IBD Elite 2023: What the heck is an OSJ?

IBD Elite 2023

Offices of supervisory jurisdiction may be one of the most important — and least understood — topics in wealth management. 

The businesses offer compliance, technology and other services to tens of thousands of independent financial advisors in exchange for widely differing percentages of their revenue. OSJs also act as critical supervisory and recruiting nodes for massive firms like LPL Financial, Cetera Financial Group, Cambridge Investment Research and Osaic (formerly Advisor Group). The OSJs generate much of their profits through what's called an "override fee," which is a percentage of the revenue generated by their ranks of advisors. The size of the override varies based on the amount and types of services provided by the OSJ.

Jodie Papike, Cross-Search
Jodie Papike is the CEO and managing partner of Cross-Search, an independent financial advisor and executive placement firm.

Usually, the OSJs collect "a pretty small override" of a few percentage points, according to veteran industry recruiter Jodie Papike, the CEO of Cross-Search. However, that fee could grow into "a pretty big override" into tens of points when the OSJs "provide their advisors the same level of support that someone would have at a wirehouse," Papike said.

"It's so complicated, and there are so many different scenarios," she said in an interview. "There are so many things that advisors don't know."

For the 38th annual edition of the IBD Elite study of the largest independent brokerages in wealth management, Financial Planning spoke with Papike and nine other entrepreneurs, executives and experts to compile a guide to a type of business seen only in that channel of the industry. With independent brokerages topping $41 billion in yearly revenue, OSJs play a pivotal role in their particular segment of the industry — regardless of anyone's opinion on them.

The uninitiated may have no view whatsoever. For some independent financial advisors, though, the question of whether to be supervised by a brokerage's corporate office or an OSJ affects how their businesses operate, what they're paid, which services they can access and when they may decide to go to a different firm or leave the industry altogether. At a range of a single person with a Series 24 License to firms with hundreds of advisors called super-OSJs, they have emerged as key institutions for an industry that displays ambivalence about the complicated money and power dynamics of relationships among brokers, OSJs and brokerages.

And despite public posturing, OSJs like Private Advisor Group, the Independent Advisor Alliance, The Wealth Consulting Group and Affiliated Advisors have become important for large brokerages viewing retention of their growing amount of advisors and assets as a necessity in the competition among the giants of the independent channel.

"In an industry that espouses the benefits of diversification, there is a ring of irony that independent broker-dealers have found themselves with overly concentrated OSJ clients," Brad Wales, the founder of consulting firm Transition to RIA, said in an email. "While they might publicly downplay the impact of losing a super-OSJ [firm], the amount of advisor recruiting it takes to make up for billions in lost assets is no easy task."

Find a printable PDF of this year's annual IBD Elite rankings here. And follow this link to see the data in an interactive table.

Defining OSJs
OSJs take on many disparate meanings, depending on how you view them.

The most narrowly technical definition of OSJs comes from FINRA Rule 3110 on supervision, which refers to "a branch office or an office of supervisory jurisdiction (OSJ) of each location, including the main office," that has "an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker-dealer is required."

Independent brokers must choose a supervisor for themselves between the compliance staff members of a brokerage firm's corporate office or the team led by the principal or manager of an OSJ. To some, that additional third party works as a kind of middleman getting paid on revenue that might otherwise flow to brokerages or financial advisors. To others, the OSJs add value to the other sides through their recruiting on behalf of the brokerage, resources for advisors and clients and the ability to find a smaller community within a giant firm of thousands of brokers.  

Calling an OSJ a "branch" works as a commonly used substitute for the jargon. But that gets confusing quickly, since the basic concept of a bank branch or an office of a large corporate financial firm fails to encapsulate a network of independent, small wealth management businesses overseen by an entity that is different from a big national brokerage. Adding to the fog of terminology, advisors often refer to the principal or manager of an OSJ as an "OSJ" for short, and many OSJs are also "hybrid RIAs" that have their own registered investment advisory firm separate from that of the brokerage.

The alphabet soup of identities and an expanding breadth of services explain how OSJs operate as third-party businesses between the advisor and the brokerage firm while paying and receiving money on each side of the equation. Independent advisors usually take home the largest share of their revenue net of fees, which is known as their payout. But the OSJ and brokerages get significant and assorted percentages out of that business plus fees relating to the use of their technology, RIAs and other investment services.

