The Evolving OSJ: Emerging Business Models Prepared for: AssetMark, Inc. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited.
TABLE OF CONTENTS EXECUTIVE SUMMARY... 4 WIDENING VALUE PROPOSITIONS EFFECT THE ENTIRE WEALTH MANAGEMENT CHAIN... 6 INTRODUCTION... 7 METHODOLOGY... 7 CURRENT LANDSCAPE AND INDUSTRY TRENDS... 8 INDUSTRY CONSOLIDATION... 8 SUPERVISION... 9 ADVISOR RECRUITING AND TRANSITIONING... 9 GROWTH IN FEE BASED MANAGEMENT... 11 THE EMERGENCE OF THE VALUE DRIVEN PRACTICE... 12 UNDERSTANDING THE OSJ MODEL... 13 PARTICIPANT OVERVIEW... 13 SEGMENATION... 14 TRADITIONAL OSJS... 15 FACILITATORS... 15 BUSINESS BUILDERS... 15 BUSINESS BUILDERS SUPERVISE APPROXIMATELY... 15 STRENGTHS AND WEAKNESSES OF EACH MODEL... 17 TRADITIONAL OSJS... 17 FACILITATORS... 17 BUSINESS BUILDERS... 17 THE EVOLUTION OF THE OSJ BUSINESS MODEL... 19 EMERGING SERVICE MODELS... 19 PERFORMANCE METRICS... 20 REVENUE SOURCES... 20 REVENUE GROWTH... 21 ADVISOR PAYOUT RANGE... 21 CLIENT ASSETS PER ADVISOR... 22 FEE BASED ASSETS AS A PERCENTAGE OF TOTAL CLIENT ASSETS... 23 ADVISOR PRODUCTIVITY... 23 DRIVERS OF PERFORMANCE... 25 AREAS OF SUCCESSES AND CHALLENGES... 25 LEADERSHIP AND STAFFING... 28 LEADERSHIP... 28 STAFFING... 28 TECHNOLOGY... 29 SERVICES... 31 PRACTICE MANAGEMENT... 32 MARKETING... 33 CONCLUSION... 35 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 2
LIST OF FIGURES FIGURE 1: INDUSTRY TRENDS AFFECTING OSJS... 8 FIGURE 2: NUMBER OF U.S. BROKERAGE FIRMS... 9 FIGURE 3: FINANCIAL ADVISORS AFFILIATED WITH WIREHOUSES... 10 FIGURE 4: ESTIMATED PERCENTAGE OF CLIENT ASSETS IN FEE BASED MANAGEMENT PROGRAMS... 11 FIGURE 5: PERCENTAGE OF REVENUE DERIVED FROM RECURRING AUM BASED FEES BY ADVISORS WITH INDEPENDENT AND INSURANCE AFFILIATED BROKER DEALERS... 12 FIGURE 6: OSJ SEGMENTATION... 16 FIGURE 7: EMERGING SERVICE MODELS... 19 FIGURE 8: REVENUE SOURCES... 20 FIGURE 9: REVENUE GROWTH... 21 FIGURE 10: ADVISOR PAYOUT... 22 FIGURE 11: CLIENT ASSETS PER ADVISOR... 23 FIGURE 12: FEE BASED ASSETS AS A PERCENTAGE OF TOTAL CLIENT ASSETS... 23 FIGURE 13: REVENUE PER ADVISOR... 24 FIGURE 14: OSJS RELATIVE SUCCESS IN KEY AREAS... 25 FIGURE 15: OSJS RELATIVE CHALLENGES IN KEY AREAS... 26 FIGURE 16: SELF IDENTIFIED STRENGTHS OF OSJS... 27 FIGURE 17: OSJ S NET GAIN IN ADVISORS AS A RESULT OF RECRUITING EFFORTS... 27 FIGURE 18: PERCENTAGE OF OSJ PRINCIPALS MANAGING THEIR OWN BOOK OF BUSINESS... 28 FIGURE 19: NUMBER OF ADVISORS PER STAFF MEMBER... 29 FIGURE 20: TECHNOLOGY SOURCING... 30 FIGURE 21: AREAS OF TECHNOLOGY ADVISORS SEEK TO IMPROVE... 31 FIGURE 22: SERVICES PROVIDED BY OSJS... 32 FIGURE 23: PRACTICE MANAGEMENT SERVICES PROVIDED BY OSJS... 33 FIGURE 24: MARKETING SERVICES PROVIDED BY OSJS... 34 LIST OF TABLES TABLE A: PARTICIPANT OVERVIEW... 13 TABLE B: SEGMENT DESCRIPTIONS QUALITATIVE... 16 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 3
EXECUTIVE SUMMARY Amidst a backdrop of increasing regulatory requirements, rapid technology innovations and competition from traditional and emerging players, financial advisors are continuing to evolve and shift to valuebased practices. As this progression continues, broker dealers ( BDs ) that directly support advisors are compelled to adapt to keep pace and drive growth. The role of the Office of Supervisory Jurisdiction (OSJ) is no different and progressive OSJs have launched new business models to take advantage of opportunities presented in the shifting landscape. OSJS: EVOLVING, GROWING, DIFFERENTIATING Today s OSJs have more reasons and new opportunities to look beyond their role in supervision. Since 2002, the number of FINRA registered BDs have decreased by approximately 25%, primarily driven by consolidation. Whether intended or not, OSJs have become an extension of BDs providing an avenue for deeper personal relationships and expanded service offerings. At the same time, more advisors are moving away from captive channels and are going independent. Firms providing a plug and play operational infrastructure that allows advisors to start up quickly are becoming an attractive option for newly independent or transitioning advisors. For OSJs, these services move beyond supervision to full service operational and consulting support. To understand trends in the OSJ model this study analyzed affiliation options, branding, recruiting approach, advisor compensation, services provided, advisor standardization, and technology. Three models emerged: Traditional OSJs: Supervision is the Traditional OSJ s primary role; activities beyond supervision are usually an extension of the underlying BD offerings with minimal direct support from the OSJ. Traditional OSJs often promote their reputation, referral network, and personal relationships with drivers of value. Facilitators: These OSJs have taken the traditional OSJ model a step further by providing business building services such as practice management or marketing support. While this segment offers complementary support, the support and services are not part of a formal service offering designed to stand on its own. In essence, they are truly facilitating the advisor experience, acting as a liaison between the advisors they supervise and their BDs. Business Builders: These OSJs are engaged in providing services to advisors on a turnkey or customized basis. Business Builders tend to identify specific areas where they can assist advisors, including practice management, marketing, technology and leadership support. In the industry, this model may often be referred to as a Super OSJ, but this survey reveals that a group of smaller, progressive OSJs are also adapting this full service model with the goal of building sustainable, transferable businesses. While this study show how the services and support offered by OSJs impacts their relative business performance, it should be noted that evolving an OSJ model requires the OSJ to work within the framework of what is permitted by affiliated broker dealers. Long term, relationship building services and the regular revenue streams provided by fee based business make Business Builders stand out. For most performance indicators, a trend emerges as performance ranks in order from Business Builder to Facilitator to Traditional OSJ. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 4
Revenue Sources: All OSJs have a portfolio of advisors with both fee and commission based revenue. Business Builders, however, generate a majority of their revenue from recurring AUM based fees as opposed to commissions, the only segment to do so. For Traditional OSJs, 74% of their advisor s revenue is commissions based. Conversely, Business Builders foster advisors with 61% fee based revenue stream. Revenue Growth: Fee based revenue streams have greatly benefitted Business Builders revenues. Traditional and Facilitator OSJs indicated a 12% 3 year growth rate, while the Business Builder model indicated a 32% 3 year growth rate. Assets and Revenue per Advisor: Managed assets and revenue per advisor grows progressively from Traditional, Facilitator, and Business Builder OSJs. The average AUM per advisor is $12M, $23M, and $38M for each, respectively. Average annual revenue per advisor for Business Builders is $279k compared to $199k for Facilitator and $118k for Traditional OSJs. Given the current regulatory environment, we anticipate the shift to fee based business to continue and, while many OSJs are helping advisors further embrace a fee based model, Business Builders are perhaps the most successful in recruiting efforts driven by offering a suite of services and support. STRATEGIES THAT DRIVE PERFORMANCE Four themes consistently emerged that supported the differentiation and relative performance of each OSJ model. Within each of the themes there was variability in top performers but, in aggregate, Business Builders consistently had top honors in all 4 themes: Leadership and Staffing, Technology Infrastructure, Value driven Service Offering and Dedicated marketing support. Leadership and Staffing: Principals at OSJ offices often act in an advisor capacity, managing a book of business in addition to their OSJ practice. For Traditional OSJs and Facilitators, this can be 80% to 88% of