Historically, “failed” wholesalers went to work for 3rd Party distribution firms and were viewed as nothing more than “mercenaries”; simply a hired-gun with little regard to how or where they were raising money. This dynamic evolved throughout the years and many (not all) 3rd Party distributors created value by raising and retaining assets. My point? This evolution will not only continue, but will also start to minimize the middle-man in this 3-way relationship. Wholesalers will start to form direct relationships with asset managers as these roles become more acceptable…and more profitable. Actually, this phenomenon is already starting to materialize.
This dynamic is further fueled by the growing number of unemployed wholesalers (see my prior blog on margin compression). What are all these unemployed folks going to do? I certainly don’t think there are many (if any) firms expanding their sales forces so we need to recognize that, out of necessity, the traditional wholesaling model is forever changing. The good news is that there is an opportunity for these folks to utilize their skill set, but they need to be willing to take a leap of faith…a BIG leap of faith.
My consulting firm focuses on “boutique” asset managers and helping them raise assets. Some firms are so small they don’t even fall into the category of “boutique”. Most of the time, they were started by some investment folks, have developed a solid track record and now recognize that they NEED help with distribution. I have had multiple conversations with asset managers that want sales people but their firm isn’t big enough to support the infrastructure. So, what’s the solution to this problem? One possibility is to hire a 3rd party distribution firm which can have some heavy up-front costs for the asset manager. Plus, some questions what “value” the management of these firms are actually adding. So, why not get rid of the “middle man”?
Enter the 1099 Wholesaler model
Perhaps there is a match between out-of-work wholesalers and small asset managers that need distribution. This will create the next generation of wholesalers – the 1099 wholesalers. A 1099 wholesaler simply means that you are an independent entity. You are not a full-time employee but rather hired as a “consultant” in an effort to raise assets. You receive no medical benefits, no 401ks and most likely will not even be invited to the year-end holiday party. You have to be extremely self-motivated and have the entrepreneurial DNA gene. So why does this sound attractive?
- You have the potential to earn a high payout: 25-45 basis points plus a trailer
- You are not mandated to focus on specific products
- You are not micro-managed
- Most of these asset management firms, regardless of size, are associated with a Broker/Dealer where you can “hang” your licenses
- Most importantly, you get to fully leverage the relationships that you have built-up throughout the years. These are YOUR relationships.
This 1099 wholesale trend is not going away and I think that once sales folks become more comfortable (perhaps out of necessity) with being completely autonomous you will see wholesalers developing multiple relationships with different asset managers. Lastly, LinkedIn will be the platform where wholesalers can find these types of opportunities – I have already seen a few asset managers use this platform to recruit 1099 wholesalers.