The independent brokerage channel's annual revenue, 2007-2022

The brokerage pays the OSJ supervision fees and aids their recruiting of advisors with offers of transition assistance, which is a type of recruiting bonus for incoming brokers. The OSJ sometimes pays those recruiting bonuses itself, or a portion of them, rather than letting the brokerage firm give the advisors the full check. 

The OSJ further pays certain fees to the brokerage for one service or resource or another, as well as a portion of the branch's combined revenue, to the corporate office. Out of their portion of that total pie, advisors pay the override fees to the OSJ, plus any other charges to their branch and their brokerage.

Every aspect of the triangular relationship remains subject to secretive negotiations among parties on guard against the threat that any of them could get out of the arrangement. The dizzying ties between the three sides can sometimes take several years of litigation to unravel.    

Grasping the concepts poses difficulties for many ex-wirehouse brokers who may view the registered principal, the OSJ manager, as being similar to the head of a branch, region or division, according to Rita Robbins of New York-based Affiliated Advisors. That is an "inaccurate comparison," because the position has "really different roles and responsibilities" around advisory practice management in addition to revenue, growth and recruiting, she said.

Rita Robbins, Affiliated Advisors
Rita Robbins is the president and founder of New York-based Affiliated Advisors.

Her OSJ with Osaic spans more than 90 advisors and $3.5 billion in client assets, with a specific focus on solo practitioners who comprise about 60% of Affiliated's ranks. Some brokerages require advisors whose annual revenue production falls below specific levels to go to an OSJ rather than the corporate office for their supervision, according to Robbins, who acknowledged that firms like Affiliated aren't a fit for everyone. For example, a team that has reached more than $3 million in annual revenue may want to consider leaving an OSJ, she said.

"If you are a multimillion-dollar team with a large support staff, you can effectively work with a home office directly," Robbins said. "If you want to be running a business and you have the resources and people to effectively manage a team of experts, that's great."

Brokerages often have an OSJ requirement that designates it as "the most senior person or highest producer" of an advisory team, according to Paul Tolley, chief compliance officer of Waltham, Massachusetts-based Commonwealth Financial Network. The firm — the No. 7 company in the IBD Elite with $2 billion in annual revenue — works with a group of about 120 OSJs that has remained largely the same in number for the past decade. 

A lower share of Commonwealth's brokers than in the past use OSJs "because of advisor choice," Tolley said. Part of that stems from the simple fact that many advisors would rather not take on supervisory tasks such as trade reviews, email oversight or investigating potential red flags.

"As a practical matter, our advisors are not required to engage in or don't engage in the activities that would automatically trigger an OSJ," Tolley said in an interview. "We are very particular about the advisors that come here and stay here, but our focus is, 'How do we help advisors grow?' And that's usually not by putting them into a supervisory role if there's a way for us to perform that supervisory function."

Year-over-year revenue changes in the independent brokerage channel

Different structures and philosophies
Not every independent brokerage uses OSJs outside of their corporate offices. The 28 brokers managing $300 million in client assets with Conway, Arkansas-based brokerage and registered investment advisory firm Trutoro report to co-founder and Chief Compliance Officer Debra Shannon as their OSJ manager. Trutoro, the No. 45 firm at $2.2 million in annual revenue, would be more likely to hire additional compliance staff than bring on other OSJs. 

Shannon likes "having my finger on the pulse of the firm in every area" and makes a point of telling any advisors fearful of compliance mistakes that, "'I promise you, if you don't bring me into the loop with these things, I can't help you," she said.

"We're very personable," Shannon said. "Every advisor has my cell number. They can call me when they need me. They can't be in business without us, and we can't be in business without them, so we work side-by-side. And I work really hard to make compliance not a fearful thing."

Gail Murdoch and Debra Shannon, Trutoro
Gail Murdoch (left) and Debra Shannon (right) launched Conway, Arkansas-based independent brokerage Trutoro in 2013.

Other independent brokerages have seen some of their largest OSJs turn into sizable enterprises in their own rights and bolt away to their own broker-dealers or outside vendors. 

Tampa, Florida-based Concurrent Investment Advisors followed a path this year previously blazed by firms like Independent Financial Partners, Level Four Group, Signature Estate & Investment Advisors, Arkadios Capital and Steward Partners in leaving a major brokerage, with one small twist. Concurrent left Raymond James Financial Services but gave up its OSJ status in order to use Purshe Kaplan Sterling Investments for any brokerage needs, instead of launching or buying a broker-dealer.      

That means Concurrent "no longer shoulders the OSJ supervisory responsibility," even though being an independent RIA comes with its own oversight duties, CEO Nate Lenz said in an interview. After dropping the brokerage and the OSJ moniker, Lenz offered some cautionary warnings about how advisors or their branches sometimes get less independence.

