Realistic Ruminations on Broker-Dealers [Episode 12]

In this Episode of the Perfect RIA Podcast:

Matt and Micah broach the subject of either keeping, hiring, or parting ways with a broker-dealer.


In this episode, Matt and Micah tackle a topic that is far from simple. But they do so in a way that demystifies the subject and offers encouragement for those who may be in the midst of switching broker-dealers (BDs)–or perhaps for those who have never performed the cost-benefit analysis of the dynamic to begin with. And that is one of the most important facets of the talk: a rather robust degree of cost-benefit analysis should be performed in order to weigh the pros and cons of your own personal broker-dealer partnership.

More specifically, in the episode, Matt and Micah want to provide the right questions for listeners to ask about their own partnerships with broker-dealers. They provide personal anecdotes that drive important points home throughout the talk; and these are great complements to the overall message of the talk. But instead of the focusing on the many nuances of the episode (which are best experienced by listening to Matt and Micah themselves), let’s spend some time on fleshing out the idea that a broker-dealer is not a good fit for your practice if it takes away value from your clients.

So, while we are on the topic of value, Matt and Micah have always stressed the importance of bringing massive value to clients. To echo both of their words in the episode: “don’t screw over your clients!” A broker-dealer is a valuable tool to have at your disposal for handling compliance work and other shopkeeper-type responsibilities, but if the partnership is only benefitting you, over that of your clients, then consider parting ways with your BD–especially if you are looking to transition into the more independent, RIA world.

Some things to watch for when considering if your partnership with a BD is more detrimental than beneficial are the following:

  • Could you use the money you would otherwise be spending on a broker-dealer and instead reinvest it in yourself or slash prices for clients? It might not seem like it in the grand scheme (especially if your net is well in the 10’s of millions), but the money does add up. And if you are considering taking the plunge into a BD-less realm, Matt and Micah really suggest you have a significant cash cushion (at least 6 months revenue) on hand. Especially if you are transitioning into the non commission-based realm of the RIA.
  • Consider cost-effective strategies for getting busywork (like email archiving and file backups) done. Instead of a BD, there are other options. You can choose from a wide array of options for the purpose of finding someone to handle the more menial tasks around the office. And with the freed-up time and a less expensive payroll, you can further provide your clients value.
  • Lastly, know that broker-dealers aren’t concerned with your clients–especially if the business conducted doesn’t personally affect your BD. This by no means should be taken as defamatory towards BDs in general, but instead, it is just the name of the game. Your clients’ satisfaction and wellbeing lies outside of the broker-dealers purview. Instead, why not fashion a system that is solely devoted towards your clients and which doesn’t operate (at any level) in a way that is negligent towards your clients.

The list goes on during the episode; these are just some of the most trenchant points. And to bolster the knowledge they imparted, they provide some action points for listeners to adhere to. If you have a broker-dealer, are transitioning away from one, or have definitely decided to move on, these tips are invaluable. Two that are really important are as follows:

(1) Create a contingency plan. This means that one should always be prepared for emergencies and should plan for the possible severance of relationship with your broker-dealer. (2) And make sure that a clear-cut vision is established between your firm and BD to guarantee transparency in communication. There are two other action points which are just as important and can be found within the episode. You really don’t want to pass up this opportunity to learn from Matt and Micah on this one. And if you want to read along, the transcript is below. Thank you for stopping by. We really do appreciate it!


Full Episode Transcript

Introducer: 00:01 Welcome to The Perfect RIA Podcast, the only show dedicated to helping you build a highly effective financial planning practice that delivers, both, an amazing client experience and an amazing lifestyle for you and your family. What you will hear today is not theory, but rather real world tested in the trenches systems that your hosts, Micah Shilanski and Matthew Jarvis, have developed in their own respective practices, which have been recognized as some of the best in our industry.

Introducer: 00:40 Before we get started, a quick reminder from our attorneys. This podcast is intended only for a professional audience and should not be considered as tax, legal, financial, investing, or even cooking advice. Past performance is no guarantee of future results, and you, alone, are responsible for you. And now, lean forward and let Micah and Matthew show you how to build the perfect RIA.

Matthew Jarvis: 01:15 Welcome, everybody. Welcome to another episode of The Perfect RIA Podcast with your host, Matthew Jarvis and Micah Shilanski. Today, we want to talk about a question that we get from advisors pretty often. In fact, Micah, I got this from an advisor just last week. I was visiting his office, and he said, “Hey, Matthew, do you think I should leave my broker-dealer and be RIA only?”

Matthew Jarvis: 01:37 Now, that’s an incredibly broad question, right? There’s not an across the board answer, and so what we want to talk about today on the podcast are some of the things I shared with this advisor, we’ll call him Joe, to help make that decision because, as we’ll talk about, there are a lot of good reasons to be with a broker-dealer, and there’s also reasons to not be with a broker-dealer.

Matthew Jarvis: 01:57 But to get us started, Micah, why don’t you kick us off with some background as far as your experience with broker-dealers, your kind of history there? We won’t name any names. We don’t need to get in trouble with anybody, but kind of give us a little bit of background in your experience there.

Micah Shilanski: 02:11 It’s funny when you had mentioned that comment that someone said, “Well, should I leave my BD?” My first answer is yes! Right? But that’s right. It’s such a broad question. My experience when it comes back to … So when I started in the business, my father, who had started our firm, was already associated with a BD, so I had grown up with BD mentality with understanding. Now we’re also our own RIA, so we work dual registered capacity. That was a nice place for us to be ’cause it gave us a little bit more freedom, but we could see, because we were living in both worlds, we could see the two different sides, while for when I first started most of our business ran through the BD, it was a governing body, so to speak. You got to see the good and the bad of the rules and how things got mainstream and what they did.

Micah Shilanski: 02:58 So, there are some pros to a BD that’s there. They’re gonna give you guidance, which not is always good guidance, but they’re gonna give you guidance on how things need to get done and how things need to be processed that’s there, and so that was up and pretty much, we ran most things through the BD until about four years ago. Then we had an incident, a cyber security incident take place with our clearing firm, and they pretty much said, “Eh, we don’t really care,” not our BD. It was the clearing firm. And that really gave us pause and so we made a switch and changed to put everything under RIA and we went to [Schwab 00:03:34].
Micah Shilanski: 03:34 So, that’s been really positive and that was kind of our first little break in saying, “You know what, we’re really going to make to separation.” And then just recently we fully separated from our BD, so I’m no longer security’s licensed as you yourself as well right Matt?
Matthew Jarvis: 03:49 That’s correct. So, my BD experience is pretty similar. When I started in 2003 we were with a broker-dealer that was owned by an insurance company, which has kind of its own special set of circumstances there, but we were with them for about 5 years, and then we decided to change to a different independent broker-dealer.

