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.