Tumult Could Expand Ranks Of RIAs
Once upon a time in the not-too-distant past, financial advisors at the big wirehouse firms touted the strength and stability of their parent company as a calling card. Not anymore. With Wall Street turned upside down by the recent unprecedented financial turmoil and several once-great firms now folded or bought, thousands of broker-dealers and advisors at the likes of Merrill Lynch and Lehman Brothers-along with other busted financial titans such as Wachovia Securities and American International Group-could be looking to move. The same goes for advisors at other large financial institutions who are rethinking their futures in the traditional broker-advisor business model.
"It's an interesting time for the business, but it's not Armageddon," says Mark Tibergien, CEO at Pershing Advisor Solutions. "It's not about businesses closing, it's about change in how they operate."
What has changed, Tibergien says, is that traditionally when wirehouse advisors left their firms they joined a comparable firm on the Street. Now there are more choices. Pershing's Advisor in Transitions program presents five options for advisors looking for a change of scenery: either form or join a broker-dealer firm, form or join an RIA firm, or do a hybrid between the two.
Tibergien says the wirehouse firms have shifted their emphasis in advisor compensation from signing bonuses to retention bonuses, and some of those bonuses come with handcuffs requiring long commitments for three to nine years. He says advisors have to weigh the pros and cons of staying put versus calling their own shots. Pershing normally gets five to 10 calls a week from advisors looking to transition to the RIA space, Tibergien says. Lately, that's increased to between 75 to 100 inquiries a week.
And Pershing isn't the only leading custodian and consulting firm whose phones are ringing off the hook. Scott Dell'Orfano, executive vice president at Fidelity Institutional Wealth Services, says recent call volume and Web site visits to links related to broker-dealers going independent had quadrupled over last year. "There's not a sense of panic," he says. "They're asking a lot of pointed questions, and people seem to be in decision-making mode."
When advisors meet with Fidelity, Dell'Orfano says he looks at how far along they are in the transition process in terms of seeking legal counsel, what kind of structure they prefer, whether they've talked with clients about the possible change, and whether they're thinking of transitioning alone or with others.
But not every wirehouse broker is ready to go the RIA route, and a lot of that depends on how they've run their practice. "In many cases it's as simple as looking at their percentage of fee- versus commission-based business as to whether they'd be better off with the independent broker-dealer model rather than a 100% RIA model," Dell'Orfano says.
Some advisors might be suited for a combination of the two. Fidelity's offering includes its Hybrid One platform that enables dually registered broker-dealers and RIAs to manage both their commission- and fee-based business.
Schwab Institutional's Business Startup Solutions platform helps advisors transition to the RIA route with services that include introducing them to attorneys who can set up the legal structure of their practice. It also helps them with technology needs, locating an office and establishing their brand.
John Furey, Schwab Institutional's director of strategic business development, says advisors wanting to go the independent RIA route should have at least $50 million in assets under management, but it makes more sense for those with $100 million in AUM.
Furey says Schwab has boosted its marketing efforts to wirehouse brokers and that call volume to Schwab had doubled in a month as of early October. The company expects to grow its base of custodied assets by $18 billion this year, or double last year's increase.
Advisory Business Gains Market Share; Succession Problems Persist
It's becoming a happy refrain: another study showing how much the financial advisory business is thriving. All of that is well and good, but as the 2008 Moss Adams LLP Financial Performance Study of Advisory Firms points out, the industry's robust health is making succession planning harder for advisors.
"It sounds almost trite because over the past few years we've trumpeted the healthy growth and profits of the advisory business," says Dan Inveen, senior research manager for the financial services practice at Moss Adams, a Seattle-based consulting firm. "If there's a new spin, it's that it's coming in the face of challenging market conditions."
Inveen says advisory firms are relying less on wealth appreciation to grow assets and more on picking up new assets from other advice distribution channels. In 2007, the growth in assets under management at firms participating in the study was 20.2%. Of that, 13.5% came from new assets, far outpacing assets from existing clients and changes due to market performance. Revenue on average jumped 22% last year.
