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Few regulations and a number of ownership changes in the independent broker-dealer space could make 2016 a good year for recruiting.
“It’s been an interesting environment, to say the least,” says William Morrissey, managing director in charge of recruiting at LPL Financial, about the regulatory environment, evolving interest-rate policies, market volatility and nonstop consolidation.
“All of those things are creating disruption in the marketplace,” Morrissey says.
And where there is disruption, there are recruiting opportunities. Lots of them. In May, American International Group completed the sale of its Advisor Group of broker-dealers to Lightyear Capital and a Canadian investment manager. The ownership change impacts about 5,200 advisors.
Also in May, John Hancock Financial Network completed its acquisition of Transamerica Financial Advisors and its 800 advisors. The same month, Cetera Financial Group emerged from bankruptcy with a new parent company (Aretec) and a plan to better integrate its 10 broker-dealer firms, which handle 9,000 advisors among them.
Some reps affiliated with Cetera-owned Investors Capital and VSR have had to move to other Cetera firms or leave. So those two firms have been the most fruitful prospecting grounds within the Cetera camp, recruiters say.
Lastly, in July, MetLife finalized the sale of its broker-dealer unit to Massachusetts Mutual Life Insurance Company. The B-D business serves about 4,000 advisors.
As a result, “recruiting is picking up steam at many firms” that aren’t undergoing a change of ownership, says Jodie Papike, executive vice president of Cross-Search, a Jamul, Calif., recruiting firm. “Advisors feel if they have to go through a transition, they might as well know what all their options are.”
“We’ve had a lot of incoming calls—double the normal volume because of those [ongoing] deals,” says Eric Schwartz, founder and chief executive of Cambridge Investment Research. In some cases, people were given a few months to move from firms that were reorganizing, he says. “As a result, we’re having the best recruiting year in the history of our company.”
As of mid-July of this year, Cambridge had commitments from advisors representing $64 million in revenue, Schwartz says. That sum by itself would be a better-than-average recruiting year. He expects to end the year with $85 million to $90 million in added revenue.
And Schwartz expects the consolidation to continue. Currently, the top 10 B-Ds have about 60% of the business, but he predicts the top surviving firms will end up with an 80% to 90% share over the next 10 to 15 years.
“It’s just not easy for small B-Ds,” he says. “Some are well run and have a super niche, [but profit] margins are tough,” and the coming DOL rule will shrink profits further.
Over at AIG’s former Advisor Group, things aren’t nearly as problematic as some competitors looking to poach reps might depict. Spokesman Tony Vignieri says the overall retention rate year-to-date at the group’s four broker-dealers was 95% following the Lightyear announcement in January.
The ownership change closed without much disruption, says Jeff Auld, chief executive at SagePoint Financial, one of the Advisor Group firms. There was “no repapering of any accounts, and the technology we were using, and everything, stayed very much the same.”
When the Lightyear deal was announced, Auld says he and his staff met with the recruits they had in the pipeline and ended up keeping every one. His goal this year is to recruit $16.5 million in revenue. At the end of June, SagePoint had commitments of nearly $10 million, he says.
Morrissey at LPL says volatility and angst over the (then yet-to-be released) DOL rule slowed movement in the first quarter. “Despite that, we’ve had a very steady recent pipeline,” Morrissey says. “It looks like things are starting to loosen up.”
In the first quarter, LPL added a net 39 advisors, a turnaround from the net loss of 44 through all of 2015. The firm does not break out recruiting data or net new assets, but its advisor count has remained at around 14,000 since the end of 2014.
Nevertheless, Morrissey says 2015 was the third-best recruiting year in the firm’s history. Head count can be misleading because of the number of retiring LPL reps, he says. The firm has also said it culled its ranks, cutting lower-producing brokers last year.
Papike, who recruits for LPL and other independent firms, thinks LPL may be on the upswing. “Their pipeline looks really good, they have some really large deals [pending], and my guess is their numbers this year will be very good.”
Andrew Daniels, managing principal of business development at Commonwealth Financial Network, tells much the same story about a slow first half. The beginning of the year was slow, possibly because of what he calls “DOL ambivalence,” but the second half “is looking to be significantly over what we normally do,” he notes.
Daniels expects to add $45 million to $50 million in recruited revenue this year, about even with last year’s $50 million.
Raymond James Financial Services is on track for a record recruiting year, besting even 2009—when firms feasted on advisors fleeing from failing institutions, says Scott Curtis, Raymond James’s president.
