Broker-dealers sum up the future of advisory services in two words: rich folks.
The broker-dealer industry undoubtedly is dealing
with some tough issues these days. Competition remains fierce, as firms
contend with narrowing margins, demands for expanded services and a
playing field in which the dominant players appear to be getting more
dominant. Increased scrutiny by regulators also has added pressures and
costs to operations, forcing companies to adapt on the fly.
But it's not all as glum as it may seem. In fact, once you get industry officials to start talking about affluent clients, the retirement needs of the baby boom generation and the growing need for financial advice, all those other problems seem to fade away.
That's because many broker-dealers are in fact seeing healthy revenue growth as they gear up-through the expansion of products, training and technology-to serve the needs of millionaire clients.
"Independent broker-dealers are prospering," says Dale Brown, executive director and CEO of the Financial Services Institute, a trade organization composed of 109 independent broker-dealer members. "We are providing a service that Americans need-that is, access to quality and affordable advice and products and services. I think the future is very bright."
Judging by the way broker-dealers are directing their capital expenditures, it would seem the industry feels the key to its future lies in the assets of the estimated 9 million American households that have at least $1 million in liquid assets. Speak to broker-dealers about their newest offerings, and odds are they will be talking about advisor training programs for serving the needs of the affluent, expanded lineups of alternative investments and greater support services in areas such as estate and tax planning, small business issues and retirement planning.
Advisors clearly are striving to service larger accounts, and broker-dealers are racing to pony up [to pay up?] with the services to support their efforts. William C. Van Law III, who took over as senior vice president and national director of business development for Raymond James Financial Services late last year, says that at his company, the recent focus on affluent clients does not signal an abandonment of smaller accounts. It is, however, an indication of where advisors see the bulk of future growth occurring.
"While a number of firms are trying to target their advisors in the direction of fee-based and high net worth, that is not our culture," Van Law says. "Our culture is far more inclusive than that, and we are truly focused on providing broad and deep resources and letting advisors decide what sector they are focusing on. That said, the segment of high-net-worth and ultra-high-net-worth clients is the fastest growing segment of the market, and advisors are very much attuned to it."
The pursuit of wealthier clients has gained momentum over the past several years and is reflected in the growth patterns of Raymond James. Over the past five years, Van Law says, the company has seen its client assets more than double, from $58 billion in 2002 to $125 billion this year. During that time, he notes, the number of advisors has remained relatively stable. Customer accounts, however, have grown from an average of $394,000 to $612,000.
The upstream movement has been partly due to an expanded offering of alternative investments and a greater emphasis on training and support, says Fred Whaley, Raymond James' managing director of wealth solutions. Although Raymond James created its Wealth Solutions platform seven years ago, when it started to introduce products such as hedge funds, private equity, real estate and structured notes, Whaley says that two years ago the company added an advisory team to the unit that supports advisors in areas of concern to affluent clients with $5 million or more to invest, such as strategies for dealing with concentrated stock positions.
The advisory team also offers in-depth training to advisors, and about 20% of Raymond James' advisors have participated in at least some of the sessions, he adds.
Along with training, the firm has placed a renewed emphasis on retirement income planning, an area that Whaley says the entire industry has probably underemphasized up until now. "We have spent the last 20 years of preparing people to build their wealth through growth, and there is going to be a shift where we have to provide an income stream from that same portfolio," he says.
Among the services in the works, Van Law says, is the launch of a financial planning suite consisting of planning tools and asset allocation models from SunGard, Forefield and Ibbotson. "What we've done is put together best-in-class rules to help our advisors meet their ever-increasing complexity of needs," he says.
Similar efforts to service the affluent market are under way at market leader LPL Financial Services. Bill Dwyer, president of LPL's independent advisor services, says the challenge in meeting the demands of affluent clients is not only in launching products such as structured notes, hedge funds and other alternative investments, but also in training advisors to use them effectively.
"If you look at the industry and the challenges we face, the demand for advice is just exploding," Dwyer says. "Then when you look at the surveys of consumers, you see the breadth of services they want from one trusted advisor is expanding as well."
LPL, whose advisory business is up 29% this year, is planning the launch this summer of Wealth Vision, which is designed to address the client demand for expanded services by providing a platform that allows advisors to aggregate and manage client data across a range of products, including those not serviced by LPL. The service, which LPL will be introducing in a joint venture with eMoney Advisor-a developer of planning and wealth management software-is designed to increase advisor efficiency, particularly when dealing with affluent clients, Dwyer says. "This allows the advisor to store things like wills, mortgage documents and deeds and centralize all those services in one place," he says.
Another effort has gone into asset allocation strategies. LPL's research department has expanded its offering of model portfolios, with about 60% of the company's advisors tracking one or more of the department's models, he says.
The focus on the millionaire client hasn't led to a lower level of service for smaller accounts, Dwyer says. On the contrary, he says, the company views servicing smaller accounts as an important component of serving affluent clients.
"An advisor may enjoy the $5 million or even $20 million account, but you also have to take the $55,000 brother-in-law account," he says. Toward that goal, the company has developed a series of Optimum Model Portfolios that are designed as low-maintenance engines for servicing smaller accounts with as little as $15,000 in assets. Since the product was introduced in September 2004, advisors have put a total of $3 billion into these small-account portfolios, he adds.
"What's really interesting is, if you look at advisors in 2006 who used Optimum portfolios, they grew at a rate 30% faster than those who didn't use the vehicle," Dwyer says.
While the broker-dealer industry is one where analysts often offer gloomy forecasts for smaller companies in the face of the dominance of LPL and Raymond James, smaller broker-dealers continue to maintain that they are able to carve out a healthy niche in the marketplace by offering more personalized service to advisors.
John Rooney, managing principal of Commonwealth Financial Network, says his company expects to meet its goal of 20% growth this year and add 50 advisors, despite the fact that larger companies continue to gobble up market share. Rooney says his company is viewed as an "attractive alternative" by advisors who feel their companies have grown too big too fast, to the point where there has been a dilution of core services. "There are a lot of advisors who are leaving big companies," he says.
As an online broker-dealer competing with larger operations, Barry Metzger, CEO of brokersXpress, says his company has to focus on providing cutting-edge technology while at the same time remaining lean in its operations. The company also has carved out a niche for itself in options trading. "Our user interface is head and shoulders above the rest," he says. "It's a great differentiator for us."
Smaller broker-dealers also are joining larger players in going after the affluent. At Sigma Financial Corp., the company has concentrated on putting its top 150 reps through a 30-week Cannon Financial Institute training program that leads to the designation of Certified Wealth Strategist.
Such training, along with maintaining a manageable size, has allowed the company to compete effectively, says Jennifer Bacarella, Sigma's director of firm development.
"The key thing that separates us from the LPLs of the world is we have always maintained our commitment to keeping the size of the company very manageable," she says. "Our claim to fame is that we know all our reps."