From the September 2002 issue of Investment Advisor • Subscribe!

Best in the Business

Tough times haven't changed the basics of success

Times have been tough. Ask anybody in the business and she'll tell you that portfolio returns are down and clients are nervous. While almost everyone feels the pain of the bear market, it's hard to quantify the discomfort. Cerulli Associates' Senior Analyst Matt McGinness says that despite information gathered for a new report on the state of the retail RIA market (see "Survey Says," page 20), there's no trustworthy number for how the market has affected advisors' business.

This doesn't mean that the business pressure isn't real. Advisors know this as do reps' broker/dealers. One tough year has followed another, unnerving even some of the most sanguine clients. But as the saying goes, when the going gets tough, the tough get going. The 2002 Broker/Dealers of the Year obviously have this ability.

Repeat Winners, Again

This was the 12th year that Investment Advisor has asked its readers who are reps of broker/dealers to rate their B/Ds on a host of issues--everything from marketing support to compliance to how well the B/D's home office keeps open the lines of communications with reps. This year, more than 3,200 readers responded, with the ballots tallied by Research Editor Liana Camporeale. One of the interesting observations about this poll is noting each year which firms finish where. Company growth accounts for some jockeying for position, while the economy and changes in ownership can account for others. Clearly some broker/dealers make greater efforts to encourage their reps to participate in the reader poll (though this year, as in the past, some companies go over the line in their encouragement, resulting in some ballots being invalidated when we judge them not to have been individually filled out by, and sent directly from, reps). Those B/Ds that have the greatest rep satisfaction rate--determined by how many reps give their B/D the highest ratings--are awarded this coveted prize.

Some companies hang on to the top slot; some miss it by a hair one year and then come roaring back the next. Some win years in a row, but in different divisions. We have four repeat winners in 2002, though not all won in 2001.

Division I (comprising broker/dealers with less than 200 reps) was reclaimed this year by Signal Securities, Inc., which last won in 2000. Last year's winner in Division I was NEXT Financial Group, Inc., but due to an explosive growth in number of reps (it went from 161 in 2001 to 270 in 2002), NEXT moved into Division II (200-499 reps), where it again reached the top spot. Division III's winner this year (for companies with 500-999 reps) was Commonwealth Financial Network, and Division IV (for B/Ds with more than 1000 reps) was taken by FSC Securities Corp.

What might surprise you is how often the same companies have won. This year every winner was a returning champion. NEXT's first victory was just last year, but Signal has won six times in 12 years. Commonwealth has won eight times, and FSC five (although the last time FSC placed at the top was in 1996).

What does this say about the companies that take the top prize in their divisions? Apparently quite a lot, according to the voters. We talked both to the leaders of the B/Ds and to some of the reps themselves (see "The Reps Speak" sidebars) to get a feel for what's been going right in this grisly (or would that be grizzly?) market.

When the Blue Chips Are Down:Signal Securities, Division I

Jerry Singleton, president of Signal Securities, Inc., based in Ft. Worth, Texas, acknowledges that the market over the last two years has been "crummy. I could use stronger words, but you can't print 'em," he says. Despite that, however, Singleton says that Signal has had very few unhappy customers, which he attributes to the company's having done "the right things" from the outset. Most clients, he says, are in long-term balanced portfolios that have not needed many adjustments. That has "reaffirmed our long-term balanced financial planning strategy that we've used from day one," he points out. Client accounts are down, he acknowledges, but nowhere near as much as the market. "It's been a matter of reevaluating and deciding that where we are is where we want to be, and just waiting for all this muckety-muck to pass."

One way that Signal has coped with the one-two punches of a bear market and the September 11 disaster is to focus on "service, service, service," says Singleton. It is the answer to the question put to him by competitor friends, who he says ask him how Signal merits such confidence from its reps. Signal has moved to lessen the paperwork load for reps by putting forms on the Web, paying commissions and fees electronically, and reducing overall paperwork requirements. The company has also begun an education initiative for reps whose practices are within 60 miles of the Signal home office in Fort Worth, holding bimonthly meetings on new products as well as education on issues like tax law changes. Singleton says the meetings are very popular.

