Independent broker-dealers pulled off another profitable year.

    Independent broker-dealers hit some grand slams last year when it came to recruiting. Just ask Mike McCormick of Pittsburgh-based Blue Vase Securities LLC, who decided to affiliate his own profitable, 150-rep investment firm with ING Advisors Network in November-a move he said will allow him and his firm's advisors to get back to the business of investment advice again.

"As we move into higher-end wealth management we want to be able to compete with the Smith Barneys, and the ING name will allow us to do that," says McCormick, who launched Blue Vase in 1988 and grew it to $12 million in gross dealer concessions last year [2005]-the number one broker-dealer in the city, according to the Pittsburgh Business Times.
    Besides getting the ING name, McCormick says the compliance onslaught his firm endured in the past 18 months-living through four federal and state audits without cause-as well as the pending need to do another major investment in technology were other major drivers for the partnership. "Essentially, we see this as outsourcing our back office. And it gives me the ability to get back to what I like to do, which is coaching other advisors," says McCormick, who is projecting a 10% growth in revenue for Blue Vase in 2006.
    What is increasingly clear is that as more independent broker-dealers set themselves up as strategic outsourcing partners, they are finding bigger and better firms driven to their door by stagnant or shrinking profit margins and the accelerating compliance melee that's taken place over the past five years. "We're having more and more discussions with advisors and broker-dealers like Blue Vase who find that back-room, compliance, technology and other issues are taking up just too much of their time," says John Simmers, CEO of ING's Advisor Network.
    The upshot is that many independent broker-dealers are making significant gains in recruiting, especially among larger advisory firms. After spending three years consolidating, "we came out strong in 2005 to get back into the recruiting game. We thought it would be a tough stretch, but we're finding we're right in there," says Simmers. "We added $90 million (in gross dealer concessions) through recruiting in 2005 and about 1,000 new folks. The total is about 8,500," he adds.
    Like many of the firms, Simmers reports that they have a number of large firms in the recruiting pipeline for early 2006. Independent broker-dealers' ability to stay lean, while developing state-of-the-art platforms and back-office services, has led to their increasing market share while maintaining profitability, says Chip Roame, president of Tiburon Strategic Advisors, which just released a telling new survey on the independent broker marketplace. The fact that independent broker-dealers have done that well is even more remarkable considering that they've made these strides in a sideways stock market, Add to that dramatically higher compliance costs and a shrinkage in sponsors' marketing support dollars and it's clear that many have put their businesses on firmer financial ground than in he days when they were heavily dependent on sponsor support.
    The acquisition of LPL Financial Services, the nation's largest independent firm, last October by two private equity firms, Hellman & Friedman and Texas Pacific Group, confirmed what many had thought for some time-that successful independent brokerages are worth more than anyone ever expected. In the late 1990s, a rash of independent brokerages were bought at 40% to 50% of revenues. The LPL deal was valued at $2.5 billion, or about 2.4 times revenues.
    Granted, LPL was hugely profitable, had made tremendous technology investments to convert to a self-clearing business, and was operating on a scale with $1.1 billion in revenues that could rival wirehouses. LPL's 20% growth over the last decade topped virtually all independent firms, so the price-to-earnings multiple was only marginally higher than its growth rate. Still, the transaction probably raised the value of all other dependent firms.
    "The price is what the price is," comments LPL CEO Mark Casady. "It's a unique franchise. These are owners who are going to be with us for a very long time."

Wirehouse scandals, as well as the fact that wirehouses often dismiss someone producing in the $250,000 gross commission range, continue to push wirehouse reps to make a leap to independence, Tiburon found. As for those advisors already independent, and producer groups such as Blue Vase, Roame's survey found that the quest for bigger revenues, increased assets under management, increased income and the ability to retain revenues were the four leading business motivators.
    Other goals for advisors and brokers seeking partnerships with independent broker-dealers include integrated technology, more free time, the ability to delegate more work and establish a niche market and reduce expenses, Tiburon found.
    Not surprisingly, independent broker-dealers, which currently number about 1,000, are tracking these needs precisely with innovative products and services designed to attract and help advisors and brokers where they say they need it most-productivity-and with marked results. AIG began offering strategic coaching programs to advisors in 2005, and saw the productivity of those advisors who signed on improve by 10% to 20%. "I tell our folks, 'You can work harder or you can work smarter.' It's that simple," says Keith Johnson, a former AIG advisor for 18 years who now heads up AIG's new coaching programs. AIG Financial Advisors added 450 new reps and $40 million in new revenues to the firm's overall production of $260 million in 2005.
    The first program Johnson helped create is called "collaborative coach," a year-long program for newer or mid-level advisors that helps them look strategically at their business and figure out where they want to be and how to get there. "We meet four times a year, and our team of five regional vice presidents follow up and coach the advisors, as well as hold them accountable for agreed-upon goals," he says.

