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Due Diligence Topics Not Discussed

After spending years in the financial services industry, you would think I had seen it all.  One area that has always baffled me with this industry is the due diligence process when looking for a new broker-dealer partner.  There are so many miscellaneous fees, mandatory fees, pricing, technology stacks, etc. that most advisors don’t know to ask some of the questions that will affect them in the long-term.  For example, does the broker-dealer charge an additional program fee for certain money managers?  Do they change transition money if an advisor is going to an OSJ vs. going direct?  Who owns the client data in the CRM system should you leave?   The list goes on and on.  

I truly don’t believe the broker-dealer or their staff are hiding these items on purpose, but let’s be honest they all have goals to meet.  In this blog I will break down some of the vital areas you should be looking into when making a broker-dealer change.  These are the very reasons why a team like Trusted Visions is so important to work with when seeking a new broker-dealer.


Additional fees:

Every broker-dealer has mandatory affiliation fees, although they all name them differently.  Some name them monthly service fees, affiliation fees, or E&O, etc.  This is an area you really want to pay close attention to, because many broker-dealers mark these fees up above and beyond what they are paying.  Simply ask the recruiter how much these areas are marked up and which fees are marked up.  In addition, some broker-dealers charge an additional program fee for you to use third-party money managers.  This is a very important question to ask when conducting your due diligence.  This additional fee can be as high as 5 bps. more!  Lastly, you always want to pinpoint the exact account termination fee amount, should you decide to leave that broker-dealer.


Transition money:

While most advisors say that the money is not part of their decision-making process, it always comes down to money.  Two areas I would like to focus on this section are:

  1. The transition package itself.
  2. Will transition money change if an advisor joins your OSJ vs. going direct with the broker-dealer

Just because a broker-dealer is offering 2, 3 or 4 times more than the rest of the broker-dealers doesn’t mean they are the best fit.  Most, if not all times this happens it is simply because they are either desperate to get more advisors, or they cannot compete with other broker-dealers.   In that case, they have no choice but to offer substantially more. 

If you are a recruiting enterprise or OSJ, it is important that you ask your potential next BD partner if they change the transition money for a recruit that wants to join your OSJ versus going direct to them.  This is huge when analyzing the dollars that can be offered to an incoming prospect.  It certainly can be a deal breaker for a number of prospective advisors!


Recruiting number/financials:

In this final section I wanted to cover an area that many times is never discussed or brought up during the due diligence process.  First, you have many firms out there touting they have had a record recruiting year.  While that is great news, it is important to delve into the details.  For example, there was a firm that stated they had a record recruiting year for 2021.  That is a strong point and it gives you a nice, warm and fuzzy feeling knowing you may be moving to a firm that is showing solid growth.  However, the devil is in the details.  What this particular firm is not saying is that ¾ of the recruited GDC in that so called “record recruiting year” were firms that were already with them, yet they purchased their practice!  In my opinion, if the GDC and assets were already with your firm, how do you count them again as recruiting GDC? 

Secondly, it is important that you look at the firm you are interviewing in terms of how much in GDC or assets did they recruit in the previous couple years, but more importantly, how much in GDC or assets did they lose in that same year.  If a firm recruiting $50 million in new GDC, but then lost $30 million in GDC, that raises some red flags.  There are several ways to obtain these numbers, but it is an area that should be reviewed without question. 

The last portion of this topic, which I would say 99% of the time is overlooked is asking for your potential broker-dealers financials.  Many broker-dealers will push back on this.  Simply ask yourself, “why is there push back if they have nothing to hide?”  This will give you a great overview of the financial status of that broker-dealer.  Let’s be honest.  We are in an ever-consolidating marketplace and it looks like it is only going to continue.  You want to ensure that your next potential broker-dealer partner has plenty of cash reserves and isn’t running their business all on credit.

These are just a few areas that are simply overlooked when seeking a new broker-dealer.  At Trusted Visions, we have over 100-years combined experience in the financial services industry.  We are here to walk alongside you to ensure we are taking a detailed and serious approach to finding you the best broker-dealer partner.  We don’t take this responsibility lightly!  You are trusting your career with us and we want to ensure you are asking the questions you don’t always know to ask or don’t think to ask.  Call or email me today to set-up a confidential consultation at (954) 383-8736 or ian@trustedvisions.com.