AIG's transition suites help brokers become independent.
Having to repeatedly explain to clients why his
wirehouse employer was embroiled in front-page ethics scandals was just
one of the catalysts that drove advisors Gary Meyers and Blaine Hess to
start shopping for a new broker-dealer a year ago.
"It was more and more difficult to show up at work and see my firm's name negatively portrayed in the Wall Street Journal and then have to answer client questions about it," says Meyers. The 24-year wirehouse veteran and co-worker Hess considered all of their options, shopping nine different broker-dealers before deciding if and where to move the $130 million they manage.
While hanging out a shingle was enticing, the leap to full independence was a little intimidating. So the partners chose a training-wheels approach to independence instead. They signed on with FSC Securities' new transition suite, a program designed to help brokers make the move to independence over a period of time while providing them with a turn-key office and all of the compliance and front- and back-office support they need.
In March, Meyers Group became the first firm to locate in FSC's glitzy new Atlanta-based transition suite, expected to open officially this month. AIG's Advisor Group, which FSC is part of, already has five other transition suites up and running across the country, including ones in San Diego, Manhattan, and Garden City, Paramus and Red Bank, N.J. Another will open this year in Phoenix.
Each of the seven offices-under the auspices of the AIG Advisor Group, which includes FSC, Royal Alliance, Advantage Capital and AIG Financial Advisors (formerly Sun America Securities, Spelman & Co. and Sentra Securities)-can house a number of different and very distinct firms embarking on the journey to independence. The suites are all slightly different, depending on the tastes of suite managers and the brokers who are transitioning. Each can house between eight and 15 broker shops. Each shop also will have its own logo, so for instance, the clients and prospects who visit Meyers or Hess are visiting The Meyers Group, a critical element in the move to independence.
In contrast to going it alone, the transition suites provide onsite administrative and transition assistance to help brokers convert their clients to the new firm and fill out all licensing and application changes. The transition team also includes trainers and consultants who work to ensure the advisor's own team is tech savvy and working toward the advisor's goal (which can include conversion to a fee-only shop or even heavy marketing to wealthier clients). The upshot is the new firm is up and running in as little time, and with as little disruption, as possible.
But while Meyers and Hess are the first in Atlanta, they are among a growing cadre of wirehouse brokers making the leap to semi- or full independence. That's according to brokerage executives and analysts across the country who report that brokers are fleeing the taint of Wall Street scandals, and the price they pay for research they never use and proprietary products they don't sell. Brokers themselves told us they're also running away from dwindling payouts, shrinking customer service, the insult of ticket charges and the threat of reduced profit-sharing payments
The lure of independence itself is of course multifold. For one, the payouts are significantly higher. While wirehouses are paying 25% to 40%, AIG's transition suites routinely pay 50% to 60% and full independence can gross brokers 90% or more. Brokers making the leap get the chance to build a firm they control and can sell in the future. And for the first time, brokers say, the technology is as good or better at independent broker-dealers than it is at the wirehouses.
"Transition suites give brokers the best of both worlds. They get the tools and support they need at the same time they are building their own firm," says Jim Cannon, president and CEO of AIG Financial Advisors, a partner company of AIG Advisor Group. Thirty-five sizeable producers have currently found a new home in AIG's five transition suites, and Cannon says he'll add 50 more brokers as two more transition suites go live this year. "We're seeing interest from more and larger wirehouse producers than ever before," he adds.
Gary Bender, director of national recruiting at AIG's Royal Alliance unit, which launched the behemoth's first transition suite three years ago, says that sometimes reps who join one of the company's four transition suites he oversees in New York and New Jersey decide to go independent in three or four months, while some stay more than a year. The transition is smooth, brokers say, because of the team that AIG devotes to making it that way. On average, reps retain 70% or more of their clients (often shedding those who weren't great fits anyway). The biggest surprise? "We've come a long way in the last few years to be very competitive with wirehouse technology. If we weren't, they wouldn't come here," Bender says.
It's likely that as wealthy clients continue to make a hasty exit from wirehouses, taking their money with them, so will the best and brightest wirehouse brokers. Traditional firms have lost 11% of wealthy client's business in the last two years and declining satisfaction ratings indicate the exodus will continue, according to the Spectrem Group, a consulting firm that tracks the wealthy's investing habits. Where is the money going? To independent advisors. In fact, 65% of wealthy investors who work with an independent advisor say they "intentionally avoided advisors affiliated with a brokerage, bank, insurance or mutual fund company," Spectrem found. With only 27% of the wealthy investors who still use a traditional broker reporting that they receive "excellent service"-the lowest rating in years-experts expect the exodus to independent advisors to continue.