the principals. Business Builders have far fewer principal advisors (43% of total principals); meaning there is more dedicated leadership developing the OSJ business. Additionally, in regard to staff support, Business Builders employ more staff members per advisor than do Facilitators and Traditional OSJs. In some cases, OSJs provide training to advisor assistants or run advisor staff through their payroll so advisors do not have to handle these tasks. Flexible arrangements in staff management can be attractive to advisors who wish to concentrate as much time as possible on client facing activities as opposed to managing payroll. Technology Infrastructure: Concerning technology, Facilitators indicated that technology is one of their top three challenges, while Business Builders ranked as one of their top successes. Not coincidentally, Business Builders appear to perceive technology as less challenging than the other models. In many cases, Business Builders constructed their entity from the ground up and technology was a key consideration from the start. Business Builders appear to be more involved in technology sourcing compared to other segments, 71% provided reliable infrastructure technology. This can be a big attraction to advisors. It is not so much the purchase cost but the abbreviated learning curve and the comfort in knowing the OSJ can provide the setup and support without having to deal directly with the BD or do so on their own. In particular, close to half of Business Builders provide a customer relationship management (CRM) system to advisors they supervise, thus alleviating a significant pain point for many independent advisors. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 5
Value Driven Service Offerings: OSJs offer a wide range of services to assist advisors such as onboarding, technology training, practice management, and back office support. Dedicated resources at the OSJ level can be a key enabler that helps advisors grow their practice. Book management is a prime example; all Business Builders indicate that they work with advisors to manage their book of business while only 30% of Traditional OSJs indicate the same. Additionally, many OSJs are helping advisors further embrace fee based management. The number of options can be daunting for advisors, and OSJs can play a critical role in providing advisors access to and assistance with packaged fee based models, supporting technology and investment specialists that can help advisors successfully transition. Succession planning is also a service that stands out. Traditional OSJs appear to feel less successful in the area of succession planning. Indeed, multiple interviews with traditional OSJs indicate that many of the advisors have no succession plan. In contrast, succession planning underscores part of the value proposition for Business Builders. Dedicated Marketing Support: Marketing support is another core area where Traditional OSJs seemingly are less likely to offer services and support than are Facilitators and Business Builders. Business Builders in particular appear more apt to have dedicated marketing specialists, which likely contributes to higher revenue production and revenue growth. Additionally, of 5 surveyed marketing activities (campaign management, social media, specialists, design services and event planning), 4 of the 5 services are offered by 71% or more Business Builders. WIDENING VALUE PROPOSITIONS EFFECT THE ENTIRE WEALTH MANAGEMENT CHAIN The wealth management advisory chain continues to evolve and in part, diverge. While the emergence of fully scaled, low service solutions is growing, many independent advisors and their service providers are focused on delivering services that widen value proposition and provide a deeper level of client engagement. For OSJs choosing these service oriented models, there are quantifiable positive impacts: Higher revenues driven by a shift to recurring fee based business Improved recruiting and advisor retention supported by transition and business development assistance for advisors Competitive positioning and scalable solutions for BDs For OSJs looking to evolve to the Facilitator or Business Builder model, the suite of offerings can demand high capital requirements; but the payoff can be seen in the higher revenue streams and better recruitment positioning. BDs benefit, too, by leveraging the OSJ to create scalable strategies and increasing their attractiveness to advisors. The most direct beneficiary is the advisor who will have a wider range of options tailored to their needs. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 6
INTRODUCTION Financial advisors are continually evolving. Today s advisor seeks to provide a holistic experience to investors through comprehensive financial planning and managed portfolios to better identify and meet investors goals, all underpinned by technology. This evolution is also evident among advisors with independent and insurance affiliated BDs, spurred by industry consolidation and the breakaway movement of advisors from captive firms to independent channels. This shift also affects the role played by OSJs that oversee advisors. AssetMark commissioned Aite Group to undertake a study looking at the OSJ landscape and the role OSJs play in advisors success. The study consisted of personal interviews that focused on participants business models, value proposition and services offered to understand how OSJs are responding to industry trends and advisor demands. METHODOLOGY Throughout the course of Q3 2015, Aite Group conducted personal interviews with 25 principals responsible for managing an OSJ branch. The principals, all affiliated with independent and insuranceaffiliated BDs, represent 340 years in collective experience overseeing an OSJ. The OSJs that participated comprise 1,800 advisors spread across 920 branch offices, managing close to $40 billion in client assets. The goal of the research was to assess the state of services OSJs offer their advisors by analyzing emerging business models and methods employed by OSJs. To better capture the essence of each OSJ s business model and structure, Aite Group arranged and conducted personal interviews with OSJ principals. Personal interviews were conducted precisely to help capture qualitative insights into not only the what but also the how of emerging models. Participants responded to a series of questions related to their business model, relationship and support provided by their BD, services and technology available to advisors, relative areas of strengths and weaknesses, and high level practice metrics. Additionally, Aite Group conducted annual online surveys from 2012 to 2014 among 1,229 financial advisors across multiple BD channels as well as registered investment advisors (RIAs) regarding attributes of their practices, operational and technology setups, product usage, revenue generation, etc. This paper is supplemented with data from those surveys. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 7
CURRENT LANDSCAPE AND INDUSTRY TRENDS Firms in the global wealth management industry are increasingly confronted with an operating environment that is more complex and demands more resources to remain competitive. The evolution of advisors and their service providers continues against a backdrop of regulatory uncertainty, competition from traditional and emerging players, and the rapid pace of technology change. Additionally, the industry is facing increased scrutiny from the public and government calling for greater fee transparency and a uniform fiduciary standard, all of which will likely be manifest through more regulation. OSJs are not immune to the impact of key trends that are reshaping the wealth management industry, and they must respond. Additionally, OSJs are faced with a specific set of trends that affect their business: industry consolidation, increasing supervisory responsibilities, advisor recruiting and transitioning, growth of fee based management and the emergence of value driven advisor practices. Figure 1 highlights key industry trends affecting OSJs. Figure 1: Industry Trends Affecting OSJs Industry consolidation Increasing supervisory responsibilities Advisor recruiting and transitioning Growth of fee based management Emergence of the valuedriven practice Source: Aite Group INDUSTRY CONSOLIDATION The US wealth management industry continues to be in consolidation mode, driven by the need to build scale into operations to generate more revenue without a commensurate increase in expenses. The number of FINRA registered brokerage firms has declined by approximately 25% since 2002, 1 and as acquisitions occur and small brokerage firms withdraw, the trend should only continue (Figure 2). 1. The National Association of Securities Dealers (NASD) was reorganized in 2007 and became part of the Financial Industry Regulatory Authority (FINRA). 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 8