OSJs that use a brokerage firm's corporate RIA rather than their own hybrid investment advisory company give up a "significant amount of control" of the economics and geography of the business to the broker-dealer, Lenz said. For their parts, any advisors with OSJs should understand the contractual agreements and "beware of the landlord," he said.

"It gives the OSJ a significant amount of control over the advisors' destiny," Lenz said. "As long as you're in the broker-dealer framework, you do have a landlord. And I think it's important to read the terms of your lease."

The larger a percentage that an OSJ pays out of an upfront bonus loan compared to the portion absorbed by the brokerage, the more it gets "in a deeper sense tied to the advisor," according to Papike, the recruiter. Several recent arbitration cases and disturbing anecdotes highlight the lengths that independent wealth management firms or their OSJs may go to retain advisors or clients in the wake of a move to another company

"If an advisor joins an OSJ, they don't know to ask, 'If I want to leave you at some point, am I free to do so?'" Papike said. "You want to believe that everything is going to be perfect forever, and that's natural. I always tell people that you have to think about the worst-case scenario."

At least one major independent wealth management firm rejects the concept of OSJs as unnecessary to its structure. 

Austin, Texas-based Kestra Financial, the No. 12 firm at $790.2 million in revenue, does not have OSJs "because we believe that we can best enable advisor success by working directly with them rather than through an intermediary," President Stephen Langlois said in an email. While Langlois acknowledged that OSJs "can provide value for all types of advisors," he said that the higher producers generally "tend to look for other solutions" later in their careers.

"An OSJ is often an organizational structure that's beneficial for smaller producers who have greater need for training and education, as well as access to scale that they themselves cannot achieve on their own," he said. "We're very specifically looking to partner with like-minded, larger producers that are interested in creating intimate relationships with our home-office teams and their peer community, as opposed to smaller producers that may benefit from a more traditional OSJ/producer group model."

Evolving businesses
Giant hybrid RIA-OSJs have turned into much more than compliance centers or producer groups. Their ranks include firms such as Carson Group with its 140 partner firms and 430 advisors, Wealth Enhancement Group and its $70.8 billion in client assets and Private Advisor Group's more than 750 advisors and $28 billion. Each of them have received outside infusions of capital from private equity firms or other investors.

Besides the recent move by Steward Partners, there have been significant deals recently that serve as evidence of the significance of OSJs in the industry. Wales, the consultant, pointed to No. 1 firm LPL's acquisition of one of its largest OSJs, Financial Resources Group Investment Services, for $140 million plus asset-based earnout payments and Mariner Wealth Advisor's purchase of another big OSJ at LPL, The Financial Services Network. 

Each of the major deals and all of the arrangements between OSJs and brokerages reflect the complex links between them and independent advisors.

"A standard sized broker-dealer OSJ typically receives the rack-rate payouts of the firm," said Wales. "Larger super-OSJ payouts are typically a closely guarded secret. One can imagine the challenge created by a super-OSJ learning that a similarly sized super-OSJ at the firm is receiving a better deal than they are."  

In theory — and the OSJs would argue, in practice — the advisors receive benefits from this haggling with the brokerages over basis points of revenue and shopping among vendors and asset management firms for the best deals.

Jimmy Lee, The Wealth Consulting Group
Jimmy Lee is the founder and CEO of Las Vegas-based The Wealth Consulting Group.

The roughly 145 advisors at 41 offices with $7 billion in client assets under administration using a Las Vegas-based OSJ, The Wealth Consulting Group, pay as little as 15 to 20 basis points for money management that would cost 50 to 70 elsewhere, CEO Jimmy Lee said in an interview. 

"We've created investment solutions at a fraction of the cost of what the competitors offer it at for the independent advisors," Lee said. "Advisors can move to us, use our model portfolios and increase their revenue and, at the same time, lower their client costs."

About 250 advisors in 140 offices with more than $16.5 billion in client assets with a Charlotte, North Carolina-based OSJ, Independent Advisor Alliance, can choose to register with the firm's RIA only, with the RIA and LPL as their brokerage, or with LPL as their RIA and brokerage, according to CEO Robert Russo. The corporate model offers "reduced cash flow" compared to the higher payout in the other two options, but it also comes with the most "transition assistance" bonuses from the brokerage, he noted. In contrast, the hybrid RIA means more business for Independent Advisor and higher take-home revenue for advisors on the payout.

