Broker-dealers sum up the future of advisory services in two words: rich folks.
The broker-dealer industry undoubtedly is dealing
with some tough issues these days. Competition remains fierce, as firms
contend with narrowing margins, demands for expanded services and a
playing field in which the dominant players appear to be getting more
dominant. Increased scrutiny by regulators also has added pressures and
costs to operations, forcing companies to adapt on the fly.
But it's not all as glum as it may seem. In fact,
once you get industry officials to start talking about affluent
clients, the retirement needs of the baby boom generation and the
growing need for financial advice, all those other problems seem to
fade away.
That's because many broker-dealers are in fact seeing healthy revenue
growth as they gear up-through the expansion of products, training and
technology-to serve the needs of millionaire clients.
"Independent broker-dealers are prospering," says
Dale Brown, executive director and CEO of the Financial Services
Institute, a trade organization composed of 109 independent
broker-dealer members. "We are providing a service that Americans
need-that is, access to quality and affordable advice and products and
services. I think the future is very bright."
Judging by the way broker-dealers are directing
their capital expenditures, it would seem the industry feels the key to
its future lies in the assets of the estimated 9 million American
households that have at least $1 million in liquid assets. Speak to
broker-dealers about their newest offerings, and odds are they will be
talking about advisor training programs for serving the needs of the
affluent, expanded lineups of alternative investments and greater
support services in areas such as estate and tax planning, small
business issues and retirement planning.
Advisors clearly are striving to service larger
accounts, and broker-dealers are racing to pony up [to pay up?] with
the services to support their efforts. William C. Van Law III, who took
over as senior vice president and national director of business
development for Raymond James Financial Services late last year, says
that at his company, the recent focus on affluent clients does not
signal an abandonment of smaller accounts. It is, however, an
indication of where advisors see the bulk of future growth occurring.
"While a number of firms are trying to target their
advisors in the direction of fee-based and high net worth, that is not
our culture," Van Law says. "Our culture is far more inclusive than
that, and we are truly focused on providing broad and deep resources
and letting advisors decide what sector they are focusing on. That
said, the segment of high-net-worth and ultra-high-net-worth clients is
the fastest growing segment of the market, and advisors are very much
attuned to it."
The pursuit of wealthier clients has gained momentum
over the past several years and is reflected in the growth patterns of
Raymond James. Over the past five years, Van Law says, the company has
seen its client assets more than double, from $58 billion in 2002 to
$125 billion this year. During that time, he notes, the number of
advisors has remained relatively stable. Customer accounts, however,
have grown from an average of $394,000 to $612,000.
The upstream movement has been partly due to an
expanded offering of alternative investments and a greater emphasis on
training and support, says Fred Whaley, Raymond James' managing
director of wealth solutions. Although Raymond James created its Wealth
Solutions platform seven years ago, when it started to introduce
products such as hedge funds, private equity, real estate and
structured notes, Whaley says that two years ago the company added an
advisory team to the unit that supports advisors in areas of concern to
affluent clients with $5 million or more to invest, such as strategies
for dealing with concentrated stock positions.
The advisory team also offers in-depth training to
advisors, and about 20% of Raymond James' advisors have participated in
at least some of the sessions, he adds.
Along with training, the firm has placed a renewed
emphasis on retirement income planning, an area that Whaley says the
entire industry has probably underemphasized up until now. "We have
spent the last 20 years of preparing people to build their wealth
through growth, and there is going to be a shift where we have to
provide an income stream from that same portfolio," he says.
Among the services in the works, Van Law says, is
the launch of a financial planning suite consisting of planning tools
and asset allocation models from SunGard, Forefield and Ibbotson. "What
we've done is put together best-in-class rules to help our advisors
meet their ever-increasing complexity of needs," he says.
Similar efforts to service the affluent market are
under way at market leader LPL Financial Services. Bill Dwyer,
president of LPL's independent advisor services, says the challenge in
meeting the demands of affluent clients is not only in launching
products such as structured notes, hedge funds and other alternative
investments, but also in training advisors to use them effectively.
"If you look at the industry and the challenges we
face, the demand for advice is just exploding," Dwyer says. "Then when
you look at the surveys of consumers, you see the breadth of services
they want from one trusted advisor is expanding as well."
LPL, whose advisory business is up 29% this year, is
planning the launch this summer of Wealth Vision, which is designed to
address the client demand for expanded services by providing a platform
that allows advisors to aggregate and manage client data across a range
of products, including those not serviced by LPL. The service, which
LPL will be introducing in a joint venture with eMoney Advisor-a
developer of planning and wealth management software-is designed to
increase advisor efficiency, particularly when dealing with affluent
clients, Dwyer says. "This allows the advisor to store things like
wills, mortgage documents and deeds and centralize all those services
in one place," he says.
Another effort has gone into asset allocation strategies. LPL's
research department has expanded its offering of model portfolios, with
about 60% of the company's advisors tracking one or more of the
department's models, he says.
The focus on the millionaire client hasn't led to a
lower level of service for smaller accounts, Dwyer says. On the
contrary, he says, the company views servicing smaller accounts as an
important component of serving affluent clients.
"An advisor may enjoy the $5 million or even $20
million account, but you also have to take the $55,000 brother-in-law
account," he says. Toward that goal, the company has developed a series
of Optimum Model Portfolios that are designed as low-maintenance
engines for servicing smaller accounts with as little as $15,000 in
assets. Since the product was introduced in September 2004, advisors
have put a total of $3 billion into these small-account portfolios, he
adds.
"What's really interesting is, if you look at
advisors in 2006 who used Optimum portfolios, they grew at a rate 30%
faster than those who didn't use the vehicle," Dwyer says.
While the broker-dealer industry is one where
analysts often offer gloomy forecasts for smaller companies in the face
of the dominance of LPL and Raymond James, smaller broker-dealers
continue to maintain that they are able to carve out a healthy niche in
the marketplace by offering more personalized service to advisors.
John Rooney, managing principal of Commonwealth
Financial Network, says his company expects to meet its goal of 20%
growth this year and add 50 advisors, despite the fact that larger
companies continue to gobble up market share. Rooney says his company
is viewed as an "attractive alternative" by advisors who feel their
companies have grown too big too fast, to the point where there has
been a dilution of core services. "There are a lot of advisors who are
leaving big companies," he says.
As an online broker-dealer competing with larger
operations, Barry Metzger, CEO of brokersXpress, says his company has
to focus on providing cutting-edge technology while at the same time
remaining lean in its operations. The company also has carved out a
niche for itself in options trading. "Our user interface is head and
shoulders above the rest," he says. "It's a great differentiator for
us."
Smaller broker-dealers also are joining larger
players in going after the affluent. At Sigma Financial Corp., the
company has concentrated on putting its top 150 reps through a 30-week
Cannon Financial Institute training program that leads to the
designation of Certified Wealth Strategist.
Such training, along with maintaining a manageable
size, has allowed the company to compete effectively, says Jennifer
Bacarella, Sigma's director of firm development.
"The key thing that separates us from the LPLs of
the world is we have always maintained our commitment to keeping the
size of the company very manageable," she says. "Our claim to fame is
that we know all our reps."