January 1, 2001

The Personal Touch

The human element is still vital to the business,

Illustration by Tim Raglin

Early science fiction stories used to speculate on the obsolescence of man, brought about by the advance of technology. Robots tended to business, did the chores of the day, and handled manufacturing and labor tasks, leaving human beings free to indulge in whatever they chose - or forcing them to struggle for a meaningful existence in a world in which they were no longer quite necessary. The Internet looked for a while as if it were taking this notion to a new level - eliminating advice and human intervention in stock trades. Some of the wirehouses seem to have adopted this automated theory, concentrating on the development of technology to the exclusion, some might say, of human beings in the back-office systems of the advisory business (a business that they're new to anyway, in terms of fee-only advice).

But broker/dealers are capitalizing on that very basic ingredient - some more than others. In this sometimes bearish market, it's been paying off, even as wirehouse and discount broker business and shareholder value both trend downward. (Shares of brokerage houses have been experiencing a bit of the overall market volatility in recent weeks, as predictions of lower demand for stock offerings and IPOs lowered forecasts and stock prices.)

To take the pulse of the broker/dealer business, we decided at first to go to the top: we talked to the winners of our annual broker/dealer poll ("Monuments to Success," September 2000 Investment Advisor) to see how they were faring, and what sorts of issues they face as the marketplace shifts and changes form. Then we talked to some advisors and asked them what they looked for in a B/D.

No Springtime for Stockbrokers

Art Grant, president of Cadaret, Grant & Co. in Syracuse, New York, says that business there is great. "What's interesting is that the wirehouses do a great job and have great people; they have a fee-based business and are not just transaction-oriented, as they used to be. Yet I have the impression that times have slowed down for them, and the market of the last six months has slowed them down."

"Stockbrokers," he points out, "are finding it slow going. Our business has not stumbled the least bit. I think it will - we'll have a slowdown, but a normal cyclical slowdown - but we haven't had it yet. Our people have strong customer relationships, mostly financial-planning-oriented, and our business hasn't slowed down."

"An awful lot revolves around the service side," says Carol Sandstrom of Clearwater, Florida, who formerly was with the independent B/D rep recruiter The Turning Point and now recruits reps for Sentra Securities. "Some larger companies are not user-friendly to the rep, and you get a lot of voice-mails and not a lot of the personal touch," she points out. "Some of the bigger ones get a little bit colder. Although Sentra is part of the SunAmerica network and bigger, it's sort of the best of both worlds," she says - "big enough to have a lot of the features of large firms and small enough to recognize brokers' voices when they call in."

Jerry Singleton at Signal Securities in Fort Worth, Texas, agrees. "I think there are two things that keep any small firm successful today. First is the area of personal relationships, versus being just a number at a big firm and getting buried in bureaucracy. In a smaller firm, you have the ability to maintain close personal relationships. The second thing is service, service, service. We try to excel in service to our reps, as well as to clients. At the firm level, obviously, investment advisors are clients. We think what has made us successful is service, as opposed to trying to supplement that service with technology. Technology can't surpass a human voice, a human touch, or the empathy and concern for the problems and concerns of that representative or client."

That doesn't mean that Signal ignores the needs of advisors for technology, however. "Technology will have an impact on all firms, large and small," says Singleton. "The question is, how do you utilize that technology to maintain your niche in the marketplace? I think that's where skill and expertise at the upper management level of any firm comes into play." What Signal does, says Singleton, is keep current on technological improvements as they come out, and consider whether they are indeed something that will be worthwhile for its advisors. Signal also surveys its reps, he says, so that it can get an idea of what they really want rather than burying them under an avalanche of constantly changing programs and functions. "I believe a lot of this stuff that they're putting out there is used by maybe 2% of the investment advisor population," says Singleton. "It looks and sounds good, but maybe it's not that beneficial to you on a day-to-day basis."