Consolidation is creating an environment in which fewer, larger firms increasingly control a greater share of client assets. As BDs increase in size, the ability for the home office to know every advisor by name and provide that personalized service becomes more difficult. Indeed, home office operations often consolidate because of mergers and acquisitions. This environment presents opportunities for OSJs to play a more critical role in advisors success by acting as a conduit between the BD and advisors to extend the BDs services, technology and support on a more personalized and local level. Progressive OSJs are also building a sustainable business focused on extending additional services and support, and they are increasingly recruiting advisors directly to their OSJ. Figure 2: Number of US Brokerage Firms -24% 5,392 5,272 5,191 5,111 5,029 5,005 4,895 4,720 4,578 4,456 4,289 4,146 4,105 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: FINRA SUPERVISION Increased supervisory requirements, stemming from the changing regulatory environment over past years is an ever present and growing concern for firms and their advisors alike. Many independent and insurance affiliated BDs leverage their network of OSJs to scale supervisory responsibilities. This allows the sponsoring broker to shift some duties to the field, while fostering a personal relationship with the advisor. Given their core function, OSJs may be in a unique position to help their advisors adjust business practices to meet these new standards. ADVISOR RECRUITING AND TRANSITIONING Competition for advisors among independent and insurance affiliated BDs is fierce. Historically, BDs in these channels have competed for advisors based on payout ratio payouts tend to be higher here than 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 9
in captive firms because advisors are invariably responsible for sourcing their own infrastructure (office, equipment, health insurance, staff, etc.). The largest captive firms have fewer advisors in 2015 than in 2007, or shortly before the financial crisis (Figure 3). Successful advisors coming from captive BDs are seeking a plug and play environment in which they can quickly transition without having to set up their own infrastructure from scratch. These advisors do not necessarily need a boost to their performance through practice management; rather, they need the operational and technology setup handled for them. The instances of successful advisors moving from captive channels to independence will likely increase over the next few years as advisor retention packages expire, or golden handcuffs come off among advisors with captive BDs. A group of advisors at captive BDs also transition to the independent channel because they are not able to meet production quotas. Underperforming advisors are often cast aside by their captive BDs as part of annual pruning of low producing advisors. These advisors are generally not entrepreneurs and need support to boost their productivity and efficiency. These advisors can benefit most from the coaching and support offered by progressive OSJs. Figure 3: Financial Advisors Affiliated With Wirehouses -15% 63,871 62,514 55,186 56,083 57,187 55,666 54,189 54,295 2007 2008 2009 2010 2011 2012 2013 2014 Source: Company reports, Aite Group OSJs are in a position to deliver more personalized services and attention to advisors than are BDs home offices, which are increasingly serving more advisors. Many OSJs are emerging to augment recruiting done at the BD level by recruiting advisors on their own and providing the infrastructure and support to better assist advisors in transition. With the number of advisors poised to decline in coming years as many enter retirement, recruiting will become more competitive. New service models built on a solid value proposition will therefore become even more important in recruiting advisors. The result is an emerging environment in which the OSJ provides the hands on, local support while also leveraging the resources and scale of a large BD. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 10
GROWTH IN FEE BASED MANAGEMENT The wealth management industry is witnessing a shift away from one off product sales and toward managed portfolios that generate recurring fees based on client asset levels. A managed portfolio is more conducive to helping clients achieve their goals, which has been borne out of the financial planning movement. The shift to fee based management is occurring across the industry; the percentage of client assets in fee based programs was approximately 37% at the end of 2014, up from about 30% in 2012 (Figure 4). Advisors with independent and insurance affiliated BDs are no exception to this trend, but for many advisors in these channels who historically have mainly generated commissions from investment and insurance products, gaining comfort levels with the myriad fee based products available has been daunting. Still, advisors in these channels indicate that fee based management is becoming more and more important to their bottom line; revenue from recurring AUM based fees increased among advisors in these channels from 2012 to 2014 (Figure 5). Many OSJs are helping advisors further embrace fee based management. The number of options can be intimidating for advisors, and OSJs can play a critical role in promoting fee based products by providing advisors access to and assistance with packaged fee based models and supporting technology as well as investment specialists who can help advisors take their practice to another level. Many advisors struggle with the transition from product sales to fee based management because they are concerned that they may lose clients or are unsure how to transition their existing client base without disrupting existing revenue streams. Alignment with the right OSJ can help advisors with little experience providing feebased management an opportunity to become acclimated more quickly, increase revenue growth, and provide additional services, such as financial planning, that mitigate short term revenue loss during a transition. Figure 4: Estimated Percentage of Client Assets in Fee based Management Programs 30.3% 32.4% 33.5% 35.6% 37.1% $4,139 $4,424 $5,084 $6,191 $7,075 Source: Company reports, Aite Group 2010 2011 2012 2013 2014 Estimated, Fee-Based Client Assets as Percent of Total Assets 2010-2014 ($ billions) 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 11
Figure 5: Percentage of Revenue Derived From Recurring AUM Based Fees by Advisors with Independent and Insurance Affiliated Broker Dealers 2012 19% 2014 28% Source: Aite Group survey of 1,229 financial advisors, Q1 2012 to Q2 2014 THE EMERGENCE OF THE VALUE DRIVEN PRACTICE The manner in which financial advice is provided has slowly changed over the years. The days of advisors flipping through phone books and cold calling prospects with a pitch to buy a stock or a bond are gone. In its place, many advisors have evolved to offer a holistic, goals based planning experience centered on financial planning, tax and estate planning, and leveraging institutional quality portfolio models to provide clients with an experience once reserved for the ultra wealthy. The shift to fee based management has created more repeatable revenue streams, which in turn create more sustainable value driven practices. Succession planning has become top of mind not only due to the aging advisor force but also because advisors who have created value driven practices want to be able to monetize their business when they decide to exit. OSJs are well positioned to help advisors create a value driven practice or help those who do have a value driven practice plan for succession. Many OSJs are building a sustainable business of their own centered on providing the infrastructure, services and support to other advisor practices. Additionally, many OSJs are building advisor succession planning directly into their core business and use the readymade succession plan as part of their value proposition when recruiting advisors. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 12