Matthew Jarvis: 04:07 And so, we can talk a little bit today about changing broker-dealers.

Matthew Jarvis: 04:11 So, I was with them, let’s see. That must have been about 2007, 2008, about 5 years later I formed my own RIA. So, I broke out from the broker-dealers RIA, but I still had my BD affiliation. And then, just this year, actually this summer, we finally severed our tie with the broker-dealer entirely, similar to yourself. So, as you can tell, both Micah and I have a lot of experience with broker-dealers, changing broker-dealers, leaving broker-dealers.

Matthew Jarvis: 04:36 But let’s start with the benefits. Micah, you sort of kind of alluded to those already. I know that probably one of the most important benefits of a broker-dealer, and this is something that you and I are passionate about, which is forcing mechanisms right? We talk a lot about forcing mechanisms for your schedule, for your efficiency, for your appointment process. Whatever it is. The broker-dealer does provide a very good forcing mechanism for compliance, right?

Matthew Jarvis: 04:58 They require that all of your marketing material go through the broker-dealer. They’re scanning all of your emails. They are doing proactive compliance checks. And so, that is a very important forcing mechanism.

Micah Shilanski: 05:10 It is, and it’s not one that forces you. This is the nice part about this forcing mechanism, it’s the BD that’s responsible for it. So, there’s very little you have to do as long as you’re kicking it into their queue and not going outside of their systems, which that would be an intentional action going outside of their systems. If you’re staying inside of their systems they’re giving you that guidance.

Micah Shilanski: 05:31 You know Matt, I’m going to say another thing that is good about BD’s, and I haven’t found this on the RIA space so let me know if I’m missing it, is like it or not the leaders club, or top of the table, or whatever those club levels that your BD is going to call it, but one of the things is that you get to see in a BD who is doing the job really, really well at least from a monetary standpoint.

Micah Shilanski: 05:55 And so, you can all of a sudden go and find people quicker in a BD conference that are doing things exceptionally well, find out what they’re doing, what’s their secret sauce, and how do you learn from them, versus on the RIA world when you go to RIA conferences, you know, some people like that there’s none of that. There’s no ribbons on your name tag or anything else, but now you don’t know everyone else’s practices. It makes it harder to find different people to see what they’re doing really well.

Micah Shilanski: 06:19 So, I’m going to put that as a plus on the BD side.

Matthew Jarvis: 06:22 Yeah. That’s a really good point. I kind of want to highlight for everybody listening, and Micah correct me if I’m wrong, the benefit isn’t that you get invited to go to some kind of Ritzy place that you could have just paid for yourself out of the BD cut right?

Micah Shilanski: 06:34 No.

Matthew Jarvis: 06:34 It’s that affiliation?

Micah Shilanski: 06:36 It’s, you know, I see and I have gotten several great ideas from other people at our BD on stuff that they did for marketing, or stuff they did for client service and whatnot, and maybe I would have gotten those somewhere else, but I was like, “You know what? This guy did really good. I’m going to go talk to him and see what he did really good this last year he’s most happy about.” And then why reinvent the wheel? If it sounds like a great idea, great. If it’s going to help my clients lets go implement this.

Matthew Jarvis: 07:01 Yeah. And odds are that whatever that advisor is doing has been run through your BD compliance department right? So, it doesn’t give you an automatic green light, but again, you’re not having to reinvent the wheel, or having to convince the compliance department that it’s a good idea.

Micah Shilanski: 07:15 Only most of the time.

Matthew Jarvis: 07:18 Yeah, that is true. I think we’ve all run into advisors at a BD conference and they say, “Oh, well, I’m doing this.” “Really? How did you get that approved?” “Well, I don’t think I need to get it approved.” “Oh really? Huh. Well, good luck to you.”

Micah Shilanski: 07:32 “Good luck and I’m going to talk to somebody else.”

Matthew Jarvis: 07:35 That’s right. You know, a note on compliance. I’ve been audited by the State of Washington where my office is located a few times, and if my memory is correct both times when they asked to see our marketing, our correspondence file, they said “Who’s doing your correspondence review?” To make sure that you’re being compliant. We would say, “Hey, our broker-dealer does.” And we would show them the sign off letters and then, at least in the State of Washington, they were like “Great. Check the box.” They were glad that somebody else was looking at that.

Matthew Jarvis: 08:02 I ended up having a small SEC audit while I was in the process of leaving my broker-dealer, and the SEC they said, “Well, hey, who’s going to do your compliance review when you’re no longer with a broker-dealer?” And I kind of snickered a little bit. I’m like, “My stuff is all clean when it goes to the broker-dealer. They don’t do anything with my stuff.” And I said, “Well, I’ll do it.” And they kind of hemmed and hawed a little bit and I said, “But we do have a compliance consultant that reviews our material on a regular basis.” “Oh okay.” And then they checked the box.

Matthew Jarvis: 08:27 So, there is a … You know, it looks good to the regulars that somebody else is watching over your shoulder on compliance.

Micah Shilanski: 08:34 Yep. And I would say that would be the big thing. If you’re going to go to your own RIA, you know, approving your own stuff, you know, it’s a conflict of interest, and while I’m a chief compliance officer in my firm I can approve other people’s things but I don’t approve my own things. I kick those out to our compliance consultant because I’m biased, and so I want the SEC, at least so far, they have liked that concept of you’re not just pushing all of your stuff through, you have a process and you’re following your process. That’s a lot of stuff they want to see.

Matthew Jarvis: 09:07 Yeah, it really is. So, another benefit, and this is something Micah that you and I had discussed, which is being with a broker-dealer helps you kind of step out of so much of the shopkeeper stuff to worry about right? The BD is sending you the checks, you’re not usually processing your own billing. They’ve found their own E&O insurance. They probably have platform recommendations right? They’re doing the email archiving for you.

Matthew Jarvis: 09:28 So, there’s definitely a lot of infrastructure, and that can vary of course. You know, if you’re at a totally independent broker-dealer versus if you’re in a wirehouse arrangement, right? The amount of infrastructure varies, but that’s definitely something that you have to think about. “Alright, do I really want to take that over? Do I want to be the one responsible for email archiving?”