Technology and service are the two objectives of Lynnfield, Massachusetts-based Investors Capital Corp. President Timothy Murphy says Investors Capital is leveraging the Internet for its advisor clients by offering a search function on the corporate Web site that allows prospective clients to find advisors within their geographical area who fit their needs.

Also a priority at Investors Capital is the use of technology to make reps' lives easier. Drag-and-drop forms are just one of the technological improvements being worked on, because, says Murphy, "nobody likes to do paperwork."

The next major event on Investors Capital's horizon is its IPO. Scheduled for mid-January, that will launch the company not only into the market (and provide equity ownership for reps) but also herald the opening of client/rep service centers across the country, beginning in Florida and California.

Add Value, Add Value, Add Value

If you ask Jim Putnam, managing director of national sales at LPL Financial, what the greatest challenges are for the broker/dealer industry in general, he'll tell you that it's looking for ways to add value to the client relationship. (LPL didn't win in our poll, you might remember, but was the runaway vote-getter when we asked reps to name the one B/D they'd most like to work for, other than their own.) "What's paramount for us," he says, "is continuing the trust relationship that our advisors have with their clients." Such a relationship is built on communication, Putnam says, with the advisor really understanding the clients' needs and goals, educating clients on how their money is being put to work, and then providing quality advice. "That's where we're really trying to concentrate: empowering our reps with the tools to add value to their relationship with their clients, and to build upon the trust those clients have given to our advisors in handling their financial affairs."

The primary areas of LPL's concentration over the next year, he says, are research and communication, followed by technology and account processing.

Roland Brecek of Brecek & Young, based in Folsom, California, offers this view on the upcoming year: "Our biggest thrust is in developing asset-based types of programs that allow the representative to be on same side of the table as the client, where they're looking at ways of increasing the client's account size and gathering all their assets, and receiving compensation for managing all of their accounts."

The second biggest issue the B/D faces is handling growth. Maintaining back-office staff in the same proportion to its reps is a priority, and that's how Brecek sees service continuing at its current high level. "We want managed growth rather than unmanaged growth," says Brecek." "We've been adding employees in our back office in advance of bringing in reps, so we control the level of service." Brecek & Young tries to maintain a one-to-nine ratio of back-office staff to reps, Brecek says, in order to sustain quality. "The last thing we want is to gain them up front and then lose them off the back" due to poor service. "And we're selective on the quality of reps coming on board. I won't add them unless I have the staff to accommodate them."

No Peaks, but No Valleys, Either

How have those reps fared in the recent roller-coaster ride of the markets? Brecek laughs. "Our reps that have placed their clients in managed accounts were somewhat bored," he says, "because there was a certain allocation in bonds and value investments. But now they're smiling. There was such a temptation to sell aggressive growth funds and high-tech and Internet-based stuff - it would have made them happy last year, but this year we would have had some very disappointed clients."

None of the B/Ds we spoke to have felt the pressure from wirehouses or online brokers. Online brokers, in particular, says Art Grant, are no threat. He points out that a lot of people who invested that way had little or no guidance, and "got beaten up bad. They'll have a lot to overcome before they invest again; they're nobody's clients." And the wirehouses, he points out, are looking at lower earnings and lowered shareholder value.

Jerry Singleton feels somewhat the same. "I don't think the online trading or online brokerage opportunities are a threat to us at all," he says. "Most of the clients that we deal with are interested in personal service, and in being able to discuss issues and opportunities, and therefore the online capabilities - with perhaps the exception of being able to view their accounts - are basically of little value to that type of client. The type of client that is going to use online trading capabilities is probably not going to be a Signal client anyway, so we don't feel that that aspect has an impact at all."

Fine, but What's Important to Reps?

