Faced with higher costs, broker-dealers are targeting larger advisors.

    It's a banner recruiting-wise year so far in 2005 for many independent broker-dealers, where the catch phrase "bigger is better" is fast becoming the norm. Advisors who can't bring a million or more in client assets in the door annually might be asked to leave.
    In fact, independent broker-dealers have begun practicing some of the same practice management techniques they've been preaching to advisors for years. This means that they're clearly identifying larger advisors and devoting a greater percentage of their resources to helping them flourish-often by recruiting new advisors specifically for existing shops.
    "We are looking at, talking to and trying to target bigger producer groups," says Bill McGovern, senior vice president of business development at Raymond James Financial Services in St. Petersburg, Fla. "We'd rather have people we know are very successful," says the 19-year brokerage executive. "At the lower end of the spectrum, we know it's a challenge for us to support an office that's only bringing in $150,000 to $200,000, based on the revenues we get out of that and our costs of supporting independent advisors, which we find are growing and frankly, unknown."
    In fact, Raymond James isn't only targeting bigger firms, the firm is also actively weeding out lower-end producers, McGovern says. The results, so far this year, have been pronounced. The firm brought on 314 new advisors with a total of $30 million in gross dealer concessions. (GDC represents the revenues a product manufacturer pays to the broker-dealer for the sale of its products.) Twenty-five percent of these advisors joined existing firms, he adds. At the other end of the spectrum, Raymond James terminated 296 advisors, which cost only $6.3 million in GDC in comparison. "We have a very clear agenda, and it requires that we force low-end producers, often part-time people, out," McGovern says.
    Raymond James is not alone in its quest to beef up the size of the advisory firms it recruits and to which it caters. Nor is it the only beneficiary of the turmoil that is propelling larger advisor groups out of regional and national wirehouses and into independence. While equity ownership in their firm remains a driving force for advisors, the thought of transitioning clients out of the old wirehouse's proprietary products into a new wirehouse's products, only to have the firm gobbled up and have to start over again, has become less and less enticing, executives say.
    That's leading more veteran brokers and advisors, with larger books of business, to independent broker-dealers. In fact, firms such as Mutual Service Corp. (MSC) in West Palm Beach, Fla., and Royal Alliance in New York City, report that as much as 60% of their new recruits come from wirehouses, while as much as 50% of new recruits are brought on to bolster the marketing and sales prowess at existing multiple-producer firms. That helps offset administrative and regulatory costs, and creates efficiencies in a way that setting up hundreds or thousands of one-person shops that have to be supervised closely no longer can.
    "As costs have risen and in anticipation that they'll continue to rise, we continue to aim for higher-end producers," says Jay Vinson, MSC's manager of new business development. To underscore that goal, the firm targets advisors it believes can significantly increase their business quickly, usually those who are at least at the $250,000 GDC level. "Our goal is to help them grow by 25% in the first 15 months, and we'll do everything possible but sit in their seats to help them achieve that goal," says Vinson, who estimates that the firm will add $20 million in overall new GDC this year.
    One important step in the campaign to get big is to help each firm understand where it is today and where it needs to go. MSC uses a seasoned transition team to help new advisors develop and implement a business blueprint. The elite advisor groups at the company get the added benefit of MSC's recruiting efforts, which are designed to help bigger shops get even larger.
    "Right now, we're doing this kind of recruiting for about 15 of our top offices, but we may go to 20 offices in the near future," Vinson says. That's up from ten firms MSC helped with recruiting last year. Those shops alone brought in $8 million in GDC in 2004. "This has evolved into a program where we provide financial assistance and subsidies and transition assistance to help these bigger firms develop and launch their own marketing and recruiting plans."
    As revenues are pinched and the costs of regulation and technology continue to soar, more firms are refining their recruiting efforts to hone in on advisors with specific attributes. For instance, Commonwealth Financial Network, based jointly in Boston and San Diego, is targeting advisors with demonstrated business savvy-specifically those who have already hired an administrative assistant-and sweetening the deal with the first-of-it's-kind satisfaction guarantee.
