Bigger might be better on the battlefield, but try selling that virtue to an advisor whose clients' million-dollar 401(k) rollover check has been lost for days in the bowels of a huge broker-dealer.
These days, some planners who value getting their phone calls returned quickly, their problems solved expeditiously and their applications processed promptly are leaving big-name giants to partner with smaller shops.
Of course, no broker-dealer firm is an island, and bad business decisions, unbridled operating costs and flagging revenues can show up quickly on the balance sheet of a firm without deep pockets or a corporate parent. But so can superior service, innovative training, technology and a bottom-up approach to meeting advisors' and investors' needs.
In fact, when smaller and midsized broker-dealers seriously set out to win over reps, they find many are waiting for the opportunity to be more than just a number at their existing firms. For the purposes of this article, we've defined small and midsize broker-dealers as having 15 to 1,100 reps. And the fact is, many are holding their own or even triumphing over larger firms.
Losing wealthy clients because of administrative snafus at his mammoth Southwestern broker-dealer gave advisor Timothy Fazzone the incentive he needed to change firms. "We saw a pattern emerging that we didn't like," says Fazzone, president of Equitable Insurance Agency of Ohio in Columbus. "We were losing clients, and it was taking longer and longer to solve problems. We decided that to grow our business, we needed better service from our broker-dealer," says Fazzone, who runs the firm with his father, William.
So after working with a giant "where we felt like a number on a computer," Fazzone signed on with upstart Oberlin Financial Corp. in Bryan, Ohio. The firm, launched in March 2000, has agreements with just 15 planning firms so far and plans to grow to about 250 shops in the next few years. It's run by Cliff Oberlin, a veteran brokerage executive who has built successful smaller broker-dealers before.
"It's a year after the switchover, and my clients are much happier. I really have been able to be more productive," Fazzone says. He adds Oberlin makes sure his firm complies with NASD rules and comes up with marketing ideas to help increase sales.
That sounds like a nice oasis, after Fazzone's former broker-dealer not only didn't try to stop him from leaving, but it also withheld commissions when he announced he was terminating. No one asked what caused him to leave or if anything could be done to change his mind.
So much for loyalty and relationship-building. Smaller brokerages use tales like Fazzone's to point out how advisors may get lost at large firms, at which customer-service departments may employ 100 or more people working off hard-and-fast policies sometimes designed to manage to the lowest-common denominator rather than provide the flexibility small-business people need.
Oberlin has more than 20 years of experience running a smaller broker-dealer. He sold his 275-rep firm, MFI Investments Corp., to the bank-holding company Mid-Am Inc. in 1995 and continued to run it until 1999. By creating a new firm with three partners, Oberlin says, he gets to do what he loves best. "We built the infrastructure, and now we're networking with advisors we believe are like us, so we can build a bottom-up firm with people who we want to be our partners," he says. Oberlin means partner in the literal sense of the word. He's offering higher-producing firms an equity-sharing program in the new broker-dealer.
"When we find people we want to partner with, this allows them to be owners of the company," says Oberlin, who expects to build his roster to 50 planning firms by year-end.
With prices for independent brokerages skyrocketing in the late 1990s, small firms are starting to view offering equity as a more significant inducement to recruit and retain reps than the widely criticized practice of making forgivable loans. However, it's doubtful acquirors would pay the huge premiums today that they did two years ago.
Oberlin isn't alone in his approach to making partners of his reps. Ed Forst, president and CEO of Lincoln Investment Planning Corp. in Bala Cynwyd, Pa., also is offering equity interests in his company to some higher-producing offices. "I'm very interested in giving field professionals an equity stake in the firm," says Forst, whose 360-rep firm specializes in the 403(b) market. "This sets up parallel interests," he adds. "It also helps us move from a payout game to a value game."
Payouts have escalated so much, they are moving beyond some firms' abilities to stay profitable, Forst says. "We want to bring it back to the point where we have common interests-where we're strategic and business-development partners."