This year, more recruits are coming to Raymond James from other independents, Curtis adds. Normally Raymond James does well with wirehouse recruits, but the shift to gathering more from other independents is “probably one of the biggest contributors to our big year. … [Independent prospects] are concerned about future capabilities of their firms, or they’ve outgrown their firm,” he says.
As of March, Raymond James had 3,663 advisors, up by 241 from the same period a year ago. The firm doesn’t report recruiting data separately.
What’s the draw for independent advisors looking for a new home?
Industry recruiters say advisors are looking for firms with stable ownership and the resources to support everything from compliance and technology to practice management and succession planning.
Recruiting “continues to be difficult for firms that don’t have a lot to offer,” Papike says.
“A lot of the conversation recently has been along the lines of, ‘How will you help me sell my practice [or] grow my practice,’” SagePoint’s Auld says.
“Our primary story is our private ownership, and that we have a succession plan here, giving people a lot more comfort,” Schwartz says. A few years ago, Cambridge’s ownership plan was “the No. 5 concern; now it’s the No. 1 concern for a lot of people,” he says.
“Technology is still a big one” in terms of attracting advisor talent, Curtis maintains. “When people look at what they have technology-wise, it’s such an important connection with their firm. And cybersecurity is more and more important.”
DOL Spillover
Compliance resources and talent are especially important with the pending implementation of the DOL’s fiduciary standard rules, observers say. Some recruits “specifically joined” Cambridge because their existing firms lacked a workable plan to implement the rules, Schwartz says.
The DOL’s rollout of its rule “really did encourage advisors to take a look at their B-D, and at what their [firm was] doing to protect [them] against all these changes,” Papike says.
As the DOL’s two-part April 2017 and January 2018 implementation dates get closer, IBDs will experience greater disruption and consolidation, Morrissey says. “The DOL rule will be an accelerant of those trends.”
Larger firms, even assuming they’re adapting to the new DOL world, aren’t immune from poaching. Brokers at the wirehouses and some of the bigger independents are often fed up with bureaucracy, nickel-and-diming and loss of personal relationship with managements, recruiters say. Once the pain point reaches a high enough level, they start to consider other options.
“The frustrations are that they don’t matter [at their firms] anymore,” Commonwealth’s Daniels says. “And they fear there are other agendas going on at their institutions that aren’t about advisor support.”
Compliance burdens in general, and the added requirements from the DOL, might impact trends in the fast-growing hybrid channel. (Hybrids have their own independent RIA firm while also affiliating with a broker-dealer. Many of them custody advisory assets at a third-party custodian.)
On one side of the coin, some hybrids might be tempted to give up their securities licenses in the belief that running a pure RIA will make it easier to comply with the new DOL rules.
On the flip side, some might throw in the towel on running their own RIA and use their B-D’s corporate advisory instead, thereby avoiding some of the oversight and liability. That trend, if it occurs, could help IBDs recruit more reps and bring more to their bottom lines.
“Especially if [an advisor] is doing rep-directed advisory business, the billing and statement [fees] are big profit centers at B-Ds,” says Jon Henschen, founder of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn.
But other B-Ds will have to think about throwing in the towel.
“Smaller B-Ds, the really small ones, with under 100 reps, are really getting serious about whether [staying in business] makes sense,” says Papike. “Regulation has gotten so difficult, expenses continue to go up, profit margins are shrinking, and it’s difficult to recruit because it’s … hard to do without a really great platform.”
Some of these smallish B-Ds are looking at operating as large OSJs, Papike says, landing a deal with a B-D and monetizing their business somewhat, turning over much of the administration to the dealer, and maintaining control of their advisors. “We see a big trend with that,” she says.
LPL has focused on recruiting into the “super OSJ” model and has a number of large offices that by themselves would be decent-sized B-Ds, many with a particular marketing focus. Morrissey says it works for attracting B-Ds that want to sell out, and also for attracting individual reps who don’t want to hassle with their own branch.
Cambridge hasn’t been looking to acquire B-Ds and turn them into OSJs, but it nevertheless recently did that, landing Protected Investors of San Francisco, a broker-dealer with about $8 million in revenue.
“It’s not our primary focus,” Schwartz says about the broker-dealer to OSJ conversion, but he’s looking into it after getting 10 unsolicited calls from B-D owners in the last year.
“There’s a bit of sticker shock for some of these [B-D] firms” though, after seeing some of the overvalued numbers real estate mogul Nicholas Schorsch was offering for broker-dealers several years ago, Schwartz says.
“And with the DOL [rule], there are a lot of unknowns” with broker-dealers, Schwartz adds. With transition costs and added pricing pressures (especially on firms that sell high-commission products), revenues and the prices owners might get from selling out will be on the decline, he says.