The race is on among independent broker-dealers to recruit more top fee-based advisors.
By Tracey Longo
Greg Powell was managing $200 million with Morgan
Stanley in 2005. He had very big office, an eye-popping income and was
the number one financial planning advisor office at the firm five years
in a row. Then, he says, he saw the writing on the wall.
"I realized that Wall Street just isn't getting it," says Powell, who has spent the past 25 of his 47 years as a broker. I knew that the independent model is where everything was headed and we had to go there, too." After 17 years at the investment bank, Powell made the leap to owning his own firm in February, with the aid of LPL Financial Services. He brought three wealth managers and two support staff with him. He says he's already seeing dynamic changes in his firm, which he named FI-Plan Partners, and has established in an office building he bought in Birmingham, Ala. "Today, we're seeing wealthier clients and more business owners come in the door," says Powell, who believes his assets under management have jumped in just the first three months with LPL.
Frankly, every broker-dealer sales rep will tell you his back-office is the one that will bolster your bottom line and reduce your expenses. But talk is cheap. Now there is an aggressive new push among competing players to actually measure what they do for advisors, particularly in terms of the profitability and lower costs they can help advisors achieve. It's early in the race, but so far LPL Financial Services, by virtue of being first, best or maybe both, seems to be at the front of the pack.
Advisors affiliated with the firm make more than twice as much pretax income as advisors who work with other broker-dealers . That's according to a new survey comparing 50 LPL-affiliated advisors with more than 100 advisors affiliated with 27 other broker-dealers. Of course, LPL commissioned the Moss Adams study, and the sample size at many rivals was too small to draw sweeping conclusions from.
The firm wanted to see if the benefits they provide to advisors are quantifiable. They earn significantly more revenue per client. They have a much higher degree of recurring revenue, great efficiencies which translate into lower salary overhead and significantly more revenue-per-professional than their peers do. However, the results may also indicate that the firm simply appeals to bigger reps, so the process becomes one of self-selection.
"We're extremely pleased that the fee-based platform is helping advisors increase their own profitability," says William Morrissey, senior vice president of Advisory Consulting Services at LPL. That's also translated into tremendous growth for LPL, which has 6,200 advisors. "It's been dramatic. Since 2004, we've doubled the assets we hold from $20 billion to $42 billion (at the end of February). We're off to a very good start in 2006. We continue to refine our platform to provide advisors scale to continue to grow."
Other broker-dealers are promising to conduct surveys of their own designed to measure how their products and services bolster advisors' bottom lines. What is equally clear is that fee-based advisors have been making significant contributions to broker-dealers' revenues, as well. With fee-based business booming and the industry coming into its own, it's becoming increasingly important for broker-dealers competing for advisors' business to be able to articulate the value they can add. To get and hold advisors' attention, firms are rolling out a never-ending stream of new services designed to support these newfound darlings of profit.
"This is just a great business for us to be in," says Valerie Brown, president of ING Advisor Network, which has more than 8,500 advisors and reps. "There's more than $10 billion in our fee-based platform. It's been growing at an average rate of 41% and we expect it to keep growing by more than 20% annually."
At presstime, ING was rolling out a new fee-based platform called Advisor Works, which Brown says has gotten a good response from the people she is recruiting. "I met with a gentleman last week who manages $400 million, and he was impressed that this will allow him to automatically rebalance across all client accounts with auto blasting," she says. "In the old days, someone would have had to fill out individual tickets for each client."
To help those ING-affiliated reps who want to transition to a fee-based practice, ING created Advisory University, a three-day educational forum that shows reps how they can get started. "It's been a great success," says Brown. "About 500 folks have graduated so far. We help them set a target for the assets they want to be managing a year down the road and then we follow up with them. They're beating their goals by 100%."
Clara Sierra, senior vice president of the AIG Advisor Group, says that fee-based recruiting at the firm is robust. "Every single recruit we brought in 2005 was fee-based," says Sierra, who estimates that about 3,400 of the company's 8,000 affiliated reps charge some form of fees. "The industry is driving advisors to the fee-based model, and we've adjusted our services accordingly."
In fact, the firm's new recruiting tagline is: "Advisory Services: We make house calls," which is designed to highlight the company's nine-member consulting team. "On any given day of the week these folks are in advisors' offices, talking to them, helping them do diagnostics. I think it's one of the strongest parts of our business model," says Sierra. The company is also doing a booming business with its one-day seminar, "Sales to Solutions: A Fee-Transition Process," which is held each month in a different city and is designed to help reps transition to a fee-based model. So far, Sierra says, about 240 reps have attended the program.
The same phenomenon is fueling growth at major custodians. Schwab Institutional is also seeing growth in its fee-based ranks of 5,400 advisors. "We're seeing business from a variety of channels, but the fastest-growing component is the broker turning independent," says Bob Oros, a senior divisional manager with the company. "We've seen a huge increase in interest in brokers wanting to set up their own firm."
The size of firms is also increasing. "Where 12 months ago maybe the average broker approaching us might have been $50 to 100 million, now we're seeing many more pushing the $1 billion mark," says Oros. "They have big corner offices and typically teams of five to seven people. They realize they have the critical mass to go it on their own. And with our model they retain 100% of their revenues."
To reach brokers who are thinking about going independent, Schwab has started doing a series of Web casts on transitioning to a fee-based model, which brokers can log on to after the market closes. "I think we're just in the beginning stages of this trend," Oros adds. "We've really seen it take off over the past 12 months."
Commonwealth, an early entrant to the fee-based arena, has grown its fee-based assets to more than $10 billion with just 1,000 advisors, 84% of whom have done some fee-based business, says Wayne Bloom, the firm's director of wealth management. "We're done well and the markets have cooperated in the past few years, now we're trying to provide an interconnected picture of all we do." To encourage advisors to do more fee-based business, Commonwealth offers its Growing Advisor Program, which reduces fees as assets grow. Bloom says average account sizes are continuing to grow and have now hit the $214,000 mark for managed accounts and $354,000 for separate accounts.
Another remarkable growth story is FISERV, where just 450 advisors have grown assets under management by 31% to some $15 billion. "Our whole approach is making advisors lives easier. We're working hard to improve their efficiencies and streamline their processes," says Sean Gultig, vice president of advisor services at the company.
The company is also helping affiliated advisors cut costs by offering services such as omnibus trading for mutual funds. "We're very excited about the future. I want to compete with Schwab and Fidelity, but I don't want to be them," Gultig adds.