Micah Shilanski: 09:45 Yeah, and that’s the pro and a con, we’ll get into it when we get to the con side, but on the pro side I absolutely agree. They have simplified your decision-making because they have limited options, but they have an option for things that you need to do. So, they’ve really taken away that owner hat where if were of the mentality that says, “Look, I don’t want to make any decisions. I don’t want to research any of this stuff. I don’t want to hire someone to do it. I just want to work with clients.” And your BD allows you to help your clients the way you want to maybe it’s not a bad choice to be with your BD.
Matthew Jarvis: 10:14 Yeah. It’s really not. I guess it stresses the point that this isn’t just a monetary discussion right? A lot of times advisors will say, “Hey, I’m paying my BD X right? I’m paying them 10 points. I’m paying them 50 grand.” Whatever the number is, but it’s not just about the money in this scenario.

Micah Shilanski: 10:31 And this goes to one of the things is I think when you’re choosing your BD, and maybe this is going to tip us onto the con side, so let me know if we still want to talk some more pros Matt, but what is the future vision of your BD? What is the future vision of your firm? And does your practice align with that vision?

Micah Shilanski: 10:51 And that’s a lot of the reasons that we started going our separate ways than our BD is because our BD had a certain vision which was not our vision. It was for a long time, then they got bought out, it went a little bit different, and we needed to go our separate ways.

Matthew Jarvis: 11:05 Yeah. That’s a really good point, and I guess that does straddle the pros and cons right? It’s a pro if your vision and your BD’s vision is aligned then you’re both marching down the same path right? You’re supporting each other on that journey, but if your visions part, for a buyout in your example Micah of your broker-dealer, or your practice evolves, that can sort of drive a wedge in the relationship, right? If you’re about, I don’t know, managed money, and they’re about direct placement products that can create a conflict. Whatever it might be in the scenario.

Micah Shilanski: 11:33 Exactly.

Matthew Jarvis: 11:35 One other thing on pros before we switch over, and Micah, both you and I worked in the independent space, independent broker-dealers, where the amount of support is somewhat limited, but some broker-dealers do provide some technology platforms, some of them can get some discounted pricing. I feel like that’s less of an issue now than it used to be. There was some software that the only way you could get it was through an enterprise license, and so you couldn’t buy it as an individual rep, but I’m not really sure that’s the case. I can’t even think of any software right now that only the BD’s have access to.

Micah Shilanski: 12:02 Yeah, not any that you’d want. I was going to say probably 5 or 10 years ago I would say that’s the case, but I can’t think of anything that you’d need, and in fact, I’m going to jump us to the con list real fast.

Matthew Jarvis: 12:13 Yeah. Please.

Micah Shilanski: 12:14 And on that note, one of the things that I think is really important is, look, the BD has your back and helps protect and do the things as long as it’s in their best interest. As soon as protecting you is not in their best interests they do not support you. So, what this means is even if you’re at a broker-dealer then you need to keep a copy of all of your own records right? You can’t just rely on the BD to have everything, because what if the BD gets bought out and you leave? What if you get a U5 Notice for whatever reason and you’ve got 30 days to get all of your stuff? That may not be enough time.

Micah Shilanski: 12:49 So, you’ve got to archive all of your own emails anyways. You’ve got to keep a record of all of your client files, as long as they approve it by the way.

Matthew Jarvis: 12:58 Yes.

Micah Shilanski: 12:58 This is the little caveat there. Make sure they know this. Our BD, we made very clear we’re our own RIA, we’ve got our own disaster recovery policies in place, we were required to keep copies of this stuff and they were kosher with it.

Micah Shilanski: 13:09 So, we had to keep copies of everything. So, we had duplicate systems, or duplicate costs because we’re paying the BD to do this, but now we’re having to do it ourselves, but this now makes us more independent.

Micah Shilanski: 13:21 So, now, because we want our freedom and independence where we’re not tied to a broker-dealer in case, again, our views go separately, this now adds a cost, another cost associated with the BD. Not only a monetary cost, but a staffing cost right? It takes time to keep two systems up.

Matthew Jarvis: 13:39 Yeah. And you’ve got a lot of good points there Micah, and I really want to stress on this idea that the broker-dealer has your back until they don’t, and if you look in your contract, your contract with the broker-dealer, everything is slated in their favor right? They can take any documents they want from you, that’s not a reciprocal privilege right?

Matthew Jarvis: 13:55 So, just to your point, if you say “Hey, I’m leaving. I want a copy of all of my email archives.” In most situations I’m aware of they are under no obligation to provide those. We ran into this once, we had a broker-dealer a long time ago that was doing internal email archiving. I don’t think anybody does this anymore. I think everybody outsources it now.

Matthew Jarvis: 14:11 But, their servers dumped and lost all of the email archiving and so if we were audited and they said “Hey, show us your emails from those years.” And, you know, the SEC, or FINRA, or whomever, they’re not going to buy the excuse “Hey, my broker-dealer botched this and lost the records.” Right? They’re going to say, “Hey, you’re not keeping good records.”

Matthew Jarvis: 14:29 And so, to Micah’s point, if you’re relying on someone else for your record keeping you’re really rolling the dice. You’re putting, not your life, but your career in someone else’s hands and you’ve got to do that with a lot of caution.

Micah Shilanski: 14:41 Now, we’re always relying on someone else’s record keeping right?

Matthew Jarvis: 14:43 Yes we are.

Micah Shilanski: 14:44 Like, I don’t have a server in Alaska that’s keeping my emails. That’s outsourced.

Matthew Jarvis: 14:48 Yeah.

Micah Shilanski: 14:49 So, you’re always relying on someone else, but the point that, Matt, I think you’re trying to make here, is you want to rely on someone that has your back that you have a direct contractual relationship with that is going to make sure they’re providing this to the standard in which they have to and they’re responsible and at fault if they don’t, not through a BD that could potentially just say, “Nope. You don’t have access to it.” And shut you off, or not give you that information when required.

Micah Shilanski: 15:13 Not trying to bad mouth BD’s.

Matthew Jarvis: 15:14 No.

Micah Shilanski: 15:14 I’m not saying they will, I’m saying they might and I’ve seen it, and I’ve seen it the other.

