The Myth that is the Benefit of Scale

December 13, 2021

A tired phrase that has been echoed so often that it has become the newest cliché within the broker dealer community is “The Benefit of Scale.”  

It’s a call that has grown even more in the last decade as private equity firms and large IBDs create super network conglomerate broker dealers and praise scale as the victor. I have been hearing how great scale is since I first started recruiting in the independent broker dealer space back in 2003. I hear that scale creates better efficiencies, better economics, greater resources, and so on and so forth. 

However, in my 17 years and after working for several broker dealers, large and small, I have yet to see this so-called benefit trickle down to the advisor.  

In contrast, it can easily be argued that time and again, as we see these massive broker dealers grow, there’s a tremendous downside to what scale offers and I plan to discuss several of these.  

The top myths of scale: 

Scale provides access to a deeper pool of resources. 

One of the first so-called benefits of scale professed typically is that it provides access to a deeper pool of resources. These broader services available often include access to apparently unique or turnkey services like trust services, turn-key asset management, technology platforms, research, and pre-built advisory models as well as marketing and practice management support.  

At first glance, these look impressive and at one time, these were services that were not readily available in the independent space. However, once you start to pull back the cover on these offerings, it becomes obvious that these are nothing more than proprietary services geared toward making assets stickier to the broker dealer while creating greater profit centers for the parent firm.  

Furthermore, services like these are now easy to access on the street at equal or better costs than being offered by the broker dealer. Moreover, they are directly accessing these types of services with vendors that specialize in exactly what you are hiring them to do. 

In other words, a firm that specializes in specific services can focus their investment and resources back into the business line they specialize in. Who should an advisor trust to create, support, and continue building and improving a portfolio management technology system: their broker dealer or Black Diamond Advent?

It makes you more efficient.

Another benefit of scale that is often promoted by a new parent owner is it will create better efficiencies by offering greater service and support from a larger back office infrastructure.  

It almost always plays out the same way: a private equity or large IBD firm acquires another IBD and promises that nothing will change, bigger means better, back offices will offer greater support, and you’ll see synergies amongst firms.  

However, before long, back offices consolidate, redundancies are eliminated, and advisors are left to learn how can they just get things done.  

Advisors become confused, they don’t have a point of contact anymore, and they lose people they can count on. Then, the reshaping of the C-suite and executive management team means more work for advisors, a “vanilla” suite of investment solutions that are too limited for their clients, and more “no’s.” 

It improves costs. 

Now, if there is truly a benefit of scale, I have no doubt that it exists within economics. Why else would so many different private equity firms jump into the space? 

However, the problem is that the economies of scale trickle down to the advisor. As firms consolidate and grow, they negotiate more favorable clearing agreements that lower their costs.  

Typically, those costs are not passed on to the advisor, so an advisor may be paying the same ticket charge while their broker dealer’s ticket charge is half what it was prior.  Additionally, with consolidation, firms can negotiate better revenue deals with sponsor firms. Whether it’s sharing revenue off assets, due diligence fees, or fees to access conferences and meetings, the costs to play with the larger firms for sponsors have increased and to the benefit of the broker dealer.

The economies of scale rarely, if ever, are shared with the advisor and thus this is not a tangible benefit for the advisor.  

In summary, with scale, a larger broker dealer will offer resources, more back office support, and improved economics for the broker dealer.  For the advisor, it’s often a vastly different story where resources look a lot like proprietary, basic, and canned systems.  

At Arkadios, as a smaller broker dealer, we are investing back into areas that impact the independent practice and focus on what a broker dealer should: timely and exceptional service that ultimately drives advisor efficiency and satisfaction.  
Interested in experiencing the difference this can make? Let’s talk.