UNDERSTANDING THE OSJ MODEL PARTICIPANT OVERVIEW The study involved interviewing 25 principals of OSJs with independent and insurance affiliated BDs. Respondents represent a diverse group of OSJs in terms of business models, value propositions and services offered. OSJs range in size, from small OSJs with a handful of advisors to those that oversee more than 200 advisors, to represent a dynamic cross section of OSJs. OSJ branches that participated have been in existence for an average of 20 years, while the principals responsible for overseeing the OSJ have an average tenure of 13.5 years in that role. Participants oversee 73 advisors on average spread across 37 branch locations, which indicates that there are roughly two advisors per branch. The dynamic of having two advisors per branch is very different from the large complexes staffed with 50 to 100 advisors in the wirehouse channel. It is common for advisors in small branches to operate in an isolated fashion, unable to walk down the hallway and bounce ideas off multiple colleagues. The isolated nature of many branch offices among independent and insuranceaffiliated BDs necessitates greater involvement by the OSJ, which can promote peer networking through hosting virtual and in person events, webinars and mentoring programs to build a culture among advisors scattered about in small branches. The majority of advisors overseen by participating OSJs handle between 100 and 500 clients, with an average of approximately 250 clients. This tends to be in line with the overall wealth management industry. From a production standpoint, advisors overseen by participating OSJs produce $188,000 in average revenue annually, which is on par with average advisor production among the top 80 independent and insurance affiliated BDs. Recurring AUM based fees constitute 45% of revenue for OSJs interviewed; in contrast, a 2014 Aite Group survey of 80 advisors with independent or insuranceaffiliated BDs revealed that advisors generate less than 30% of their revenue from fee based management. Table A provides a descriptive snapshot of the OSJs that participated in this study. Table A: Participant Overview Participant Overview Experience Average age of OSJ branch 20.1 years Average principal tenure 13.6 years Footprint Average number of branch offices 37 Average number of advisors supervised 73 Average number of staff, main OSJ branch 7.6 Clients per advisor Fewer than 100 8% 100 to 249 52% 250 to 499 32% More than 500 8% Production Average revenue per OSJ $13.5 million 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 13
Participant Overview Average revenue per advisor $188,000 Average annual revenue growth, prior 3 years 14% Revenue sources Commissions from investments/ variable annuities 40% Commissions from fixed insurance 13% Recurring AUM based fee 45% Other 2% Average client assets per advisor $23.8 million Average client assets per OSJ $1.6 billion Average advisor payout range Low 59 High 85 Fee based management Average fee based assets as a percentage of total client assets 47% Fee based business arrangement Corporate RIA 60% Independent RIA 16% Combination 24% Average client charge (basis points) Low 69 High 193 Source: Aite Group interviews with 25 OSJ principals, Q3 2015 SEGMENATION The evolution of advisors raises the ante for OSJs that hope to attract and retain the most productive advisors, as choices for advisors in terms of affiliation options, branding, product availability, practice management and technology services have never been greater. With these factors in mind, OSJs were categorized into one of three segments based on the following attributes as well as qualitative insights gained from the personal interviews: Affiliation options Branding Recruiting approach Compensation Services provided Standardization Technology The following section contains a general description of each OSJ segment based on the above criteria. Figure 6 shows the segmentation of participants in each category. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 14
TRADITIONAL OSJS These OSJs oversee approximately 600 advisors administering over $5 billion in client assets. While these OSJs may provide some services beyond supervision, the services are usually an extension of what the underlying BD already offers. The overwhelming majority of advisors reporting to a traditional OSJ are contractors and hang their own shingle. The OSJ typically provides freedom to advisors to operate how they desire and rarely provides technology resources directly to advisors. Traditional OSJs typically have not executed a business plan to grow their OSJ business through the provisioning of services and support. FACILITATORS Facilitators supervise over 800 advisors managing close to $19 billion in client assets. These OSJs have taken the Traditional OSJ model a step further by offering services such as practice management support or marketing specialists. Facilitators strive to provide support services designed to promote greater efficiency and revenue growth among the advisors they supervise and push for adoption of these services. Some extend the services provided by the underlying BD and complement those with their own service offerings. While this segment offers complementary support, the support and services are not part of a formal business designed to stand on its own. Most principals also must balance a management role with managing their own book of business. BUSINESS BUILDERS Business Builders supervise approximately 400 advisors managing close to $15 billion in client assets. These OSJs are engaged in building a business focused on providing services and support to other advisors, either on a turnkey basis or through customized services. Services generally focus on practice management, marketing support, technology and associated training, and other services that help advisors to more easily transition and maintain focus on client facing activities as opposed to configuring the infrastructure on their own. There are a few different flavors of Business Builders. Some are focused on providing a la carte outsourced services, allowing the OSJ to monetize their offerings. Others are building more of a wirehouse light model that provides the plug and play capabilities of a captive BD complete with workflows, technology, and investment models while still allowing advisors an opportunity to run their practices more independently than could be achieved at a captive BD. A final group is taking the approach of a mini aggregator, acquiring practices and folding the businesses into their existing ensembles. Business Builders have a vision and an executable business plan to create a sustainable, transferrable business. A more detailed explanation of how OSJs in each segment compare across key attributes appears in Table B. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 15