Payouts for the companies with whom we talked range from about 75% to 90%. Forst says the equity arrangements, even more than payouts, are great recruiting tools, and let successful planners know that Lincoln is willing to share in the future success of the firm.
By putting everyone in accord, through company philosophy and by recruiting like-minded individuals (in Lincoln's case, advisors who serve the 403(b) market), both compliance and technology costs become more manageable, Forst says. "I think our role-all of us-is to be information consolidators."
To that end, Lincoln's tool of choice is called "Retirement Solutions." It gives reps the ability to use one universal application to build a retirement portfolio with seven risk strategies and 1,000 mutual funds from which to choose.
The "necessary technology," as Forst calls it, gives reps and their clients one-stop initiation of new accounts, consolidated statements, a universal loan provision and a Web site any client anywhere can access to check their accounts. It's also a nifty tool for employers sponsoring 403(b) plans.
It may sound Zen-like to say a mindset is one of the greatest competitive advantages these firms have, but broker-dealers believe they can add value and right-size their firms by making sure everyone-at the home office and in the field-is on the same page. To do that, Jerry Rydell, president of Sigma Financial Corp. in Ann Arbor, Mich., a 515-rep firm he founded in 1983, says he's structured his business as "a joint venture that everyone knows has staying power."
To underscore that, Rydell lets his reps know that he intends for the firm to be around a long time. That includes giving all reps a poison-pill clause that guarantees them 100% payouts on their business for five years if the firm is sold. He also provides a vital form of insurance: If a rep dies or is disabled, his or her family gets their payouts, and Sigma promises to service the business. "This is a long-term joint," says Rydell, whose revenues have grown almost 40% in each of the past five years, as the number of reps increased 25%.
All of this may sound too good to be true amid significant fallout from the worst bear market in years. But Rydell echoes what most small and mid-size brokerage executives are saying: When investors lose money, they realize they need advisors. While executives say revenues are down approximately 10% through February, they also report coming off a five-year spurt that produced 25% to 45% annual gains.
Firms can use this slowdown to check systems and rejigger technology, but that doesn't mean the cascading stock market hasn't been a shock to some advisors' systems. To help the inexperienced cope, Cadaret, Grant & Co. Inc. in Syracuse, N.Y., is doing audiocasts over the Internet to its 1,100 reps. The goal is to help them find positive approaches to deal with clients as the market still tries to find bottom.
"I'm enthused about the next nine months," says Art Grant, the firm's president. "This gives us an opportunity to perform at our highest level, and it helps planners recognize the importance of fundamentals like asset allocation and long-term planning."
While the company provides regular training as a matter of course, it's doubling its efforts these days, Grant says. The message is: This is a time to buy securities and seek advice. "So-called electronic brokers are losing ground because they can't provide advice," Grant says.
Without reaching out proactively, in both deed and philosophy, small and mid-sized firms can have a tough time of it. Ask Robert Cogan, president of Capital Analysts Inc., in Radnor, Pa. His was the incredibly shrinking firm, down to 200 reps back in 1992 (from a high of 350 in 1989), when Cogan negotiated a sale to Columbus Life in Cincinnati.
Cogan has remained at the helm ever since and has grown the firm to 500 reps. How'd he do it? "By engaging the planner as a whole client," he says. "We made a commitment to be a high-touch service firm to ask reps what their needs are and respond to them. If you do this right, it drives down operational costs across the board," he says.
Service triumphs over product, payout and price, Cogan maintains. "We've treated reps like business partners since 1992." While corporate ownership prevents stock options, Cogan is investigating a phantom program.
There's no argument that small and mid-size firms have an advantage when it comes to issues like personal touch. But larger brokerage executives argue that technology helps make a service business more high-touch, and that requires both scale and capital. Moreover, in a protracted downturn like the present environment, a substantial capital base is key to survival. Yet one year into this bear market, few significant midsized independent broker-dealers have gotten into trouble because of capital shortages, so that argument in favor of size and scale isn't holding-so far.