There are some issues that are important to advisors, though, and technology does loom large. Deb Voso, a planner in Frederick, Maryland who is a rep for H. Beck, has been shopping for a new broker/dealer. While she says she's happy where she is, a technology issue made her consider a move. "We use dbCAMS," she says, "and we were having some problems with the clearing firm our B/D uses, Bear Stearns. There were download issues." Compatibility problems were the last thing she needed, she says, and while in the end it was resolved, "there was a cloud over our heads that maybe they wouldn't support us or give us the downloads we need." Voso brought up the issue with a group of her peers. "We talked this over," she says, "and said, what do other B/Ds offer?" The group came up with a list of criteria, made a list of B/Ds, and broke that list up among themselves. "I took a very active role because of my situation at the time," says Voso.

First she asked herself what was important to her as a practitioner. Three major issues surfaced: first was technology, which had to be compatible with her existing software. Next came flexibility. "I'm my own RIA," says Voso, "and have my own Schwab business, and not all B/Ds will allow their reps to do that." Third on her list was business development. "By that I mean that a lot of us reps and advisors are getting older and doing retirement planning ourselves, and I wanted to know about succession planning, buying and selling - a lot of business issues facing those of us who own our own firms."

Voso approached 12 B/Ds, and told them of her issues. "The list went from twelve to four just because of the Schwab stuff," she says. "A B/D has to supervise that activity, even though they're not participating in it," she says. "Because of that liability, a lot of B/Ds won't allow that. They have a lot of no-load mutual funds we can use, and they feel, 'Why should we allow Schwab activity?' " However, other B/Ds support advisors who are doing that kind of work, and have offerings like sophisticated wrap programs. "So it really depends on what network you're going through," Voso concluded.

On-site visits revealed warm and comfortable cultures, cool and inflexible ones, and allowed Voso to meet many of the back-office staffers she might be working with. "I can't imagine anyone going through a search like this and not doing that," she says. It allows the advisor to learn a lot about a company, as well as allowing the company to learn about the advisor.

But after all her investigative work, she is still with her current B/D. "I've been in the business 18 years," she says. "To move from one clearing firm to another is not something you want to do if you don't have to."

Setting the Bar Too High?

Ron Pearson, of Beach Financial Advisory in Virginia Beach, Virginia, discerns one alarming trend prevalent among B/Ds that are looking to grab a bigger piece of the wealth market: the increase of minimum assets required from advisors. "My biggest concern," says Pearson, "is that as they raise the bar of minimum assets custodied with them, it's going to be more difficult for the beginning planner to get good service from a broker/dealer." Pearson cites requirements of $1 million to $5 million in assets as tough hurdles for newcomers to overcome. And when an advisor faces an obstacle like that when he's starting out, Pearson says, he'll likely remember it when he has achieved a healthy asset base and is being courted by firms that wanted nothing to do with him as a newcomer. Says Pearson, "I think a lot of them are short-sighted in the way they're setting things up." He points out that some firms are instituting a service fee of perhaps $100 a month for advisors with low levels of custodied assets - useful for smaller advisors who must go somewhere, while enabling the B/D to make some money as well. "I think that is a better way to do business than saying, 'you have to have $3 million or don't even bother calling me,'" says Pearson.

There is something else coming down the pike that B/Ds should watch, he adds. "One wonders how long it will be before B/Ds are irrelevant. There are some [Web] sites that will happily consolidate all data feeds online so that you don't have to go through a broker/dealer at all," he points out. "You can go directly to T. Rowe Price or Fidelity; the paperwork could be difficult, but that should provide competition in the near future." Sites that consolidate statements from everywhere will make it less effective to work with a B/D as a custodian, he theorizes. The only question is what those consolidators will charge for such a service.

But it may be some time before such sites replace the B/Ds who work hard at maintaining personal relationships with their reps, at least according to Voso. "I'm used to being able to pick up the phone and talk to someone if I need a problem resolved," she says. "We're still a people business. I hope the broker/dealers remember that; we're people working with people. You still need soft skills, in spite of technology. That's why people come to me instead of to a wirehouse."

Jerry Singleton echoes that: "My judgment is, in our Mach-2 busy, busy world, that there's always going to be room for a firm that will provide superior service and warm relationships."

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