Figure 6: OSJ Segmentation Business Builder 28% Traditional OSJ 40% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 Facilitator 32% Table B: Segment Descriptions Qualitative Segment Traditional OSJ Facilitator Business Builder Advisor affiliation options Vast majority of advisors are contractors Vast majority of advisors are contractors A mix of employees, partners, and contractors Advisor branding Most often, advisors use their own brand Recruiting approach Advisor compensation (payout) Services provided Advisor standardization Technology Source: Aite Group Mainly focused on quantity; in many instances advisors are assigned to the OSJ by the broker dealer Payout amount tends to be on the higher end of the range Beyond regulatory and supervision, mainly limited to what the broker dealer offers Little involvement by OSJ in terms of standardizing how advisors conduct business Seldom provide technology to advisors and mainly rely on what the BD makes available, leaving advisors to fill the gaps themselves Advisors tend to have a choice between hanging their own shingle or using the OSJ s brand A blend between quantity and quality; more selective than traditional OSJs Payout amount tends to be on the higher end of the payout range Tend to extend some of the services offered by the broker dealer to better support advisors Little involvement by OSJ in terms of standardizing how advisors conduct business Mainly rely on what the BD provides; may supplement advisors by providing some technology A distributed mix of advisors using the OSJ s brand and those using their own brands Very selective in who they choose to onboard; fitting in with current culture paramount Varies, but payout amount tends to be in the middle to lower end of the range Services mainly offered by the OSJ directly; in some cases involves an extension of services provided by the broker dealer; greater emphasis on building a common workflow Many attempting to usher in more standardization in how advisors conduct business, including approaches to fee based asset management Generally take the onus off the advisor by combining technology from the BD with technology they provide to advisors to enable advisors to concentrate on production 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 16
STRENGTHS AND WEAKNESSES OF EACH MODEL TRADITIONAL OSJS Strengths: The biggest strength of the Traditional OSJ model is that it is tried and true. There is also not a lot of investment needed in infrastructure and staffing to support this model. Traditional OSJs show solid growth revenue. Many are happy with their current situation and do not aspire to build a formal business around their OSJ activities, as most also manage a book of business. Challenges: Advisors with Traditional OSJs tend to be lower producers than those in other segments. Traditional OSJs tend to struggle with recruiting, something that will only be exacerbated as new OSJ models emerge. The struggle with recruiting is likely correlated with the lack of services, technology and support offered. Even those that do offer additional services beyond supervision, cite challenges in getting advisors to adopt practice management programs and technology. Most traditional OSJs will struggle to evolve into Facilitators or Business Builders, as they are often hampered by supervising some advisors who would not fit well in other models. Many Traditional OSJs are stymied by a lack of flexibility to embrace emerging OSJ models. These factors make it difficult for OSJs to build an enterprise business that creates sustainable, transferable value. FACILITATORS Strengths: Advisors affiliated with Facilitators tend to be higher producing advisors and show a greater commitment to fee based business than do advisors with Traditional OSJs. Many Facilitators offer additional services, or at a minimum try to bridge the gap between the services offered by the BD and advisor utilization. Overall, Facilitators seem to do a good job with service provisioning. Challenges: Facilitators tend to find technology challenging, which is likely because they do not provide the technology directly but tend to be the first line of defense for advisor technology issues. Few principals of Facilitators are nonproducing managers, meaning that their entire focus is not on growing a sustainable business based on serving other financial advisors. Facilitators may find it difficult to transition to Business Builders for many of the same reasons as Traditional OSJs but, based on their current model, would be better positioned than Traditional OSJs to make that leap. BUSINESS BUILDERS Strengths: Business Builders tend to have higher producing advisors who show the greatest commitment to fee based business. Business Builders also are able to articulate a vision along with an executable business plan; this is positively impacted by the greater presence of dedicated managers who do not also manage client assets. The vision tends to revolve around thoughtfully building a scalable infrastructure that promotes greater advisor productivity while also allowing OSJs to build a sustainable business. Leadership is critical in building a business and in successfully influencing advisors under their purview. Business Builders feel they have been successful in recruiting advisors and do not see this as particularly challenging. The breadth and depth of services, technology, leadership and support offered undoubtedly aid in their recruiting efforts. Challenges: Business Builders require the initial investment to build an infrastructure and to set up their practice investments that do not necessarily pay off quickly. In addition, there is no guarantee that if they build it, advisors will come. Business Builders need to thoughtfully offer services and technology for 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 17
which there is demand. While Business Builders report being successful in recruiting, some are admittedly too selective and wonder if they have hindered their initial growth by not bringing on advisors who they think may not be a good cultural fit. Additionally, some BDs do not permit nontraditional OSJ models, which may hinder OSJs from adapting the Business Builders model. The time has never been better for advisors to explore independent channels or to seek a new home. New OSJ models are emerging to support the evolution of financial advisors. This makes it incumbent on BDs to further embrace new models, which can only benefit them in the long term by making their firms more attractive to prospective advisors. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 18
THE EVOLUTION OF THE OSJ BUSINESS MODEL EMERGING SERVICE MODELS The evolution of OSJ business models is steeped in the depth and breadth of services offered. The shape and delivery of services varies by OSJ, and it is precisely these nuanced characteristics that contribute to the overall value proposition offered by OSJs. The current landscape is ripe for innovation in OSJ business models because of a confluence of events, including the continued movement of advisors from captive channels to independent channels due to a desire for independence, availability of technology that is competitive with technology within large captive firms, and continued consolidation within the independent and insurer affiliated BD space. Figure 7 illustrates the emergence of new OSJ service models. Figure 7: Emerging Service Models Source: Aite Group In the Traditional OSJ model, the BD acts as a hub for OSJs and advisor practices alike in terms of providing services, technology, and support. OSJs provide supervisory oversight to advisors; beyond that, in many cases the advisor is on his/her own. Facilitators also operate under similar premises as Traditional OSJs, with the exception being that the OSJ may step in and take an active role in extending services offered by the BD. In many cases, the OSJ will provide the first line of service or will facilitate advisors support requests around select non supervisory services with the home office. Facilitators generally extend the services and support provided by BDs, offering that personal touch. On the other hand, Business Builders have built an infrastructure and have a business strategy centered on providing services to other advisors. The OSJ serves as a conduit to the home office, thus ensuring a higher level of personal service and reducing or in some cases eliminating the need for advisors to go 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 19