Advisors are benefitting from a bigger market for advice, favorable demographics fueled by the looming retirement of baby boomers, and growing awareness from the investing public that independent advisors have less conflict-of-interest issues and aren't tied to a larger company's proprietary products.
The survey covers 743 advisory firms who were contacted this year from February 25 through April 9. The median firm in the survey is a five-person shop (which includes lead advisors, service providers or business development professionals); had $110.5 million in AUM and $850 in revenue; and had 160 clients.
Although conditions have drastically changed since the survey was done, Inveen notes that recent market tumult could be a boon for independent advisors. "It's one more reason for clients of wirehouse channels to question their advisors," he says. "There are a lot of good wirehouse advisors who are losing patience with having to apologize to clients for what's going on with their firms."
The study, which was sponsored by Genworth Financial Wealth Management, found that the most successful advisor firms tend to automate or outsource non-core functions, enabling them to spend more time on client service. Owners of top-performing independent practices spend 56% of their typical day on either client service or business development, versus 46% for other firms.
According to the study, the best firms focus on core services that are used by a large proportion of their clients. That bolsters their value-added proposition, meaning they can charge higher prices and generate greater revenue yield from managed assets. The top 25% of firms yield five basis points more revenue per dollar of assets managed than their peers.
The industry's continued success means that many firms are getting bigger. Five years ago, just 1% of firms were classified by Moss Adams as "market dominators"-i.e. multi-professional firms generating $5 million or more in annual revenue. In its most recent survey, 8% fit that bill.
But added size makes succession planning more difficult because it sometimes makes firms too pricey to hand down to junior partners. "Advisory firm valuations are rising, and many folks are sitting on a valuable asset and they need some kind of liquidity solution and succession planning," Inveen says.
The survey found that only one in four firms have a well-defined succession plan, and 44% of firms have no plan at all. As a result, many firms are looking at selling their practices to outsiders. Within the past two years, 29% of surveyed firms considered a sale to outside entities, and succession planning reasons were cited by 37% of potential sellers.
M&A Activity Remains Healthy
Despite a faltering economy and tumbling financial markets, the pace for mergers and acquisitions in the financial advisory space remains solid, albeit not as spectacular as last year. Still, the industry in 2008 could potentially see its fourth straight year of record deal making activity.
According to Schwab Institutional, 49 deals with a total value of $93 billion were done as of September 5. Based on rolling averages from the past three years, Schwab expects as many as 85 to 90 deals by year end. Eighty deals were done in 2007, preceded by 58 and 52 in the prior two years, respectively.
"More importantly, industry fundamentals point to increased M&A activity during the next several years," says David DeVoe, director of M&A at Schwab Institutional's strategic client group.
These fundamentals include advisor demographics, increased private-equity investment in the industry, and the proliferation of holding companies.
The average age of advisor firm principals is roughly 55 years old, and about 30% are 60 years or older. Many of them are considering exit strategies, and they're willing to explore external deals when a firm's size makes it difficult to sell it to junior employees.
Private-equity firms have increasingly jumped into the advisory business, attracted by industry margins that typically reach 25% and growth rates in the independent space of about 20%. Private-equity players generally gain a foothold by backing holding companies, whose business model is predicated on making a bunch of acquisitions of advisory firms. This includes the likes of Focus Financial Partners, United Capital Financial Advisers and WealthTrust.
"Holding companies have gone from acquiring about 15% of total assets to about 45% in 2008," DeVoe says.
But valuations for completed deals have dropped from their lofty perch of recent years, due in part to decreased access to credit in the wake of the housing and credit woes of the past year.
Valuations during the past year or so were roughly four to six times EBITDA for advisory firms in the $100 million neighborhood; five to eight times for $500 million firms; and eight to 10 times for firms with $1 billion and up.
"Valuations in 2008 are moving toward the lower end," DeVoe says, adding that holding companies are taking a harder look at what valuations should be.