Micah Shilanski: 15:19 With our, we’ll take about my separation, and Matt here’s too, about how I left it was totally amicable. The BD was really great, and this is not an experience I’ve had previously. I’ve had some bad experiences with BD transfers, and some really good ones. So it really depends.

Matthew Jarvis: 15:33 It does. And we won’t name names, but there was a pretty high-profile case from a very large broker-dealer that a rep left, thought he was protected under the broker protocol, and this BD basically hunted him down and destroyed his career right? They put a cease and desist against him, they had all of their attorney’s go after him, they ceased all of his computers and his records, and basically put him out of business, and it was a very small producer. I mean, they were really sending a message. This guy just drew the short straw. He thought he was going to be fine, and now his career is over right? He lost all of his clients, and he’s still facing legal action from this broker-dealer.

Matthew Jarvis: 16:06 And I agree with Micah, those are the rarities, but luck favors the prepared right? Always plan that someday the broker-dealer could say, “You know what? Your time is up and we’re taking everything that’s ours, and by the way, everything is ours so good luck to you.”

Micah Shilanski: 16:20 And so, on that note, one of the things that we’ve always kept is we’ve always bought our own E&O insurance. So, we’ve had two sets of E&O insurance because who pays for your E&O? Well, okay, you do technically, well your clients do technically right?

Matthew Jarvis: 16:33 Sure.

Micah Shilanski: 16:33 Because that’s how it goes through the chain, but really it’s the BD that has that policy, and so it’s the BD’s decision if you get a claim against you, and I haven’t had this, but if you get a claim against you they decide how they’re going to settle it, or pay for it or not, and if you want to defend yourself maybe the BD wants to settle and it’s going to go on your U5 that you settled a claim, and you’re like “No, I wasn’t in the wrong. I want to fight this.” It’s not your call unless you want to come out of pocket for that expense. It’s the BD’s call.

Micah Shilanski: 17:02 So, we’ve always kept our own E&O insurance outside of the BD as well so if anything ever comes up it’s our decision on what we do.

Matthew Jarvis: 17:10 Yeah. You know Micah, actually a really good friend of mine and advisor had that happen, and I’ll spare everyone the details, but at the end of the day the attorneys for the insurance company went to the clients that were suing him and said “Hey, can we settle for X?” And they said, “Yeah, we’ll settle for X.” So, the BD said “Great, we’ll take the settlement.” And he says, “Hey, I don’t want this on my U5 forever. I don’t think I’m guilty. I think I can win this in court.” And so, the settlement was a small amount relative to the scheme of things.

Matthew Jarvis: 17:33 So, the BD said, “Great. We’ll write you a check for X, the settlement amount, and then you’re on your own. You sign a release and it’s yours to fight.” And they said it was the BD’s decision not his.

Matthew Jarvis: 17:44 Now, even if you have your own policy you don’t totally get that right 100% because the insurance company will say, “Hey, we think we should settle here.” It can still be an issue, but to your point Micah, you’re the one who’s in control of that, you’ve picked the insurance company, the policy is with you not with the broker-dealer.

Micah Shilanski: 17:59 You at least have a little bit more things in your favor. That’s what you’re trying to go for. And with any relationship with any company you need to protect your clients and your business regardless whose letterhead is there.

Matthew Jarvis: 18:13 Totally agree. Okay, so let’s start weighing this out. We’ve talked about the benefits of a broker-dealer and we’ve talked about some of the cons of the broker-dealer, right? Everything has pros and cons. So, how do you recommend Micah that people kind of weigh that out? For me, I know it’s largely a dollars and cents thing. Maybe we’re all dollar and cents people, but I’m kind of a dollar and cents people. I’ve always recommended advisors start with, “Alright. How much am I paying the broker-dealer?” And sometimes that’s easy right? Sometimes I’m pay a cut of the action, or a flat dollar amount. Sometimes it’s a little more convoluted right? It’s this, plus that, plus this, plus the other.

Matthew Jarvis: 18:48 But, I think the starting point is have a really clear idea what you’re paying the broker-dealer in dollars and cents, and then more subjectively what other costs are you incurring? How much hassle is the broker-dealer bringing to your life, or restrictions on your business plan? Those kinds of things. What other considerations Micah do you think are involved there?

Micah Shilanski: 19:06 Now, yeah, I would say that’s the big thing we left off on the cons is it’s good to bring it up here is the cost of staying with a broker-dealer monetary right? Now, in our experience, and we’re not a big firm, but we’re a little bit larger than average, so we were able to go and get things cheaper than we bought them through the broker-dealer. So, that was a really good thing was that our cost actually went down when we left the broker-dealer substantially so that was really nice that was there.

Matthew Jarvis: 19:32 Yeah.

Micah Shilanski: 19:32 But you’ve got to weigh it out. Now, when you’re weighing the hassle factor. Okay, make this a real hassle factor test, not like, “I want to text my clients, and if I can’t text my clients [crosstalk 00:19:43] business by 30% a year, and my BD won’t allow me to text my clients.” Like, no, come on, that’s not a real thing. You’re not going to grow by 30% because now you can text.

Matthew Jarvis: 19:50 That’s right. Because now I can do LinkedIn.

Micah Shilanski: 19:50 So go for the real hassle factors. Yeah, “Now I can do LinkedIn and Twitter and now all of a sudden my business is going to double.” No. It’s not. So, look for real things that’s limiting your business, and then run it on the RIA side. You know, build a nice little spreadsheet and say, “Okay, what is that cost value difference?”

Micah Shilanski: 20:09 And again, when it comes down to us, what was the biggest determination for us leaving the BD versus staying was how is it going to affect our clients. The direction of the BD was not in a direction, which I think was the best suited for our clients where they were going, and so we need to make a change to number 1, take care of our clients.

Micah Shilanski: 20:29 So, that’s my first factor. Regardless of dollars and cents, how are my clients affected? And that’s what you’ve got to look at first.

Micah Shilanski: 20:37 Does it allow you more opportunity to help them? Does it increase their costs if you go independent? Does it decrease their costs if you go independent? How does that work? First you answer the client question, second you answer your firm question about what flexibility and independence does it get me.

Matthew Jarvis: 20:52 Yeah, that’s a really good point. And to that end, how much hassle will it be for the clients to change? Will all of the records come over? Will it be a ton of paperwork?