directly to the home office. Business Builders not only extend services offered by the BD but also most often add their own services and support layer that helps differentiate their OSJ businesses from traditional OSJs. PERFORMANCE METRICS The type of services and support offered by advisors BDs and OSJs impacts their relative performance in terms of generating revenue and growing client assets. An emerging and critical role played by OSJs involves bridging the gap between services offered by the underlying BD and utilization of those services by advisors. The following section hones in on performance metrics of advisors affiliated with the different OSJ models. REVENUE SOURCES Financial advisors generate revenue mainly through recurring AUM based fees or through commissions on product sales (from investment and insurance products). Advisors may also generate revenue from standalone services, such as financial planning or retirement plan consulting, although often advisors bundle the charges for these services in with investment fees. Business Builders stand out as the only OSJ segment in which advisors earn a higher percentage of revenue from recurring AUM based fees than from commissions. On the other end of the spectrum, advisors affiliated with traditional OSJs generate the majority of their revenue through commissions from product sales (Figure 8). Figure 8: Revenue Sources Traditional OSJ 59% 15% 23% 3% Facilitator 39% 15% 45% 2% Business Builder 30% 9% 61% 1% Commissions from investments Recurring AUM-based fees Commissions from insurance Other Source: Aite Group interviews with 25 OSJ principals, Q3 2015 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 20
REVENUE GROWTH Recurring AUM based fees represent a steady, repeatable revenue stream, as opposed to commissionbased product sales. The benefit of repeatable revenue streams is attractive to financial advisors and is one of the drivers behind the movement toward fee based advisory. Traditional OSJs and Facilitators report average annual revenue growth of 12% over the last three years; in contrast, Business Builders were able to grow annual revenue at a 32% clip over the same period (Figure 9). While AUM based fees likely are not solely responsible for the growth rates experienced by Business Builders, they likely have a positive impact. Figure 9: Revenue Growth Traditional OSJ 12% Facilitator 12% Business Builder 32% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 ADVISOR PAYOUT RANGE The payout range for financial advisors operating in independent or insurer affiliated BD channels varies greatly. Typically, payout is a function of production levels (higher producing advisors garner higher payout rates than do those with lower production) as well as the services and setup offered by the OSJ. This is also true of the OSJs that participated in this study, which boast a variety of affiliation options and support various setups. Invariably, there is a tradeoff between payout rate and services offered. OSJs that wrap services and support that go beyond pure supervision (examples include paying for office space, providing technology or having in house specialists to assist advisors) into their business model tend to provide a lower payout than those that simply provide supervision or other traditional services, like account approval. In the latter case, advisors are often on their own in sourcing their infrastructure, technology and marketing support. On average, OSJs classified as Business Builders show a tighter range of advisor payout rates (Figure 10). The lower payout rate among business builders is indicative of the structure and services they offer. The average payout on the high end for Business Builders (77%) is lower than the high range for Traditional OSJs and Facilitators and lower than the 80% to 90% payout rates that are common in the independent and insurer affiliated brokerage segments. Undoubtedly, Business Builders are offering lower payouts on 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 21
average precisely to support the services offered, which will help advisors grow revenue. Few firms are engaged in a strictly outsourced service model in which advisors pay directly for a la carte services. Many respondents indicate that they are trying to build a dual model through which new advisors can choose to pay explicitly for some services while taking others in a bundle in exchange for a lower payout. The average payout on the low end for Traditional OSJs and Facilitators is primarily indicative of the presence of junior advisors who are new to the business. The presence of junior advisors in practices is not standardized and varies by practice. This variability is indicative of fragmentation and a lack of structure and guidance by OSJs, thereby forcing practice managers to figure out the optimal configuration for themselves. Figure 10: Advisor Payout Source: Aite Group interviews with 25 OSJ principals, Q3 2015 CLIENT ASSETS PER ADVISOR Advisors affiliated with OSJs classified as Business Builders appear to manage a larger book of business on average than advisors affiliated with Traditional OSJs and Facilitators; Facilitators appear to outpace advisors with Traditional OSJs as well (Figure 11). It is reasonable to infer that OSJs thoughtfully offering additional services and building an infrastructure to streamline business operations either attract financial advisors with larger books of business or help existing advisors grow their practices. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 22
Figure 11: Client Assets per Advisor, 2014 ($M) Traditional OSJ $12.1 Facilitator $23.0 Business Builder $38.3 Source: Aite Group interviews with 25 OSJ principals, Q3 2015 FEE BASED ASSETS AS A PERCENTAGE OF TOTAL CLIENT ASSETS Not surprisingly, fee based assets constitute the majority of client assets within Business Builders; this percentage declines through the progression from Facilitator to Traditional OSJ Figure 12). This is likely the result of Business Builders and, to a lesser extent, Facilitators relatively greater structure around fee based management. Higher AUM per advisor combined with a greater propensity to engage in feebased business drives higher revenue production. Figure 12: Fee Based Assets as a Percentage of Total Client Assets, 2014 Traditional OSJ 21% Facilitator 44% Business Builder 60% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 ADVISOR PRODUCTIVITY Indeed, advisors affiliated with Business Builders realize over twice the revenue of advisors with Traditional OSJs (Figure 13). Services and infrastructure play a big role in advancing advisor productivity as well as attracting advisors from captive BD with large books of business. In particular, multiple principals with Business Builders indicate that they seek to construct a business that will allow advisors to more easily migrate from captive channels by building a plug and play environment. This environment 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 23
requires bundling workflows, technology, practice management and marketing services into a compelling offer to attract advisors who seek independence yet do not want to handle every nuanced detail necessary to start an independent practice from the ground up. Figure 13: Average Revenue per Advisor, 2014 ($K) Traditional OSJ $119 Facilitator $199 Business Builder $280 Source: Aite Group interviews with 25 OSJ principals, Q3 2015 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 24
