California investment advisor John Threlkeld isn't anyone's idea of a slouch. The crafty advisor has been working diligently to serve wealthier and wealthier investors, even purchasing two other advisors' practices and turning all but his top clients over to a junior planner he hired to service those on the lower tier. But by his own admission, it was an uphill haul for the 11-year veteran of the securities business until he moved his license to First Allied six months ago. The firebrand broker-dealer offers unique and, so far, very profitable late-stage venture capital and pension rescue products. Now, Threlkeld routinely uses these offerings to get traction with desirable clients in the ultra-affluent environs of Alamo, Calif., where he is building his business.
"I don't see another broker-dealer out there who is willing to bring these types of products and approaches to the affluent market," says Threlkeld, who also appreciates the time senior management at First Allied spends in client meetings with him. "I had a doctor worth $12 million who wanted early-stage venture capital, but when we explained that we could get him great returns without early stage risk and with much higher chances of a liquidity event, he wanted to write a $1 million check that day. I never had the types of solutions and content I could bring to the table to attract affluent investors. Now I do."
Threlkeld could be a poster child of the discerning and demanding advisor currently in the market for a new broker-dealer. He interviewed 11 broker-dealers before signing with First Allied and it was the firm's alternative investment products, in-depth advisor university and emphasis on high-net-worth investors and business building that sealed the deal for him. While brokerages want to attract the Threlkelds of the world, they are also confronting their own challenges and opportunities, which beg the question: Which firm might go public this year and which will thrive in the increasingly more expensive operating environment. More on this in a bit.
On the deliverables front, before you minimize the impact any single product can have in attracting clients, consider this: First Allied's affiliated investment advisors and their clients had access to late-stage venture capital deals that turned into the number one-performing IPO in two of the past four years. This kind of upside has proved to be a tremendous big draw for advisors targeting the high-net-worth market. "Affluent investors are looking for the kind of alternative investing that we provide," says Keith Gregg, First Allied's president. "Especially in this type of bear market. I can give advisors equity participation and the potential for significant upside without the market volatility."
The fact that First Allied's parent is Advanced Equities Financial Corp., a venture capital firm, has paid off handsomely, giving investors access to deals many Wall Street firms and other B-Ds can't get. "It's a big darn deal, especially for advisors who want to hunt the super-affluent investors," Gregg says. Investors got to buy Arbinet (ARBX) at $4 a share in a late-stage equity deal in 2004. The company went public in December, 2004, at $17.50 a share and closed at $29, giving investors who had access to the deal an almost 625% return.
"It's not the end-all with affluent investors, but I can tell you it is a tremendous icebreaker," says Threlkeld. The clients of advisors affiliated with First Equity also got to participate in the late-stage venture capital deal for Infineria (INFN). These investors bought the company in 2007 at $5.40 a share, it went public at $13.50 and advisors sold it at $21, earning investors an almost 400% return. The firm has several more late-stage private equity deals in the making and hopes to have another four to five liquidity events this year. "That's big money for our guys to redeploy and invest."
First Allied has 983 of the higher producing advisors in the industry (they earn, on average, $664,000 in gross dealer concessions, compared with an industry average of about $180,000). The firm expects to bring in about 200 more advisors by year end. "We call these folks independent business owners," Gregg says. "We call them that because they're in the business of making money, not practicing to make money. These folks are entrepreneurs and we treat them as such."
To that end, more than 560 advisors have been through First Allied's NextGen University, an intense four-day business-building program that kicked off last year at Duke University. The program, created in conjunction with Cannon Financial Institute Inc., confers the certified wealth strategist certification, which is designed to show advisors how to build, manage and maximize a wealth management business.
Threlkeld says the course was an eye-opener and encouraged him to start devoting his time almost exclusively to his top 25 clients, whom he hopes to clone. The training even led him to turn over his B and C level clients to a junior advisor he hired for that specific purpose.
NextGen University? Late-stage private equity deals? Independent broker-dealers who hope to win the business of advisors are having to go to a whole new level of product and service offering to do it-and they know it.
One major driving force for B-Ds is the number of "millionaires next door" who are coming out of the woodwork to work with independent advisors, but who need some convincing that their local advisor can manage substantive wealth. Chet Helck, the president and COO of Raymond James Financial, says his wake-up call came a few years back when he got a call from an advisor whose client had sold a business and had $40 million he needed managed. The client, however, had decided to shop around and see what other advisors could offer.
Says Helck: "The client invited several advisors to bid on his business and they flew teams in, but what he really wanted was to work with his longtime advisor, who asked us: 'What can these folks offer him that I can't?' I said: 'Nothing, so let's pull together a plan.'"
He called each of Raymond James' departments, which helped him build out a comprehensive wealth, tax and legacy plan. And the advisor won the business. But when he called Helck to thank him, he also said plaintively that while each department in Raymond James was helpful, "the fact is, pulling this all together was a lot harder than it needed to be." As a result, Raymond James has since launched the Solutions Area. "This gives advisors the ability to call us and allow us to weave together a comprehensive plan that fits their clients' needs, instead of them having to call each department here."
The Solutions Area works in tandem with the wealth services department launched at Raymond James a year and half ago, which is staffed by attorneys, CFPs and CPAs and pulls together aggressive client presentations ranging from trust design to financial planning. "We use our competitive intelligence so that we get pricing and performance numbers right," says Helck. "We make these presentations turnkey and specific to the client. We also invite advisors to bring their clients into Raymond James' headquarters (in St. Petersburg, Fla.) to meet with us and allow them to kick the tires."