Matthew Jarvis: 21:02 And I think you were spot on Micah. You really have to weigh that out. Cost benefit to the client first and foremost right? If you’re going to pick up an extra 2 points on your payout by going independent and it’s going to really screw your clients over, that’s not cool. That’s not delivering massive value to your clients.

Micah Shilanski: 21:16 [crosstalk 00:21:16] And you know, a lot of times, now, one of the things that’s interesting, and this may be a little anecdotal, but I’ve met a lot of people that change BD’s over time right? And Matt I’d say you’re probably the same. You know, maybe a BD is offering incentive to come over, or you get mad at your BD so you switch over there, but I’ve never met anybody who has left a BD, gone to an RIA, and then said “Holy crud, this RIA world is ridiculous. I can’t believe I did this.” And went back to a BD. Have you?

Matthew Jarvis: 21:47 Boy, that’s a good question. I want to say I know one person, but they shouldn’t have left the BD space. Their firm was just struggling to survive. Maybe they had 100 thousand in revenue and they jumped the gun, so that’s an anomaly, but other than that I’m with you. I haven’t ever seen anybody go back to the BD space.

Matthew Jarvis: 22:07 I think it’s just part of the practice evolution. You get to a point where you say, “Hey, I’m not doing a lot of direct business. I’m doing managed money so I don’t need a securities license. I’ve been doing it long enough that I know how to play by the rules. I do it instinctively. I don’t need somebody looking that closely over my shoulders.” And so at the end of the day you’re going to run that cost/benefit. “Alright, I’m paying them X, and I’m not really getting a lot that I can’t just get on the outside for a lower price.”

Micah Shilanski: 22:32 So, Matt, not to give compliance or legal advice at all because we don’t do this, but the question I get a lot from people is saying, “Well, Micah, if I give up my security’s license how am I going to make money? How am I going to get revenue in?” And I think a lot of people don’t understand really the RIA side versus the security’s side and really if you’re on the RIA space you’re an investment advisor on the RIA space, you can still charge asset management fees, you can charge financial planning fees, you can charge hourly rates, you can charge the fees to your clients and not a problem, your clients sign off, and pay, and it’s good.

Micah Shilanski: 23:08 What you can’t do on an RIA space is you’re not getting that commission. So, if you’re a commission trader and all you do is buy and sell bonds or security’s and get a commission then yeah, you’re probably not a good candidate for the RIA space, but short of that it’s pretty much you can move from the BD world to the RIA world and still be able to generate revenue. I know that’s a big concern for a lot of guys. I don’t know if something you’ve heard as well or if you’ve got any comments on that?

Matthew Jarvis: 23:35 Yeah, that’s a really good point, and I’m glad you mentioned it. It kind of had slipped my mind. Yeah, you’ve got to look at your revenue structure. To Micah’s point, if a good portion of your revenue, well really if any of your revenue is coming through on your commission side, and Micah and I have some real thoughts on that that we’ll save for another day, probably not the way you think, but we have some real thoughts there. If your revenue is coming through on the commission side, you will not be able to do that once you leave the broker-dealer space.

Matthew Jarvis: 23:59 So, you’ve got to figure out, “Alright how in my clients best interests am I going to transition that revenue?” I know Micah, for you and for myself, annuity trails were a big issue, clients that at one point annuity was a good fit for them, and we got those years ago.

Matthew Jarvis: 24:15 So, I had clients, a lot of clients, that before the financial crisis when those income guaranties were off the charts had bought a bunch of those, and they rode them through the financial crisis, and they loved them, and then I couldn’t go back to those clients and say “Hey, listen, I know you’ve loved this product, and I know they don’t even exist anymore like this, it’s so good, but you’re going to have to sell it, cash it out, so that I can get paid differently.” Right? That’s not a conversation that I am willing to have with clients.

Matthew Jarvis: 24:38 And so, it definitely took some work on our side saying “Alright, how are we going to give up that revenue without harming the client?”

Matthew Jarvis: 24:44 But, to your point again Micah, if whatever revenue is coming through on the commission side you’ve got to figure out how to deal with that.

Micah Shilanski: 24:51 And you’ve got to think about this too because I don’t want people to misconstrue what Matt’s saying. One of the things my father always taught me, and I know Matt you agree with this 100%, is your number one goal is you take care of the client.

Matthew Jarvis: 25:01 Yep.

Micah Shilanski: 25:01 If you take care of the client the client will take care of you. You don’t worry about that. You take care of the client. That’s got to be your first thing.

Micah Shilanski: 25:10 So, as Matt was saying, and it was the same with mine, I had a decent amount of VA’s, and I wanted to keep the ability to get access to those variable contracts when I give up my security’s license because I’m still working with the client, and guess what? They’re still going to come to me and ask me questions saying, “Remember when we bought this 11 years ago and how does this work again?” Or, “What’s our income plan going to be from this?” And I still need to get access to that.

Micah Shilanski: 25:34 So, on the transition, and Matt is it okay if we make a transition in our talk and let’s talk about how we transitioned? Would you be okay with that?

Matthew Jarvis: 25:40 Yeah. That would be great. Sure.

Micah Shilanski: 25:42 Okay. So, I’ll just kick it off then.

Micah Shilanski: 25:45 As we went through and decided to make our exit plan from the BD, the first thing is we went through and evaluated how it was going to affect our clients. Now, most of our clients as I said we had already done a little bit of a slip. So, we had already moved a majority of our asset, all of our asset management under our RIA, then we just had some trills and some direct business underneath our BD side, and we wanted to keep the servicing ability, or at least to be able to get information on all of those contracts.

Micah Shilanski: 26:09 So, that was the big thing that we had to figure out with our BD was how were we going to do that. The insurance stuff, direct insurance is easy. Once you give up your license your BD can sign off and any direct business non-security’s they can release and it can go to you directly under your name. So, any fixed business or equity [inaudible 00:26:30] business you have, that can go underneath you. You can still be the agent on that policy so you get all of the information and can service it, and still get the revenue, trills, if there’s any of that.

Micah Shilanski: 26:39 The variable side was the tricky one and what we did is we ended up selling the book to another agent, another broker, they bought it, and when we sold the book one of the things that we were very clear was we wanted to find [inaudible 00:26:54] a really good person that wasn’t going to screw our clients, wasn’t going to try to flip the products, wasn’t going to try to do anything. We said look, ” We’re working with the client still, we know what the client needs, here’s the plan, and here’s the income this is generate.” And we were able to sell it and get a nice piece of that trill revenue, but number one is we’re going to make sure the client is taken care of.