DRIVERS OF PERFORMANCE To understand the relative performance of each model, various aspects of OSJs businesses were viewed against the backdrop of services offered as well as their unique visions for their businesses. Analysis reveals models differences in areas of self identified successes and challenges. Additionally, four key themes emerged that differentiate among models: leadership, technology, services and marketing support. AREAS OF SUCCESSES AND CHALLENGES Traditional OSJs appear to feel less successful in the area of succession planning than do Facilitators and Business Builders (Figure 14). Indeed, multiple interviews with traditional OSJs indicate that many of the advisors have no succession plan. In contrast, succession planning underscored part of the value proposition for Business Builders. Facilitators and Business Builders also feel more successful in recruiting than do Traditional OSJs. This is likely attributable to their ability to offer prospective advisors more options in terms of services and support. Some Business Builders gave themselves lower ratings not because they were unable to recruit quality advisors but perhaps because they felt that they were too selective at times, which hindered growth. With regard to technology, Facilitators appear to sense a lower level of success in this area than do Business Builders. This is likely because most Facilitators aspire to offer leading technology to advisors but realize they are not quite there yet. Traditional OSJs likely have lower expectations than do Facilitators and Business Builders, as advisors carry more of the technology burden in this segment than they do in the other two segments. Figure 14: OSJs Relative Success in Key Areas On a scale of 1 to 10 with 1 representing not successful and 10 representing extremely successful, how successful are the following aspects for your OSJ branch? Succession Planning Recruiting Revenue Growth Scalability Regulatory compliance Technology 4.4 5.0 6.0 7.6 7.6 7.1 8.6 7.9 7.5 8.1 7.7 8.1 8.0 8.5 8.5 9.0 7.4 8.1 Traditional OSJ Facilitator Business Builder Source: Aite Group interviews with 25 OSJ principals, Q3 2015 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 25
Not coincidentally, Business Builders appear to perceive technology as less challenging than do Facilitators and Traditional OSJs (Figure 15). As many Business Builders formed their entity from the ground up, technology was a key consideration from the start. Facilitators in particular see relatively greater challenges in managing technology, as they are not heavily involved with providing technology to their advisors directly yet advisors will come to them with technology issues. Following on that same theme, Business Builders also appear to feel that supervision is less challenging than do Facilitators and Traditional OSJs. Again, supervision workflows were built into the fabric of many Business Builders since inception. Business Builders also benefit from having the ability to be more selective in the advisors they supervise, whereas traditional OSJs and Facilitators often have advisors assigned to them by the home office. Figure 15: OSJs Relative Challenges in Key Areas On a scale of 1 to 10 with 1 representing no challenge and 10 representing a big challenge, how challenging are the following aspects for your OSJ branch? Succession Planning Recruiting Revenue Growth Scalability Regulatory compliance Technology 5.4 5.1 6.0 7.7 7.0 6.0 4.1 5.6 4.6 4.9 4.6 3.6 5.9 7.0 3.6 5.2 6.3 3.3 Traditional OSJ Facilitator Business Builder Source: Aite Group interviews with 25 OSJ principals, Q3 2015 Traditional OSJs tout their reputation, referral network, and personal relationships with advisors all important attributes but not tangible ones (Figure 16). Facilitators also stress relationships and local support, and the support of their BD. In essence, they are truly facilitating the advisor experience in many ways, one of which is acting as a liaison between the advisors they supervise and their BDs. Business Builders tend to identify more specific areas where they can help advisors, including marketing support, technology and leadership (as opposed to a good relationship) a small nuance that indicates there is structure to the business and an executable business plan as opposed to a nice place to hang your shingle. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 26
Figure 16: Self Identified Strengths of OSJs Traditional OSJs Facilitators Business Builders Local reputation 30% Local support 38% Operational scale 43% Relationship between OSJ and advisors 30% Business model 25% Advisor recruiting Business model 29% 29% Centers of influence - referral network 20% Relationship between OSJ and advisors 25% Ease of transition for new advisors 29% Coaching 20% Strong BD support 25% Leadership Marketing 29% 29% Operational scale 20% Technology 29% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 Business Builders in particular appear to be outpacing Facilitators and Traditional OSJs in recruiting advisors (Figure 17). Many Business Builders also mentioned recruiting as a relative strength. Interviews with Business Builders left the general impression that quality is more important than quantity in recruiting. It is critically important to bring in advisors who will fit in with the culture they are building; a big producer with a clean record is not enough for automatic acceptance. Figure 17: OSJ s Net Gain in Advisors as a Result of Recruiting Efforts Traditional OSJ 5% Facilitator 13% Business Builder 41% New advisors as a percent of total advisors, last three years Source: Aite Group interviews with 25 OSJ principals, Q3 2015 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 27
LEADERSHIP AND STAFFING Another key theme involves the role of leadership and staffing. Support is only as good as the people providing it; the lack of solid leadership and/or adequate staffing at the main OSJ branch can be detrimental to the productivity and morale of the advisors supervised. A well respected leader can influence change through the trust built with advisors, which is critical to keeping advisors engaged and more efficient. LEADERSHIP Leadership is hard to quantify and was not explored directly through interviews with OSJs. More than one Business Builder identified leadership as a key strength; leadership cannot be overstated. In conversations with branch managers, a lack of time was consistently cited as a significant challenge. Most of these branch managers also manage a book of business. Some mentioned the need to bring on a dedicated business manager to focus solely on growing their OSJ business. Less than half of principals associated with Business Builders indicate that they manage their own book of business; in contrast, the vast majority of those affiliated with Traditional OSJs and Facilitators manage their own client lists (Figure 18). It makes sense that it is difficult to build a thriving business while also serving clients; hence, for most Traditional OSJs and Facilitators it is more of a side business. While there is merit to leadership having worked in the trenches and experienced the life of a financial advisor, it is equally if not more important to have dedicated leadership who can help advisors grow their revenue and, in the case of Business Builders, lead the growth of the business. For a small OSJ, this might not be possible initially, but as the business grows, dedicated leadership should be in place. More than one participant indicates that he or she needs to step away from working with clients to fully focus on growing the OSJ business, although it can be tough to break that bond with one s most lucrative and longstanding clients. Figure 18: Percentage of OSJ Principals Managing Their Own Book of Business Traditional OSJ 80% Facilitator 88% Business Builder 43% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 STAFFING Business Builders appear to employ more staff members per advisor than do Facilitators; Facilitators employ more staff members per advisor than do Traditional OSJs (Figure 19). It is difficult to build a 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 28
