will pay off. Just remember, if they can t deliver what you need, no price is worth making the move. Need more help? As mentioned earlier, we have participated in hundreds of RFPs, due diligence meetings, and conversions. Our team can create, gather, and analyze RFPs and present a comparison of findings to your team for decision. This allows you to focus on running your business while we do the research for you. For more information, please: Visit Or us at info@timoleongroup.com Or call P age