Micah Shilanski: 27:13 And when we did our transition from our BD we had all of our clients that had variable products sign a release and we were able to give it to that broker that we sold to so that they would give us all the information. So, we got a release from the company so we’re direct with the company that our office can call and get information, and we got a release to the broker from the client as well that we can get information from that broker that bought the business so that way we can make sure we have all of the information on the client.

Micah Shilanski: 27:39 Because of course, what’s our number one goal? Take care of the client. And so this, by getting the information, we’re able to do that.

Micah Shilanski: 27:46 And I would say too one of the big things that, it’s a little bit of a question, and Matt I’ll be interested in what you did with this, is as soon as we had made our plan we went to our BD, the executive team at our BD, and we told them months in advance of what we were going to do. We didn’t leave in the middle of the night. We didn’t go out secretly and copy things. We were 100% transparent once we had our plan and we let them know. We said, “Hey look, here’s our exit date. Does this work for you? What’s our plan? We really appreciate your help over time, it’s just now come to a different place than where we’re going to go.”

Micah Shilanski: 28:20 And I’ve talked to people that have left our BD that left in the middle of the night and they had one heck of a challenge getting things done from the BD, and our experience was not that, and I think it really was the transparency. I told the BD, I said, “Hey, if we leave, if I owe you any more for E&O insurance or anything else let me know and I’ll cut you a check immediately. I want to make sure I’m paying my bills with you. This is my expectation on your guy’s end of what I expect from you.” And it was really clear communication between us and the executive team on what was happening.

Matthew Jarvis: 28:52 Yeah. You know, my experience was very similar to yours. I did want to point out to those listening, those agreements that Micah talked about, those releases, those weren’t things that he sketched on a piece of paper right? Both Micah and I, and our respective practices, had really great attorneys to draw those up.

Micah Shilanski: 29:05 Yes.

Matthew Jarvis: 29:05 Because you don’t want to get into a spot where you’re revenue sharing, where you’re violating privacy agreements. You need someone who knows. This isn’t where you go to your estate planning attorney and say, “Hey, could you write this for me too?” You want to find an attorney who is very competent in SEC/FINRA work and have them draw that up.

Micah Shilanski: 29:21 Good point.

Matthew Jarvis: 29:22 But Micah, to your point about departure time, and I followed that same policy of being really transparent because I had a good, long standing relationship with my broker-dealer I just explained, “Hey, this is part of our practice evolution. It’s no hard feelings.”

Matthew Jarvis: 29:36 However, I would caution reps, be very careful when you’re leaving a broker-dealer that you know how your broker-dealer handles departing reps. Independent broker-dealers are usually pretty, they’re pretty friendly with that because their reputation is very important to them. The less independent the broker-dealer the less friendly they are. There are stories of reps who had started sending some emails around that they were going to leave, they got flagged by the broker-dealer, and they come in one day and all of their stuff has been boxed up.

Matthew Jarvis: 30:01 So, the bigger broker-dealers will become very aggressive if they think you are leaving. So, if you’re going to leave find out what happens to reps as they leave, and then start talking to an attorney who is very versed in that. You don’t want to find yourself on the wrong side of a cease and desist letter, or them poaching all of your clients in the night. So, it really depends on where you’re coming from I think.

Micah Shilanski: 30:22 So, I guess that would be have your plan first right?

Matthew Jarvis: 30:24 Yes.

Micah Shilanski: 30:25 Get your plan in order before you tell anybody. Any of your advisor friends, anything else, anything that can go back to the BD, as Matt said, you talk with the attorney, you get your plan in place. So, if they pull the rug out from underneath you, you’ve got your battle plan, you know what you’re going to do.

Matthew Jarvis: 30:41 And there’s really got to be, that’s an exhaustive plan right? What about your office space? What about your computers? What about your software? What about your email archiving right? You need to talk to somebody who knows what they’re doing and have a really clear checklist on that.

Micah Shilanski: 30:55 And really the best place to get at least a starter of those checklists is whatever custodian you’re going to go to. So, we chose Schwab and they gave us an exhaustive list of making a transition from a BD, and the guy that we worked with was great. He knew, he’s like, “Look, these are the questions you’ve got to ask, this is what you’ve got to avoid, these are the things you need to think about.” And they really worked with us on a whole bunch of stuff in advance to make sure we were set up for a transition. And I would imagine all of the big ones will do that.

Matthew Jarvis: 31:24 Yeah. That’s a really good point. The custodians, they’re really trying to attract breakaways, and RIA’s, and so yeah, they’ve got a whole platform, a whole team to help you with that.

Matthew Jarvis: 31:35 Well Micah, do you think we can cover some kind of rules of thumb if you will, some guidelines on when an advisor should think about leaving a broker-dealer versus staying? I know that I’ve got a couple, and I’ll give one, and I’d be curious to know Micah your thoughts on this.

Matthew Jarvis: 31:49 As sort of a rule I tell advisors “Hey, don’t even think about leaving your broker-dealer until you have at least 50 million in assets and/or 500 thousand dollars in revenue. Under that amount you just don’t have the revenue and the infrastructure to really justify leaving the broker-dealer and be able to do that smoothly, let along profitably.” Is there a number that you have Micah if somebody asked you? Or what’s kind of your thoughts there?

Micah Shilanski: 32:13 You know, I’ve actually worked with a couple of friends that are advisors that have smaller businesses, you know, 15 to 25 million, and we’ve actually helped them make a transition where they’re profitable at a smaller dollar amount. Now, they’ve got a little bit less options, they don’t have buying power like you would. So, maybe they want to go underneath another RIA, or some type of master RIA agreement, something like that, so they can make that transition have a little bit more freedom that’s there.

Micah Shilanski: 32:40 But, I would say the big thing, my rule of thumb is you better have 6 months of … You know what all we tell our clients? To have 3 to 6 months of living expenses. Guess what? You actually need to follow your own advice and go have 3 to 6 months living expenses when you make the transition.

Micah Shilanski: 32:54 So, I would say you need at least 200 thousand in revenue would be mine, and you need to have a decent cash cushion for when you make that switch because it could take 3 to 6 months to get your revenue back up.

Matthew Jarvis: 33:06 Yeah. That’s a really good point, and that ties into Micah what you said about having a plan right? What’s your plan when a quarter, or two quarters worth of revenue disappears? Whether that’s going to happen or not what’s your plan for that?