AIG is also offering an "exclusive coach" program for more senior advisors who want to accelerate their marketing programs and productivity. It was developed by two well-known AIG advisors, Tom Gau and Ken Unger. In its first year, "exclusive coach" helped advisors improve their production by an average of 20%, says Johnson.

How impressive is the 10% to 20% productivity gains that AIG has helped advisors achieve through their coaching programs? Those gains are pretty dazzling, considering that the average advisor in AIG's system achieved a 3% gain.

"What we see time and time again is that many advisors work so hard. There are simply no more hours in the day. Our job is to help them build greater efficiencies into their businesses through marketing, outsourcing (to AIG) and proper staffing," Johnson adds. "Our goal is to help advisors build the businesses they want to build."
    LPL Financial Services is also reporting a significant uptick in the size of the firms that are coming on board, says managing director of national sales Bill Dwyer. "In 2005, about 30% of our advisors had $500,000 in trailing gross dealer commissions. We are certainly seeing more advisors join us from all channels with more advisory assets than we have in the past. And larger producers tend to have more fee-based assets. Anecdotally, their client retention is higher and recurring revenues get them back to their production levels very quickly when they join us," he adds.

One advisor concern driving them to an independent broker-dealers' door? "The rate of change is accelerating," Dwyer says. "There is simply a greater continued downward pressure on pricing, and what advisors can charge clients. If ten years ago the average fee was 2.25 basis points, today it's more like 1.15 basis points," he adds. "At the same time, the value proposition and what he must deliver has greatly expanded. The time and cost of providing the advice clients need is going up."
    That's not surprising, since the baby boomers, who wanted investment and college savings advice ten years ago, are now staring retirement in the face. Simply put, retirement and income generation requires more extensive planning and investment management than a 15-year college savings plan.
    "Over the past five years, we've focused on what we can do to give advisors the most leverage in this environment," Dwyer says. With the emphasis on productivity and efficiency, LPL has introduced self-clearing, tried to minimize and streamline a spate of regulatory mandates at the advisor and broker-dealer level, and refined its technology to lower costs and expand productivity. On the tech front, the company will introduce total imaging, so advisors can scan and electronically store all of the copious documents they must keep and start running paperless offices this year.
    In addition to adding trust, mortgage and insurance services in the past two years, LPL rolled out several new investment platforms in the past two months, one specifically for high-net-worth clients that will allow advisors to integrate mutual funds and separate accounts into one account with one statement. "We will continue to do the things that will help advisors grow their top and bottom lines," Dwyer says.

While a breakneck pace of new regulation has continued to be a challenge for broker-dealers and advisors, Dick Averitt, CEO of Raymond James Financial Services, says his firm is working as closely as possible with regulators to manage the process so it works for both investors and advisors. At Raymond James, Averitt and other executives have taken on numerous leadership roles at the National Association of Securities Dealers and the Securities Industry Association to let regulators know "there are firms out there that they can trust as the model of best practices that others can follow," Averitt says. "Regulators are returning to the process of coming to advisory panels to ask for direction, and we want to be at those tables. We want good decisions to protect the investor and advisor."
    Raymond James Financial Services, which added about $85 million in revenues to just under $830 million in 2005, will undertake a startling initiative to protect investors and its advisors come mid-2006. It has gone out to all of its variable annuities manufacturers with strict blueprints of what products must look like. The new program will include reduced payouts, a move Averitt admits has caused some strife among top VA producers. "Some folks said, 'We don't want to take a cut,' and we said, "Then you shouldn't, but that's what we're doing.' But among our top 15 producers, while there was some concern at first, most have told us the time for this is now and that we're the firm to do it."
    Averitt says regulatory and productivity concerns were both on aggressive courses in 2005, and that will continue in the new year. In a sign of the times, that meant pruning a number of advisors and reps, including six of the company's top-producing "Chairman's Council." "For one reason or another, we said, 'We can't get comfortable with you. You've got to go,'" Averitt says.
    Also gone? The lowest producers. "We said, 'We know you love both of your clients, but you might be better served elsewhere.'" Minimum production requirements went to $250,000, while experience requirements went from two years to three years.
    At the same time, the opportunities for advisors who want to build wealth management businesses continues to increase at Raymond James Financial Advisor. One advisor brought a mergers and acquisition candidate to the table and earned $850,000 for the deal, which Raymond James handled. "We offer broad and deep services, and it's attracting bigger and bigger advisors. We brought in a number of $1 million offices in 2005 and there are more in the pipeline," Averitt says.