Independent broker-dealers looking to add new advisors might just want a “Goldilocks” type of market this year—one that’s not too hot, not too cold, but just stable enough to give advisors some confidence to make a career move.
An uneventful market environment could help firms overcome what has so far been an anemic recruiting environment. “When markets are doing decently, reps don’t want to upset their production” by changing firms, says recruiter Jon Henschen of Henschen & Associates LLC. “In a decline, they’re fearful that [client] retention might not be what they want because clients may be upset.”
“It’s hard to recruit right now [when] the market is doing what it’s been doing,” agrees Brad Fay, president of IBDSearch LLC. “There has not been a compelling reason to switch” firms.
But after several good years in the markets, advisors and clients “feel stable, and now might be the time [that advisors] think about” a move, says Scott Miller, president of FirstPoint Partners LLC, a recruiting firm.
LPL Financial added just 53 net new advisors in the first quarter of this year, a relatively slow pace next to the 321 advisors it tapped in total last year and the 505 it recruited in 2012. “The first quarter was more challenging than expected, but the activity for this second quarter has really picked up,” says Steve Pirigyi, executive vice president in charge of recruiting at LPL. “We’re feeling pretty good about this year’s recruitment numbers.”
Strong markets slow down activity, Pirigyi says, and with recruits who have larger and more complex practices, “the sales cycle just gets longer and longer.”
Ameriprise Financial landed 76 new advisors in the first quarter. The firm did not disclose recruiting results for the first quarter of 2013, but brought on 254 experienced advisors over the remaining three quarters of last year. In 2012, it added 382 recruits.
Ameriprise officials were not available for comment.
Cambridge Investment Research officials say recruiting remains steady. The firm has commitments from advisors who have $39 million in gross production. Those are advisors who are “signed up and in transition,” says Cambridge president Amy Webber.
The firm normally gets $50 million or more annually in recruited production. “We’d be surprised if we don’t have a better year than last year,” Webber says.
Raymond James Financial Services isn’t seeing much of a slowdown, either. “We will have the best recruiting year this year since 2009,” says Scott Curtis, president of Raymond James Financial Services. Curtis estimates the firm’s recruited production will be up 20% this fiscal year, which ends in September.
Raymond James doesn’t disclose the numbers of net recruits or recruited assets, but the firm reported 3,288 advisors in the independent contractor unit at the end of March, up by 71 advisors from the same time a year ago. Eighty percent of his recruits come from wirehouses, Curtis says, which is Raymond James Financial Services’ traditional market. The big firms are still a target-rich environment because of “the continued frustration with advisors at those firms who want to run their practices the way they want to,” he says.
Commonwealth Financial Network was on track for about $22 million in recruited revenue through June of this year, says Andrew Daniels, managing principal of business development at the firm. Daniels, who spoke to Financial Advisor in late June, said that if the current pace continues through the second half, 2014 will be “one of our better years in a long time.”
Firms and recruiters in the independent space say they are hearing from some advisors affiliated with firms owned by RCS Capital Corp. (RCAP), which has been a focus of attention ever since its executive chairman Nicholas Schorsch announced last January that he was buying Cetera Financial Group. By adding Cetera and its nearly 6,700 advisors, RCAP is now a major player in the independent channel.
But big consolidations like the one RCAP is now undergoing always cause some advisor movement. Recruiters at independent firms say they haven’t seen much movement out of RCAP-affiliated firms yet, but that’s not a surprise. Advisors tend to see how things work out before jumping ship in the wake of a merger.
Some attrition for RCAP probably is inevitable but the challenge is to retain their most productive advisors. As long as RCAP maintains the individual brands and identities of its unique B-Ds, most advisors at those firms will be happy to stay put, says Tom Daley, founder of the Advisor Center LLC, an online recruitment service. “I would anticipate overall that it will be a minority” of RCAP advisors who end up moving, he says.
Advisors generally are reluctant to jump ship, Miller says. “It’s a sticky business. They’ve got to feel a lot of pain before considering a change.”
Regulatory risk is also having an impact on recruiting. Headhunters and firm executives say bringing on a new registered rep has never been harder.
“The environment is just different—there are no innocent mistakes anymore,” Webber says. “We really have to do our due diligence [and ask], ‘Why are you leaving your firm?’ If it’s a rush job, there’s probably a reason for it. Bad things do happen to good people, but you really have to understand the facts.”
Firms are under scrutiny by Finra for having too many problem brokers, Henschen says, so firms look closely at factors like compliance and credit issues. And they may not even offer a position to an advisor who raises regulatory red flags. “If you bring on more [advisors] with bankruptcies or credit issues, Finra [can] make life difficult,” he says.
Advisors themselves are also checking the compliance legacy of firms they consider, Henschen added. “Reps look at the record, and if there’s a lot of clutter, that could turn clients off.”
Other factors could be at work in slowing the recruiting game. A shrinking number of reps in the wirehouses is one. The big firms have trained fewer new brokers in recent years and have forced out smaller producers.
Daley predicts that the total number of advisors moving will stay below levels seen prior to the financial crisis, since the advisor population is aging and tending to stay where they are. Veteran reps for the most part have positioned their businesses the way they want, and are more likely to align with other advisors at their existing firms for succession purposes. The advisor thinks, “That’s easier on both me and my clients,” Daley says.