Matthew Jarvis: 33:17 By the way, that should be every advisors plan. No matter what your business structure is, if your revenue disappears for two quarters what happens?

Micah Shilanski: 33:26 Yeah.

Matthew Jarvis: 33:26 I was talking to one of my business maker friends, this is a bit of a side note. He does a lot lending with RIA firms, which I found interesting. He said, “Hey Matthew, do you want a line of credit for you RIA firm?” I said, “I don’t know. Maybe, maybe not. Why do you ask?” And he says, “Oh, well we have a lot of RIA firms that have lines of credits that they draw on every quarter.” And I said, “Doug, my goodness, why would you want to lend to a firm that can’t manage their cashflow for three months? That seems insane to me.” And he laughed. He said, “You’d be surprised how many of these RIA firms are running out cash midway through the quarter.” So, we could have a whole discussion on what poor management that is, but you’ve got to have a plan right? What are you going to do when your revenue is interrupted?

Micah Shilanski: 34:08 You know, and I would say, going back … Yes I totally agree with that, but going back on the rules of thumb is, and this is what I tell my clients on their retirement dates as well. It says, “Look,” if they still enjoy working they can afford to retire, it says, “Look, work, but stop before you don’t like it. Go out on a high note.” Right? And that’s how I’m going to say the same thing on the BD. If you can see that path is turning, if you can see that direction is coming and it’s just more of an irritant every time their name pops up on the caller ID then that’s a good sign that you need to go because no good is coming from that and that’s going to hamper your business growth, that’s going to hamper your ability to provide massive value to your clients because you’re so fussy about your broker-dealer.

Micah Shilanski: 34:51 So, that’s something I would say to watch out for as well, and that’s less on the monetary, more on the emotional side, but I think that plays a lot of it.

Matthew Jarvis: 35:00 Yeah, it really does, and I think it ties into all of this, and Micah tell me if you feel otherwise, really every advisor, even if you love your broker-dealer, and you have an amazing relationship, and you can never imagine leaving them, in your contingency plans should be “What do we do if we have to leave the broker-dealer?” That should be written up, not necessarily on your office computer, it might be printed at home, but you really should be ready that you could leave your broker-dealer at any time right? Whether they’re bought out.

Matthew Jarvis: 35:25 In fact, my office manager, [Colleen 00:35:26], she worked at a broker-dealer office, and this is all public record so I’m not disclosing anything, the broker-dealer had a couple of alternative investments go sideways and within just a few weeks the broker-dealer collapsed under the lawsuits and suddenly all of these advisors were getting bought out by other firms, were having their licenses dropped, I mean, through no fault of their own.

Matthew Jarvis: 35:44 And so really just like you have, well in Seattle we have earthquake contingencies, whatever natural disaster, I’m in Florida right now, they have hurricane contingencies, you need to in your office have a broker-dealer, I have to leave my broker-dealer or change broker-dealers contingency plan.

Matthew Jarvis: 35:57 Micah, would you feel differently there?

Micah Shilanski: 35:59 I totally agree, but that doesn’t stop when you leave a BD. That’s the same thing when you’re an RIA though, and we go through a little bit, not as detailed as I would like, but probably a little too much more than most, is every major platform that we use I have a backup for.

Micah Shilanski: 36:14 So, whether it’s our trading software, or whether it’s our custodian, whether it’s our CRM, whether it’s all of this, I have here’s A, and here’s B, and what I like about this is I don’t feel trapped. If all of a sudden I don’t like my CRM anymore I’ve already evaluated, “Hey, I’ve got a couple of runners up that we could switch to.” Or, if I don’t like the custodian or they get froggy with me I can just switch over to someone else. I already have a relationship with another custodian that is a long time courting kind of thing, but I’ve already got somewhere else I can go to if they go south for my clients.

Micah Shilanski: 36:46 So, you should always have that in the A, B plan.

Matthew Jarvis: 36:49 Yeah. You know what? In fact, let’s do a whole podcast episode on contingencies because I always remember a couple of times a year I have my staff print, physically print all of our contact information out of our database and it goes in a safe deposit box at the bank so that if we had some really massive disaster worst case I could go down to the safety deposit box, pull out this hard copy of all of our contacts and start calling clients from my cellphone, or my sat-phone, or whatever. So, we could really have those.

Matthew Jarvis: 37:14 On our rules of thumb, Micah, is there a rule of thumb you think where you say, “Boy, why in the world are you still with a broker-dealer?” And I’ll give you one.

Matthew Jarvis: 37:21 I was talking to a friend of mine, great advisor, she is with a very well-known broker-dealer. Her office is doing about 2 million dollars a year in revenue, and the BD is getting about a 10% cut of that and so I said to her, “Hey, you’re paying the BD 200 thousand dollars a year. I know you’re doing all managed money. What in the world are they doing for you that’s worth 200 thousand a year?” And the response, and I know this is a response you’ve heard Micah, they said, “Well, the BD has my back.”

Matthew Jarvis: 37:46 Well, number one, they probably don’t, at least not until it doesn’t serve them, and for 200 grand you could hire the best law firm in the country and give them a 200 thousand dollar retainer and they will have your back better than anybody.

Micah Shilanski: 37:58 Right.

Matthew Jarvis: 37:59 So, do you think there’s a rule of thumb where you’re just saying, “You know, you’re kind of being crazy staying with a broker-dealer.”?

Micah Shilanski: 38:05 You know, that’s just an emotional justification for the fear of making change.

Matthew Jarvis: 38:09 Sure.

Micah Shilanski: 38:09 That’s all it is in my opinion. It’s, “We’re comfortable. I don’t want a business disruption.” And you know what? That could be a reason to stay. I want to give that some credit.

Matthew Jarvis: 38:17 That’s a good point.

Micah Shilanski: 38:18 You know, if you’re too worried to make that change, I look at it and say “You’re crazy.” But maybe that’s in your world is the best fit for you and that’s okay. In my world, I mean, they get 10% up front, but what are they getting on the backend? I bet they’re getting another 10.

Matthew Jarvis: 38:31 Yeah.

Micah Shilanski: 38:32 I bet it costs 400 thousand is how much they’re making on you when it’s all said and done.

Micah Shilanski: 38:39 And think about if that money was, you know, you split that money with your clients you know? You got a little bit of a pay raise, your clients costs when down. If you made a transition that could be huge. That’s the way I look at it.

