Comparing the Performance of Advisors Employed by the Institution or Its BD Partner

Financial institutions working with third party broker dealers face a choice of employing and managing their financial advisors or outsourcing the employment and management of the advisors to their broker dealer partner.  CUNA Brokerage Services, Inc. (CBSI) commissioned Kehrer Bielan to analyze data to determine how each of these business models affect business performance and the net contribution of the business to the institution’s bottom line.

There are not significant differences in performance between the delivery models of the 60 institutions studied.  Outsourcing the management of the advisors produces slightly better revenue penetration of the institution’s opportunity, revenue growth, and advisor revenue and asset productivity, while institutions that employ the advisors experience somewhat more advisory business and higher ROA, perhaps because they have much thicker advisor coverage.

On the other hand, outsourcing the management of advisors delivers much more of the fruits of the business to the institution’s bottom line—30 institutions with advisors managed by a third-party BD retained 25% more of gross revenue than 51 banks and credit unions with W-2 advisors that reported profit contribution in last year’s Kehrer Bielan benchmarking surveys.

Overall, the net income contribution of investment services in the 51 institutions that employed the advisors averaged 19%, compared to the 28% average net payout received by the institutions with managed advisors.

The net income contribution of the W-2 advisor institutions is depressed by the thinner margins in the banks with their own BDs.  The high compliance and technology expenses required to be successful in a highly regulated and fiercely competitive business squeeze profit margins even in the large banks.  Many of the third-party BDs that support investment services in credit unions and banks are much larger than most of the regional banks that operate their own BDS and are able to spread the cost of operating the brokerage and RIA business over a much larger advisor base.  And, if they are self clearing, custody fees can supplement thin margins from the brokerage business.

For an institution faced with the choice of employing advisors or outsourcing their management, there are considerations beyond which model is more effective in delivering financial services and capturing a larger share of the revenue produced, including branding, control of the client experience, the ability to recruit and retain advisors and management resources, and alignment with the institution’s strategy.  The business performance benchmarks in our study provide additional, data-driven input to the decision of who should manage your advisors.

Download your copy today: Who Should Manage Your Advisors?  Comparing the Performance of Advisors Employed by the Institution or Its BD Partner