Joey Katz, the manager of FSC's new Atlanta transition suite, predicts the new offices will house between ten to 15 individual broker companies by year-end, each with their own particular brand. "We've had a tremendous amount of interest from brokers out there who want to make the leap, but who would like a helping hand," says Katz, a former Smith Barney rep, who takes particular pride in recruiting Meyers and Hess from a national investment bank before the Atlanta transition suite even opened. "They really liked what we were creating over here and they took the leap," says Katz, who acknowledges they were instrumental in creating attractive office space for brokers and advisors. Meyers and Hess, who came in at the blueprint stage, made suggestions in terms of office design and decoration, which enhanced the suite.
Instead of making the jump to full independence, Meyers and the other brokers who choose the transition suite route, or "halfway house" as some recruiters fondly call it, get a ready-made firm they can put their name on. "The minute they walk into the space, they get full technology, a transition department that helps them transfer clients and licenses, and administrative staff that expedites their move and makes things as seamless as possible," he says. Transitioning brokers also have access to a full spate of FSC business consultants who can help them take their business to the next level and convert their practice to fee-only if they choose. Since some brokers are moving clients away from wirehouse proprietary products anyway, it can be a good time to convert to fees.
What Meyers says the move has given him is a renewed sense of being able to serve his clients and grow his business as he sees fit. More than 15 years ago, the longtime money manager created conservative, moderate and aggressive investment models he continues to use to customize portfolios for clients. That was always a problem for his former wirehouse employer, which wanted him to use their products. "I beat their best-buy list almost every year. You'd think they'd want to use mine instead," says Meyers. "But they liked their wrap fee programs better because they are low risk and low maintenance."
Today, Meyers says, he can go into his office in the morning and breathe easier. "I don't have the pressure of a manager knocking on my door every day saying, 'Sell more of my product.'" And knowing that if you didn't sell it you were not thought of favorably, calls weren't returned and clients didn't get the service they needed."
Angeli Forster, a wirehouse broker who made the leap to AIG Financial Advisors' transition suite in San Diego a little over a year ago, says she's also enjoying the freedom from sales pressure and the taint of wirehouse scandals. "I always did my own research anyway, so I didn't like paying for subjective analysis I was never going to use," says Forster, who as part of the move got to create and brand her own firm, Forster Retirement Group.
Both Forster and Meyers asked that their former employers not be named because the companies have threatened lawsuits, as national wirehouses often do when brokers leave and clients follow. While advisors joining an AIG transition suite produce an average of about $278,000 in annual fees and commissions, "it's interesting to see how wirehouses tend to treat these folks," says AIG's Cannon, who admits that wirehouse blunders with payouts and ethics have been a boon for AIG and other independent firms.
While not all independent broker-dealers subscribe to the transition suite route, most are reporting a significant upswing in wirehouse recruiting nonetheless. Overall recruiting is up 45% over 2004 and 30% of that is wirehouse brokers, says Bill Dwyer, managing director of branch development at LPL Financial Services in San Diego. "The biggest trend we're seeing is bigger producers. The leads we're getting are from producers with annual fees and commissions of more than $500,000. That's up 100% over last year."
While lower payouts at wirehouse firms and the sting of ethical scandals are definitely on advisors' radar screens, recent focus groups LPL conducted across the country found that producers feel the lack of differentiation at the wirehouses is what's hurting their business the most. "It's amazing how commoditized they think the wirehouses are," says Dwyer. "That's driven them to build their own firms, which they believe are perceived by the consumer to have more value."
Case in point: Michael Jacobs who left a wirehouse with two partners to launch their independent firm with LPL in October. They brought $125 million in assets over and have picked up another $8 million from existing clients and referrals. "It's a miracle. We haven't done any marketing," says Jacobs. "A big part of what clients like is that we own our own firm," says Jacobs, a managing director of XML Financial Group in Rockville, Md.
Dwyer says LPL doesn't have plans to go the semi-independent or transition suite route. "We've got over 30 professionals to help demystify the process and map things out step by step. We say if you build your practice profitably, it will be worth a lot. They almost always want to create their own firm," Dwyer adds.
If a broker is not quite ready to fully take their training wheels off, Bender says a transition suite can be a perfect solution. "For those who worry about signing a three-year lease and how many clients will follow, we're here," he says.