Micah Shilanski: 38:48 But, if you mentally can’t handle it, boy, that’s a reason to stick with a BD.

Matthew Jarvis: 38:53 Yeah. So, let’s talk action items. Let’s talk action items for everybody listening. Whether you’re thinking about leaving a broker-dealer or not what are some action items you can take from this podcast?

Matthew Jarvis: 39:01 I think first and foremost is to draw up a contingency plan like we talked about. What is your contingency plan if you had to leave your broker-dealer, or if your broker-dealer left you right? If for whatever reason they decided to drop you how would you handle that?

Matthew Jarvis: 39:15 And so to really draw that out like Micah had detailed. What is my contingency? Who do I call? How do I take care of my clients? On and on and on.

Matthew Jarvis: 39:22 So, that would be action step number 1, create a contingency plan.

Micah Shilanski: 39:25 I would say action step number 2 is what is the vision of your firm and what is the vision of your BD? Do those align?

Matthew Jarvis: 39:33 Yeah. I would go with number 3, and these by the way are not in a particular order, but number 3 I would say get really clear about how much your broker-dealer is costing you, and to Micah’s point, costing your clients right? What is the total cost that your broker-dealer is imposing on your client relationships? And then, kind of have a way to track that and say, “Hey, every year I’m going to update this number, and when that number gets to X.” And maybe you don’t have an X, but I would say, “When my number gets to X that’s when I’m going to leave.” So, be very aware of what it’s costing you, be very aware of what it’s costing your client so that you can start saying “Hey, is this really worth it to my clients?” First and foremost. “Is it worth to my office?” A close second.

Micah Shilanski: 40:11 You know Matt we didn’t really bring this up, but you know what? Having that number actually gives you power to negotiate with your BD as well because there’s nothing to say that you can’t go to your BD that says, “Hey look, we know what you’re making on the backend, I want a better payout, I want to lower expenses, et cetera.” What’s the worst they’re going to tell you? No?

Matthew Jarvis: 40:29 Yeah.

Micah Shilanski: 40:29 So, then I would say the next thing on the action item, not to make it too many, but reach out to a custodian. Schwab, TD, Fidelity. I’ve got my own biases, Matt I know you do as well, but reach out to somebody and start a conversation and find out what it’s really like on the other side.

Micah Shilanski: 40:46 So, instead of this crap you hear from the BD that says, “Oh my gosh, you’ve got to buy your own E&O insurance, you’ve got to find this, you’ve got to do this.” That compliance stuff is really not that challenging, you can hire it pretty cheap, and a custodian helps out a lot. So, reach across to a couple of custodians and talk with them and find out what that’s like.

Matthew Jarvis: 41:05 Yeah. I think those are really great options right? And as a reminder, our goal with this podcast isn’t just to give you great information, or an excuse for Micah and I to chat, which we always enjoy, but really it’s taking action on your firm and improving the massive value that you deliver to clients. I do Micah have just one last thing I wanted-

Micah Shilanski: 41:22 Please.

Matthew Jarvis: 41:23 To chat with you about.

Matthew Jarvis: 41:24 I had an advisor call me, and this advisor, she had just moved to her own RIA from another broker-dealer and had got a call from a major broker-dealer that’s aggressively attracting reps, and they offered her a substantial signing bonus to move her book over. I want to say it was like 2 or 3 times revenue.

Matthew Jarvis: 41:45 So, for this advisor the number was nearly a million dollars to move her practice from an RIA inside of the warehouse, and she emailed me saying, “Hey, I’m getting ready to sign this form. I can’t pass on a million dollars.” And I about fell out of my chair because this is otherwise a very intelligent advisor, I have a lot of respect for this gal, but I said to her, I said “Hey, you know that they’re just going to pay you with your own money right? They’re not pulling a million dollars out of the magic fund saying ‘Hey, we really like Suzie, we should pay her a million bucks so she can come over.’ That million bucks is coming from your payout, and by the way they’re probably not going to give it all to you, that’s another story.” But any kind of a signing bonus, that’s your money, it’s just an advance of your own money and it’s going to come at a very expensive price.

Micah Shilanski: 42:26 Yeah, especially when you said wirehouse versus independent BD. Now that just scares the crap out of me. I mean, that’s totally different. So, really watch those net numbers.

Micah Shilanski: 42:35 And if you get a retention bonus with your BD that they go through and pay, take that money, stick it in a separate account, don’t use it so you have the freedom to leave and you can pay it back whenever you want.

Matthew Jarvis: 42:45 Yeah. That is not free money.

Matthew Jarvis: 42:48 So, sorry, I apologize for that sidebar, it was just something that had occurred recently in an email exchange that I had and I just want to make sure that reps are thinking of it. That’s blood money, if you will. Somebody is paying that. Your clients are paying that. In fact, I know of another large firm, Micah you and I discussed this at a mastermind recently, they are offering 4X revenue, but they’re just going to rake your clients over the coals. If you read the deal, whatever you’re in they’re going to sell all of that, they’re going to put your clients in awful stuff. Basically your clients are paying you 4X on your revenue.

Matthew Jarvis: 43:16 So, anyway, I know both you and I are passionate about delivering massive value to clients first and foremost and everything else follows behind that.

Micah Shilanski: 43:24 Totally agree. Well, I think this was great. Take steps. Take actions. Go down that process and start looking into the other side, the other world, and it may not be as scary as you think.

Matthew Jarvis: 43:34 Yeah. And as always if you have questions or thoughts from this podcast go ahead and put them on the podcast feedback. If you have a question or a topic you’d like to discuss, if you’d like to be a guest on our podcast, just shoot us an email and we’d be glad to hear from you.

Micah Shilanski: 43:47 Thank you to our podcast listeners because our podcast is growing. We’re now in the top 50% of podcasts and that number just continues to grow, and that’s because of you guys. So, thank you. Share this with your friends, share it with your coworkers, not with people you don’t like, so we can help grow this.

Matthew Jarvis: 44:06 Yeah. Thank you all for listening. I really appreciate it. Micah, thank you for your time. It’s always pleasure talking with you my friend.

Micah Shilanski: 44:11 Take care.

Introducer: 44:15 You have been listening to The Perfect RIA Podcast. For more information on how you can build a highly effective financial planning practice please visit ThePerfectRIA.com.

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