sustainable business without properly trained staff, and the lack of staff can hinder service offerings, such as providing access to marketing specialists, financial planning specialists and investment specialists, which in turn can suppress revenue growth. The advisor to staff ratio will inherently be lower for those OSJs that are in their infancy (we interviewed a few). The overall strategy of these Business Builders relies heavily on creating operational scale through workflows and technology, which will allow them to increase the number of advisors per staff member as they recruit more advisors. Figure 19: Number of Advisors per Staff Member Traditional OSJ 16 Facilitator 9 Business Builder 6 Source: Aite Group interviews with 25 OSJ principals, Q3 2015 TECHNOLOGY Sources of core technology applications vary greatly among advisor practices, OSJs and BDs in the independent and insurance affiliated BD space (Figure 20). The BD primarily provides advisor workstations and portfolio management systems. The few respondents who source their own portfolio management systems do so to support an independent RIA. Performance reporting is also cited by most as being provided by the BD, although advisors pay for it in most cases through an affiliation or technology fee. Advisors associated with Traditional OSJs and Facilitators are primarily responsible for their technology infrastructure and hardware; advisors with Business Builders are more apt to have their office equipment provided to them by their OSJ. Handling the basic technology setup, ongoing maintenance and support can be of great value to advisors, especially those transitioning from a BD where everything was provided. Advisors with Traditional OSJs and Facilitators are also more apt to source their financial planning systems themselves, and few OSJs supply a financial planning system to all the advisors they supervise. To a somewhat lesser extent, many advisors also are responsible for sourcing their own CRM systems. Business Builders appear to be more involved in technology sourcing compared to other segments, bridging the gap between technology the BDs provide and technology the advisors would normally be required to acquire themselves. This can be a big attraction to advisors. It is not so much the purchase cost but the abbreviated learning curve and knowing the OSJ can provide the setup and support without having to deal directly with the BD or do so on their own. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 29
Figure 20: Technology Sourcing Traditional OSJ Facilitator Business Builder Portfolio management / accounting Advisor workstation Performance reporting Financial planning CRM Client portal Infrastructure / hardware BD Advisors OSJ Combination Source: Aite Group interviews with 25 OSJ principals, Q3 2015 Past Aite Group surveys of financial advisors consistently show that CRM and financial planning are two areas where advisors would dedicate the largest percentage of a hypothetical technology budget (integration is also mentioned often; Figure 21). While the BD may have integration with a handful of popular CRM systems, it is difficult to get thousands of advisors to adopt a single system, let alone 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 30
mandate one. As such, many advisors are dissatisfied with their CRM precisely because they are responsible for sourcing it themselves. Figure 21: Areas of Technology Advisors Seek to Improve Improving integration among business applications Financial planning CRM 12% 14% 14% Improve mobile access 9% Advisor dashboard 7% Portfolio construction and analytics Form pre-filling Research systems 5% 6% 6% Please allocate your budget in percentage terms across the applications/capabilities you would like to add or improve Source: Source: Aite Group survey of 402 financial advisors, Q2 2014 SERVICES Principals interviewed were asked to indicate whether their OSJ offers a range of services to advisors they supervise. Facilitators and Business Builders appear to have a greater likelihood of employing financial planning or other specialists than have Traditional OSJs (Figure 22). Interviews with Business Builders reveal that many do not have a dedicated financial planning expert because most advisors already excel in that discipline. There is also a noticeable disparity in the provisioning of technology training between Traditional OSJs and the other two segments. Technology is playing a more critical role in wealth management, and the ability for advisors to successfully transition from a sales based role to an investment consultant or financial planner is incumbent upon their ability to utilize portfolio management and financial planning applications. Independent and insurance affiliated BDs are continually upgrading their advisor facing technology, but adoption and utilization remain low; dedicated training resources at the OSJ level can be that key enabler that helps advisors grow their practice. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 31
Figure 22: Services Provided by OSJs New advisor onboarding 70% 100% 100% Technology training 40% 88% 86% Practice management support Back-office support 70% 80% 88% 100% 100% 100% Traditional OSJ Facilitator Business Builder Financial planning specialists 20% 43% 75% Other specialists 20% 38% 57% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 PRACTICE MANAGEMENT Practice management revolves around giving advisors the tools and advice to increase revenue and profitability. While most OSJs interviewed for this study indicate that they offer some form of practice management support, the depth and breadth of services differ widely among OSJs (Figure 23). With the exception of social media training and succession planning, Facilitators and Business Builders appear more likely to offer practice management support to the advisors they supervise than do Traditional OSJs. Facilitators and Business Builders also appear more apt to offer staff management. In some cases, advisor assistants were either trained by the OSJ or run through the OSJ s payroll so that advisors did not have to handle tax reporting and payroll. Flexible arrangements in staff management can be attractive to advisors who wish to concentrate as much time as possible on client facing activities as opposed to managing payroll. A resounding theme among many participants, particularly Traditional OSJs, centers on the dearth of advisors leveraging practice management tools and coaching. The most often cited reason for advisors not leveraging services was attributed to the principals reticence to meddle in an experienced advisor s business or the notion that experienced advisors do not want any assistance. Book management is a prime example; all Business Builders indicate that they work with advisors to manage their book of business while only 30% of Traditional OSJs indicate the same. Prospecting training is another area where Facilitators and Business Builders appear more active than Traditional OSJs. In essence, many advisors affiliated with Traditional OSJs are on their own in terms of practice management development. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 32
Figure 23: Practice Management Services Provided by OSJs 60% Social media training 50% 57% 40% Prospecting training 71% 88% 30% Traditional OSJ Book management 75% 100% Facilitator Business Builder Succession planning programs 60% 75% 100% Staff management 20% 57% 63% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 MARKETING Marketing support is another core area where Traditional OSJs seemingly are less likely to offer services and support than are Facilitators and Business Builders (Figure 24). Dedicated local marketing specialists can be of great value to advisors, who otherwise will use outside contractors. Marketing specialists can create value beyond pure campaign management or collateral creation; they can also capture best practices by various advisors and circulate ideas that have proven beneficial to the whole group. Business Builders in particular appear more apt to have a dedicated marketing specialist than are Traditional OSJs or Facilitators. Access to marketing specialists likely contributes to higher revenue production and revenue growth. While BDs are increasingly making digital marketing content platforms available to the field, many advisors cannot make the leap to posting content online or creating campaigns. Marketing specialists can be valuable resources that aid advisors in their marketing efforts, enabling advisors to spend more focused time on client facing activities. 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 33
Figure 24: Marketing Services Provided by OSJs Campaign management 20% 75% 71% Social media assistance 40% 63% 71% Traditional OSJ Marketing specialists 30% 25% 71% Facilitator Business Builder Design services 50% 43% Event planning 60% 63% 100% Source: Aite Group interviews with 25 OSJ principals, Q3 2015 2016 AssetMark, Inc. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 21710 C31172 06/2016 11/30/2017 34