A couple hundred high-net-worth clients have visited the St. Pete office with their advisors in the past few years, Helck says. The average client has $5 million plus to invest. "They want to know that if the advisor gets hit by a bus, there is an institution behind him or her to keep the plan alive and working," he says.
So far so good, he adds. Recruiting at the B-D is up 50% over last year when the firm added 314 advisors to its ranks of more than 3,000. The firm manages nearly $127 billion and is projecting 2008 revenues of $1.1 billion. Its average producing rep is also way above industry averages with some $328,000 in annual gross dealer concessions, while the number of advisors annually producing over $1 million grew to over 120.
Sherri Stephens, president of Stephens Wealth Management Group, which manages 340 million for 245 clients in Flint, Mich., says that Raymond James continues to add value to her practice. Stephens, who is on Raymond James' President's Council, says the firm is good at listening to what advisors need and creating solutions. "We go in a room for two and a half days and say to top management: 'This is what we need in technology. How can we make compliance easier? How can we get better?'
"We want to do wealth management at a very sophisticated level and we want a polished deliverable that makes sense and doesn't cost millions. We're getting there," says Stephens, who, like all smart advisors, is very bottom-line oriented. "We always look at what being with Raymond James costs us, and for now it's worth it. I look at what firms have gained by going it alone and I don't see it."
She says the broker-dealer has helped her create a succession plan with a firm down the road in Detroit and adds tremendous value in the compliance area. "They keep us on track," Stephens says. "They do an audit once a year and constantly help us make changes. It's a big safety net that makes us feel that we're not flying solo."
Helping advisors grow is also the emphasis at Securities America, which has a crack acquisitions support team it deploys to help advisors who are buying practices negotiate the best deals and terms. The B-D is also about to unveil a practice-acquisition financing program, says Stephen McWhorter, the company's chairman, CEO and president. The program will lend up to $500,000 at a prime rate in down payment money to advisors in good standing who have at least $250,000 in gross dealer concessions. The loans are available from Ameriprise Bank, which, along with Securities America, is an affiliate of parent company Ameriprise. "We think this will help a lot of reps go out and find the best deals," says McWhorter.
The firm is also offering to help advisors maximize the value of their practices and will offer "next-level" coaching to help them build million-dollar practices and groom them for sale. A "how to buy a practice" coaching program was introduced earlier this year.
On the consolidation front, "it's a great market out there, and there are lots of acquisition opportunities," McWhorter says. "We're definitely in acquisition mode, but we're looking for cultural fits that are truly independent. The two things really working in our favor are the high costs of technology and compliance."
In 2007, revenues at Securities America grew by 16% to $506 million, and the number of affiliated advisors is approaching 1,700. Recruiting is strong, with more than 70 new reps recruited so far this year, McWhorter says.
Brian Hamburger, the founder and managing director of MarketCounsel, a compliance consulting firm in Englewood, N.J., says the onslaught of costs for B-Ds will "make it difficult for midsize firms to thrive. This market will continue to drive consolidation because the firms need economies of scale they'll only get with bigger revenues. Those revenues can be hard to come by right now. There will always be bigger firms and boutique firms, but the guys in the middle will find it tougher and tougher to find accommodation," Hamburger says.
Bill Dwyer, president of LPL Financial Independent Advisor Services, says helping advisors manage complexity is the firm's priority. "In the 1990s, it was about getting new accounts. Now it's 'How do I get more capacity, gains and efficiencies?' So our number one goal is helping advisors face this challenge." Dwyer, like other B-D executives, says that this mandate is critical as clients come into significant sums of money. "We are seeing more small business owners, and we have to help advisors maintain and win this business."
Recently, Dwyer got a call from an advisor in Logansport, Ind., whose client sold a trucking business for $18 million. "The last thing that guy wanted was to turn over his account to some investment banker. So we helped his advisor continue to work with him." To do that, LPL has just rolled out its integrated advisor solution program to serve its 11,100 affiliated advisors. The platform includes an expanding suite of products and services, including structured notes that LPL is offering through a partnership with Deutsche Bank and JP Morgan. "That business is up 1,500% in the first quarter," Dwyer says.
As for recruiting, Dwyer says he expects it will be up 20% this year and lead to larger advisor groups joining LPL. "We're talking to some groups with as much as $20 million in production," he says. "It's interesting times in recruiting. Today, more reps are having to talk to clients not just about the markets, but the very stability of the firm they're working with. If you're sitting there having to explain how it's still safe to do business with your broker-dealer, it presents us with ripe recruiting opportunities. Our pipeline is up 100%." Adding to LPL's recruiting tools is the fact that the firm has instituted a new stock option plan and a health-care plan for advisors-the first ever in 40 years.
Meanwhile, the broker-dealer Commonwealth is continuing to offer more services to advisors, including alternative product solutions and targeted business consulting, says Andrew Daniels. "We are constantly evaluating alternatives, including some private equity deals, as well as managed futures and real estate," adds Daniels, who says the firm's cadre of almost 1,200 affiliated advisors is on target to grow by about 100 advisors this year.
Charles "Chip" Roame, managing principal of Tiburon Strategic Advisors, a consulting and market research firm on the financial services industry, says that Commonwealth "is a great firm betting on practice management and technology and will win the upgrader war."
As for news and rumors that a couple of these firms will go public-First Allied's parent Advanced Equities Financial and LPL -Roame says the deals could be done, but only when the time is right. In the meantime, he expects LPL to do some blockbuster move, "like buying Morgan Stanley's brokers."
Stay tuned for more exciting times in the B-D world.