While Independent Advisor is "seeing some firms get aggressive and go up to 60 basis points on assets," a typical transition assistance offer for corporate brokerage and RIA platforms amounts to about 0.4% of assets, according to Russo. That equals a bonus loan of about $400,000 to advisors managing $100 million — provided they stay with the same brokerage over the term of note. Hybrid RIA advisors might get $150,000 upfront, Russo said. Custodians, technology and whether advisors need a brokerage license figure in their decisions, too.

"It's kind of a whiteboarding exercise where you have to get to understand what their ultimate outcome would look like, in terms of what their business would look like," Russo said. "Depending on their vision, one of those models will probably be better served to them."          

Pat Sullivan and John Hyland launched Morristown, New Jersey-based Private Advisor in 1997, and the firm has been expanding in collaboration with LPL, its brokerage of the past 25 years. 

In the late 1990s and the early to mid-2000s, OSJs "became really prevalent" with independent brokerages seeking to build a "local sense of community with advisors" and outsource some services they couldn't easily manage at scale for geographic and other reasons, according to Private Advisor CEO Frank Smith. 

Around 2009-10 following the financial crisis, hybrid RIAs "really became, for a lot of those OSJs, the next evolution of that model," Smith said. Today, Private Advisor offers itself as a potential destination for larger teams that might otherwise start their own RIA because they "want a level of flexibility, autonomy, customization, community," he said.

"We create a different option for them that still provides them very competitive economics," Smith said. "That's where I think our model makes the most sense."

Value propositions in the eye of the beholder
The overrides paid by advisors at Private Advisor can run as low as the mid-single digit percentage points up to 60% to 65% for brokers receiving services like real estate, payroll and other administrative resources from Smith's team in a setup similar to those of wirehouses. 

LPL compensates Private Advisor for its supervision of the teams and assists with the firm's recruiting efforts, he noted, citing "the largest part of the relationship" as stemming from the custody of advisory assets. Like other hybrid RIAs at LPL, Private Advisor pays LPL an "oversight fee" of 5 basis points for advisory assets held with other custodians. The setup incentivizes the hybrid RIAs to use LPL as their custodian and compensates the brokerage for any oversight responsibilities for assets held by its clients on outside platforms.

Administrative and platform fees, as well as charges for trading, billing and performance reporting, represent other revenue sources flowing back to brokerages from OSJs in addition to the payouts, according to Papike, the recruiter. At certain firms, an advisor who might otherwise take home 90% of their revenue under supervision from the home office might net an extra percentage point through an OSJ that gets 94% and charges an override of 3%, she said. For brokerages, the "pro" and "con" cases for OSJs revolve around recruiting.

"It's brilliant because you have potential advisors coming to you wanting to join without having to pay a recruiter in the back office to do it," Papike said. On the other hand, the brokerages may find themselves answering questions among the OSJs about their recruiting such as, "'Are you giving them a better contract than me?,'" and the fact that, "They potentially can try to pick up their entire group and move them to another firm," she said.

In the mix between brokerages, OSJs and their network of practices, advisors that join one gain access to growing forms of equity compensation, staff training resources, investment tools, marketing support, legal services, capital for acquisitions and succession plans, said Lee of Wealth Consulting. LPL has been "a great business partner" to the firm, he said.

"Overall I would say that the fee structure is very competitive," Lee said. "They do a really good job of continuing to invest in technology. We want to attract advisors who really want to provide a comprehensive wealth management experience for clients. LPL gives us the flexibility to do that."

At a firm of LPL's size, advisors are part of a group of 21,942 brokers unless they join an OSJ, Russo noted. While many people view OSJs as simply providing supervision, Independent Advisor's teams of compliance analysts and business consultants can get quicker and easier cures to any headache through their contacts at the brokerage's corporate office, he said.

"The reality is, you come to us and we solve the problem on the back end to save you time," Russo said. "If you call in, you're one of 20,000. Nobody's going to be moving mountains for that advisor."

The OSJs trying to get by without launching their own RIA or offering more services than compliance oversight also face a tough race against corporate office supervision and services that are becoming "very scalable" thanks to new technology, said Smith of Private Advisor.

"Maybe 10, 15, 20 years ago, it wasn't as prevalent," Smith said. "Pure OSJs are going to find it harder and harder to compete primarily on that service. There are going to be other things that they have to do."

For reprint and licensing requests for this article, click here.
IBD Elite 2023 Wealth management Professional development LPL Financial Osaic Raymond James Financial IBD Elite