Affiliation Model - Business Management for Financial Advisers

Advisers often allow their backgrounds to dictate their affiliations, rather than making a conscious choice about what would be best for them and their practice. There are, in fact, a number of affiliation models in this industry and a number of choices for advisers to make regarding which model on the continuum will best help them implement their own business strategies.

Many advisers came into the business as salespeople by way of the traditional securities brokerage or general agency system. We refer to that platform as one of complete control. Brokerage firms such as Merrill Lynch and Morgan Stanley best represent this model, as do general agency systems such as Northwestern Mutual and bank financial-services networks such as Wells Fargo or Wachovia. Many advisers have built dynamic practices within this framework and have leveraged off the brand recognition that these parent firms provide.

The major advantage is it offers cocoon and enables advisors to focus on clients. These advisors generally receive a high support and firms significantly have a significant identity. . The downside is usually the inability to build a salable practice, which significantly limits how these advisers can run their business affairs, the products they can offer, and sometimes even how they can interact with clients.

Of course, a significant number of advisers have migrated to one of the other three types of affiliation: regulated local autonomy, supervised independence, and total independence. Each of these models has its own set of advantages and challenges. As a rule, the farther you break away from a completely controlled environment, the higher the payout.

But advisers in these other platforms are also more responsible for their costs, infrastructure, and technical support. In other words, independence comes with a cost.

Affiliation Model Support Structure

Affiliation Model Support Structure

A good example of this migration is the system in place at American Express Financial Advisors in Minneapolis, which offers three affiliation platforms that mirror typical industry models: Platform I is indeed completely controlled, and advisers who choose this model become employees of the firm; Platform II is for statutory employees, who are then responsible for their own business expenses; and Platform III is for independent contractors, who no longer operate under the American Express name but who use an affiliated firm as their broker-dealer.

Raymond James Financial in St. Petersburg, Florida, is another example of a once-traditional broker-dealer that now crosses all four of the possible platforms with its Adviser Select initiative. In this instance, the mix is slightly different, offering relationships with its full-service brokerage firm, its independent broker-dealer, and a totally independent institutional-services platform.

In the early 1990s, discount broker Charles Schwab & Co. in San Francisco changed the broker-dealer model with its then-revolutionary institutional-services division. Many advisers discarded their broker-dealer affiliations, in some cases relinquishing their securities licenses, and set up custodial relationships with Schwab Institutional.

Companies such as Fidelity Registered Investment Adviser Group in Boston, T.D. Waterhouse Institutional in New York, and DataLynx in Denver have also become significant players in this market, offering their advisers total independence in product selection, business affairs, and client relationships, along with 100 percent of the revenues those relationships generate.

Certain turnkey providers of asset-management services, such as SEI Investments, BAM Advisor Services LLC, and the Frank Russell Co., have also, in some respects, supplemented the broker-dealer relationship.

A more recent evolution has been the creation of independent trust companies, which a number of fee-based advisers are looking to use as custodians and to clear securities at lower costs to their clients without the perceived threat of competition from their affiliation partner. The trust company model also may potentially fall under the jurisdiction of banking regulators rather than securities regulators, which can provide clients a higher degree of comfort.


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