And B-Ds aren’t screwing up new technology rollouts as much as they used to, which has precipitated movement in the past, Henschen says. “The technology implementation has improved greatly versus five years ago” thanks to better outsourcing services, he says.
Even the weather gets some blame. Advisor movement in the first quarter may have been slowed by the cold weather, which has been blamed for economic weakness overall.
Finally, some observers anticipated that a Finra proposal requiring advisors to disclose their recruitment bonuses to clients might spur some firm-switching before the proposal went into effect. But in June, Finra pulled the rule proposal, which had been criticized by some firms as being too costly and lacking a cost/benefit analysis, and promised to float a new disclosure plan by year’s end.
Competition Rising
It’s no secret that demand for experienced advisors is strong. That means firms are competing aggressively, and up-front deals offered by independent broker-dealers have been rising.
Notably, Ameriprise Financial recently raised its signing bonus to up to 150% of trailing-12-months’ production, up from 120% for top advisors.
Most independents are much lower, around 25% up front, although “now we’re seeing 30% and 40% deals … from pretty high-quality firms,” says Kyle Selberg, senior vice president of business development for Cambridge.
Recruitment packages could creep higher still, he adds. “The closer you get to year-end in a tight recruiting year, the more the purse opens up.”
RIA custodians remain tough competitors as well. “With enough in fee-based assets, a lot of people are going to go directly to becoming their own RIA” firm, Miller says. For advisory firms, the custodians offer a more cost-efficient platform, he says.
Furthermore, despite rumors of their demise, smaller broker-dealers are still active in the recruiting game and can give the bigger boys a run for their money. Smaller firms are more nimble and offer independent advisors a personal relationship with top management. And improvements in technology have been a great equalizer.
“One of the mistakes [big] firms like LPL have made is becoming too dependent on development of their own technology platforms,” says Miller, who recruits out of LPL. “Over the last five to seven years, there are a lot of third-party tech companies that have come up with better mousetraps. … That really bodes well for some [smaller firms] that can put together a variety of tech partners [and] really get best of breed.”
Clearing firms have done a better job of letting smaller firms “deliver on these [technology] dividends,” Daley agrees.
Small firms just have to “make sure they’re evolving, and they have to be selective about whom they recruit [and] getting into product areas where they run a risk,” Daley adds.
LPL hears from advisors at smaller firms who are concerned their firms are not investing enough in technology and support, says Pirigyi. “If [advisors are] planning on being in the business for another 10 or 15 years, they want a good partner” who makes those investments.
Many reps, worried about financial stability, do favor a larger firm, Henschen says. But perhaps wrongly. “I deal with a lot of small firms that have been viable for years, and made money in good and bad markets, but perception is everything,” he says.
Tuck ’Em In
Among independents, the tuck-in trend is flourishing. So-called “tuck-ins” are advisors recruited to existing branch offices of independent firms in order to avoid many of the hassles of setting up a new firm. Existing branches offer recruits a ready-to-go office with staff support and mentoring, local expertise and a branch manager who handles administrative and compliance chores. Plus, there are opportunities for succession planning and a more attractive bottom line than a solo practice might have.
“If I’m a tuck-in, with technology and staff support already set up, I don’t have to make the capital outlay to set up my own company,” Daley says. And large branches can pass along higher payouts from the home office and get better deals from vendors. “I also can private brand my firm [and] maintain my own office” or join an existing branch, he says.
“I think you’ll continue to see the marketplace expand horizontally” this way with more tuck-in advisors, Daley adds.
Selberg of Cambridge calls the tuck-in trend “one of the key drivers for recruiting,” with half of the firm’s recruits joining an existing office. For the past five years, Cambridge has been looking to attract and support what it calls “branch builders,” advisors who build their own firm within the B-D and seek to recruit their own reps.
Cambridge now has close to 20 of these large-scale operations with multiple offices. The branch-builder channel “has tripled or quadrupled over the last five years,” Selberg says. “We have … branches now that are bigger than some B-Ds,” with about $30 million in production and a hundred or more reps.
Raymond James Financial Services added a new affiliation wrinkle last November by helping launch Steward Partners, a branch network founded by two former Morgan Stanley branch and complex managers, Michael Maurer and Jim Gold. Steward has developed a succession system for older advisors, who join as partners. Now with offices in Washington, D.C., New Hampshire and Maryland, Steward’s advisors control nearly $1 billion.
Curtis says he’s open to taking on similar operations with multiple offices. “We’re in conversations with a few people [about] doing just that,” he says. “The key is finding the right people.”
In addition to infrastructure, large OSJs can provide a voice for individual advisors, says Richard Dragotta, head of Inc. Advisors, a large LPL branch network with 90 advisors in 25 offices. “We’re among the top 10” LPL offices, he says. “We’re a big customer of LPL and can get certain services and access to management you might not get if you’re an island to yourself.”
Local transition assistance is especially important to recruits, Dragotta says, and his two offsite regional meetings every year are another inducement, attended by close to 100% of his reps. Large office networks like Dragotta’s may be meeting the desire for advisors to be associated with like-minded colleagues.
“Recruiting is challenging,” Dragotta explains. “Everyone thinks it’s about payouts, but it’s a lot more than that.… People want to be associated with other successful people” and not be isolated in an executive office suite.
“In the independent world, it’s all about relationships,” Daley says. “Advisors will always choose the relationship. They want to feel loved.”