Independent broker dealer recruiter Jon Henschen Publishes "Price's Law And Large Broker-Dealer"

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Jon Henschen’s article, "Price's Law And Large Broker-Dealers" shows how larger firms can use Price's law as a model for a better overall experiance for both companies and advisors.

It is essential that larger broker-dealers offer a premier service level for higher producing advisors.

Featured October 29, 2021 on FinancialAdvisor.com, independent broker dealer recruiter Jon Henschen’s "Price's Law and Large Broker-Dealer" shows how corporate cultures can model the principles of Price's Law to set up their advisors for success.

It was Derek Price, a British physicist and information scientist, who discovered that it was often a small percentage of subject matter experts among his peers who dominated the publication of academic papers. From him we get Price’s law, which says half the publications on a subject are written by the square root of all the contributors (in other words, that five people out of 25 will get half the work done).

Let’s adapt that rule to corporate cultures. Jordan Peterson, a best-selling author and professor of psychology, says Price’s law suggests that as a company grows, the incompetence grows exponentially and competence grows linearly. It means that if a company has 10 people, three people (30%) are doing half the work, and at a 100-person company, 10% of people are doing half the work. By the time we get to a corporation with 10,000 people, we have 100 people, or only 1%, doing half the work.

That makes growth a mixed blessing. The profit growth is a blessing, while the back-office disconnect is a curse.

Henschen explains how small and midsize firms have a clear service advantage, since their advisors don’t have to go through phone trees. The reps have key contacts to reach out to for quick answers, and have relationships not only with the staff but also with management. Turnover is typically low at small and midsize firms, so the staff members the advisors call on have been employed longer and thus know the answers to many of the day-to-day questions that come up. The staff at firms with higher turnover appear inept by contrast, because they are frequently on learning curves.

Upper management at small and midsize broker-dealers know their employees well, and (as we’ve seen in Price’s law), the square rooters represent a larger percentage of the employees at smaller firms, so management knows who they are.

Since smaller firms have those advantages, what can larger broker-dealers do to counter? Here are some of Henschen's suggestions:

1. Companies must hire only “A” players. Management has to focus on hiring the best in order to skew the number of “square rooters” within a firm.

2. People should only do what they excel at. Employees are much more productive when performing those tasks they’re good at. That makes them more productive, and they find more meaning in what they are doing.

3. Companies should pay their square rooters more: Despite recent arguments to the contrary, merit-based society doesn’t treat everyone equally. The best gets more of everything.

4. Henschen points to Frederick Reichheld’s words in the book Loyalty Effect. “Companies with profits in the upper quartile pay their employees in the upper quartile for their industry, and the inverse holds true with companies in the bottom quartile paying employees in the bottom quartile for their industry. If you pay in the upper quartile for your industry, you’ll see your retention of employees rise dramatically.” Reichheld adds, “Pay cuts and price increases can boost earnings, but they have a negative effect on employee and customer loyalty and so shorten the duration and worth of those assets. Since the only way a business can retain customer and employee loyalty is by delivering superior value, high loyalty is a certain sign of solid value creation. Be aware that getting your employees to stay with the company longer won’t necessarily produce superior economics. A lot of firms are loaded with dead wood.”

5. It is essential that larger broker-dealers offer a premier service level for higher producing advisors. The top 20% of producers (which account for 80% of revenue, according to the Pareto principle) have little tolerance for mediocre service and will leave a broker-dealer that can’t deliver a high level of service.

6. If a broker-dealer has 500 employees (meaning 22 employees are doing half the work), realize that there are a large number of inefficient people. Jack Welch, the former CEO of General Electric, would do an annual purge of 10% of his bottom-ranking employees. Perhaps companies that need to do this are tacitly admitting that there’s something wrong with their hiring in the first place. But because larger firms have a propensity to be less efficient in any case, it’s still prudent to purge some bottom performers.

7. Henschen strongly urges upper management needs to escape the ivory tower and connect with advisors through phone calls, zoom calls and meetings with advisors in their home cities for lunch or dinner. The leaders of large producer groups need these connections, as do the top 10% of individual producers. At these meetings, advisors get updated on company business, but more important, they get heard and appreciated. It naturally gets harder logistically to meet everybody when a firm is getting bigger, but if managers don’t make the effort, their advisors will feel alienated.

8. Broker-dealers must focus on growing larger producer groups. Also known as “Super OSJs,” these groups often have their own staffs helping advisors with service. They sometimes act like small firms within large ones, and thus offer the same small-culture qualities. At the same time, these OSJs can give their advisors access to the premier service of the parent broker-dealer, meaning the reps are getting two levels of service.

Henschen notes what Economist Thomas Sowell said, “There are no solutions, there are only trade-offs; you try to get the best trade-off you can get, that’s all you can hope for.” There are trade-offs advisors make when choosing among small, midsize and large broker-dealers. Each size has strengths and weaknesses. Smaller firms don’t have the benefit of scale, so they focus on service, relationships and specialization. Large firms, on the other hand, have to battle with their propensity to inefficiency and questionable service, so instead they highlight their technology or depth and breadth of services, offering to help advisors grow and run their practices more efficiently. Large firms also have a major recruiting advantage in their ability to write large up-front checks to the advisors they want to entice.

Jon Henschen is founder of Henschen & Associates, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics. He is frequently published and quoted in a variety of industry sources, including WealthManagement.com, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others

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