    "Even though our stated minimum production requirement is $100,000, we're saying no to mid-$100,000 wirehouse producers who don't have an administrative assistant," says Janice Hart, Commonwealth's vice president of national field development. "We did a study of our top 250 producers and found that those who have an administrative assistant have on average $90,000 more in production, and they only spend about $35,000 to achieve that. We want advisors who function as well-oiled machines. We've learned that those who reach the $100,000 mark without an assistant have essentially created a model for plateauing, if not decreasing, sales."
    That predilection for advisors in true growth mode is paying off. Commonwealth grew its 900-strong advisor network more than 10% in the first two quarters of 2005, with GDC per rep up 8% ($260,000 year-to-date). While the minimum required production at Commonwealth is still $100,000, Hart says that's just a guideline. The firm's recruiters, who are paid salary and not commission, act more as gatekeepers to ensure that the advisors who join Commonwealth will sustain a worthwhile, long-term relationship with the firm.
    The heightened regulatory environment that broker-dealers, reps and advisors have been subjected to, and its accelerating costs, are factored in Hart's recruiting efforts, as they are at every firm we talked to.
    "We're being more careful and turning over more stones," Hart says. "Approximately 25% to 30% of reps who apply with us are not accepted." But those advisors and reps who do get the green light are given an "Uncommon Guarantee," as the firm calls it, that says that if they're not satisfied within their first year, the firm will pay all their costs to transition to another broker-dealer. The final tab the firm will pay to unsatisfied advisors can amount to their actual transition costs or 10% of trailing commissions, whichever is less. "I think this is huge," says Hart. "We wanted to take down as many obstacles as possible," Hart says. What if Commonwealth terminates its relationship with an advisor first? The guarantee is void, she says.
    While many brokerage executives are hopeful that the regulatory rampage may be coming to an end, they're being more proactive. One area under the microscope? Mutual fund C-shares.
    "We have a policy that limits an advisor's aggregate C-shares to $500,000," says Chris Radford, a senior vice president with AIG Financial Advisors. "Regulators have been through A-shares and B-shares, so we think this is the next red flag. I wouldn't say so much we're being picky, but certainly we're getting to know prospects and their business model. The last thing we want is problems. We want long-term relationships."
    As a result, AIG is putting resources into helping existing branches grow by becoming multiple branch offices (MBOs). Half of the advisors the company recruited through June have or will join existing advisor offices. While the overall number of advisors the firm recruited is down slightly, GDC is up a whopping 60%. "The trend is toward bigger offices," says Radford. 
    One of AIG's largest multiple-branch offices, headquartered in Phoenix, has 45 branches and produced $13 million in gross dealer concessions last year. "We're applying more resources here because these kinds of offices really bring value-added in terms of marketing, training, technology, management and supervision," Radford says.
    At Royal Alliance in New York, the firm won't create a new office to be independently supervised unless advisors have $1 million or more in GDC, which means many advisors who join are joining existing branches, says Gary Bender, first vice president of recruiting. Executives at the broker-dealer believes strongly that bigger advisory firms are its true niche.  "We raised our bar on minimum production to $500,000 in GDC last year," says Bender, who declined to put a dollar figure on average GDC at the firm.
    He did say, however, that the number of producers the firm had in 2004-2,045 advisors-"has gone down because we're buttoning-up our focus. Gross dealer concession has grown significantly over the past four years. We help our managers in the field with recruitment advertising, direct mail and transition financing, so that basically they do 55% to 60% of recruiting for us."
    Bill Dwyer, executive director of branch development at LPL Financial Services in Boston and San Diego, says his firm has netted 260 new advisors for a total of 6,100 through June, and has increased gross trail revenue dollars by 31%. "One of the biggest trends we're seeing is bigger producers. I think they want to focus on the next 15 or 20 years of their career." That works well for the firm in more ways than one, he adds. While low-end producers might have 15% to 20% of their assets in fee-based products, larger producers have 50% to 70% of client assets generating recurring revenues, he says.
    While recruiting has been increasing for more than 18 months at many independent firms, executives, including LPL's Dwyer, believe there may be a slowdown since advisors tend to stay put in flat or decreasing stock markets.