DeVoe's advice to advisors is don't try to time the market to get the most value for their firms. "Deals should be based on trying to achieve basic strategic goals," he says.
Independent B-Ds: Don't Tread On Us
The organization representing smaller independent broker-dealers is trying to make its voice heard to ensure its members don't get screwed when it comes to possible new regulations on the financial industry in the wake of market maelstrom. "When Congress gets involved, it's very often the smaller firms that get overlooked," says Lisa Roth, CEO of Keystone Capital Corp. in San Diego and chairman of the National Association of Independent Broker/Dealers. "Resulting rulemaking often isn't applicable to smaller firms or is difficult for them to comply with and stay in business."
The NAIBD is a trade group representing more than 350 broker-dealers. The bulk of its members have 150 or fewer registered reps, a demographic the NAIBD says comprises more than 75% of the broker-dealer industry. Roth says one of NAIBD's big concerns relates to the issue of raising the minimum amount of net capital at financial services companies, which currently is as low as $5,000 for firms that don't carry customer accounts or engage in trading activities. "We haven't seen many firms at that level making negative headlines," Roth says.
That's a theme echoed by some NAIBD members. Don Bizub, president of Western International Securities in Pasadena, Calif., says, "I don't want to see punitive regulations on broker-dealers who had nothing to do with the subprime fiasco."
Who Has The Most Satisfied Advisors?
Edward Jones and Raymond James finished in a dead heat for the top spot in advisor employee satisfaction in a survey conducted by J.D. Power and Associates. Both companies scored 879 on a scale of 1,000 in the 2008 Financial Advisor Satisfaction Study released on September 30. According to the survey, St. Louis-based Edward Jones excelled in providing a satisfying work environment and in supporting its advisors. Raymond James, based in St. Petersburg, Fla., scored points in areas dealing with job duties, products and offerings, compensation and firm performance. The second annual survey gauged the satisfaction of advisors employed by investment services companies (labeled as "employee" advisors) and independent advisors affiliated with broker-dealer firms. It looked at eight areas tied to employee advisor satisfaction--internal operational support/people; administrative and compliance support; work environment; firm performance; compensation; products and offerings; problem resolution; and job duties. Among employee advisors, the most important measure of satisfaction was firm profitability. Among independent advisors, meanwhile, support was of primary importance. The survey was based on responses from 3,124 financial advisors and was conducted online between May and June 2008.
The Business Of Serving Business Owners
Business owners are a potentially lucrative client base for financial advisors, but they can also be a tough nut to crack because many of them like to have control over their finances and they tend to employ different advisors. The key to scoring points in this market, says a study by the Phoenix Companies, is to focus on their business itself, which is their main asset.
According to research from Phoenix, a life insurance and asset management company, many in this demographic are loaded: 37% of high-net-worth households are self-employed business owners or partners, and 27% of high-net-worth retirees were business owners. Furthermore, business owners constitute 52% of those folks worth at least $5 million. But advisors who like to be the quarterback of the financial relationship need to be prepared to call some of the plays for these business owners: 72% of these advisors said that they like being involved in the day-to-day management of these clients' financial affairs. Yet 40% of business owners say they don't take the time needed to manage their finances and about one-third of them don't know the best way to invest their money. When they do turn to others for financial advice, business owners tend to use a wider array of advisors than others in the general high-net-worth population. Such advisors helping them out run the gamut from accountants and full-service brokers to lawyers and fee-based planners. Financial advisors can make inroads by delving deeper into the relationship beyond just investment topics.
"Our research shows that retirement planning is the principal driver" for financial advisors to deepen the engagement with business owners, says Rich Schaeffer, Phoenix's director of strategic business development. "For many of them, their business is their primary asset and they view it as their retirement plan. They want and need to diversify some of that reliance."
Schaeffer notes that advisors need to use traditional and nontraditional strategies to diversify income streams, especially with family-owned businesses where the trick is employing retirement-planning and income-distribution strategies that benefit not only the owner but his or her children-both those who are involved in the business and those who aren't.