It may be unusual to increase staff during difficult times, but Singleton says Signal has done exactly that. One example: adding a fixed income specialist for reps whose clients want to invest in vehicles like brokered CDs and other fixed income products. In this market, the specialist is a very busy guy, says Singleton. Signal also has insurance specialists and an asset allocation specialist, so that representatives have another educated opinion and a person to stimulate a marketing idea or help with a particular client concern.

Providing access to senior management has always been a priority, Singleton says. "We take the representatives' calls, and we return them," he says, even though the skittish market and the concerns prompted by 9/11 saw an increase in the number of calls from reps looking for "reassurance." Singleton explains that many of Signal's reps are one- or two-person offices, and at times they tend to feel more isolated than if they were working in a wirehouse bullpen.

Will Signal be changing in the future? Yes and no, says Singleton. "While you can't ignore this market and the trauma associated with it, it really hasn't changed our business model or our plans, except to make it a lot more defensive in nature," he says, adding that young people have never seen a market like this. But one thing he'd like to do is raise awareness within the business community of Signal's existence: "most of our people have come to us through referrals." Singleton would like Signal to get wider recognition and thus attract more new reps. With a sixth win as B/D of the year, can that be far behind?

NEXT Time: NEXT Financial Group, Division II

Jeff Auld, president of NEXT Financial Group, Inc., of Houston, is delighted with his company's second victory in a row. "I know of no other firm," he says, "that is actually owned by its reps. For people who are independent--and many reps are fiercely independent by nature; they're entrepreneurs--this kind of independence is extremely appealing." At least half of NEXT's reps are shareholders, he says, but whether the reps are shareholders or not, they have a voice in the company. "We create committees to provide input and direction on a number of issues: services, acquisitions, technology." Those committees help to keep Auld and the NEXT board in touch with reps.

But independence isn't the sole attraction of NEXT, according to Auld. Simple steps, such as returning phone calls, are one way the home office staff keeps reps happy. In fact, says Auld, reps who have come to NEXT from other firms say those returned calls are one of the company's defining characteristics.

Cutting costs for reps is a goal, too. Auld says that NEXT tries its best to reduce costs for reps, pointing out that it was recently able to get a decrease in transaction charges from its clearing firm. "Our firm has grown tremendously in the last two years," says Auld, "and [trading] volume has grown. Our clearing firm felt justified in reducing individual ticket charges in some areas. We passed 100% of those reductions on to reps."

In fact, any fees charged to reps by NEXT, whether they are licensing, E&O, technology-related, or ticket charges, are passed on to the reps at NEXT's cost, claims Auld. "I don't know of any other firm that doesn't have a markup built into its transaction charges."

NEXT also expends much time and effort in evaluating software packages of possible use to reps, Auld says, including asset allocation software. When the results are in on various products, the committee responsible for evaluations makes its recommendations, and then the firm approaches the software companies to negotiate discounts for its reps. Those discounts can be hefty, whether NEXT provides assistance in marketing the software or simply guarantees the sale of a certain number of units; either way, reps benefit, says Auld.

For an interesting twist on compliance, Auld offers the story of NEXT's compliance officer Karen Eyster. "She has a goal of turning around an ad the same day," he says, and usually she is able to approve new ads within a matter of hours. Seminar materials and adult education classes might take a bit longer, but she turns around less complex items such as business cards and invitations the same day. "Many think it's remarkable," he says, "and we almost forget how neat it is" because that is how efficiently she works. NEXT held an annual meeting in April, he says, and at one point in the meeting a new rep stood up and introduced himself, explaining that he'd come to NEXT because he'd "read about us and I'd come out and talked to him," says Auld. But what really sealed the deal, the rep said, was that he had spent an hour on a conference call asking questions of Eyster. It was that strong impression of Eyster that finalized the rep's decision to join NEXT. Auld says he's heard of many instances where a rep had left a firm because of a compliance officer, but he's never heard of someone joining a firm because of a compliance officer.

Take Nothing for Granted: Commonwealth Financial Network, Division III

Joe Deitch, chairman and CEO of Commonwealth Financial Network, based in Waltham, Massachusetts, says that just because Commonwealth has won Broker/Dealer of the Year so many times (eight), it doesn't mean the company doesn't take it seriously. Over the years Deitch says he's made it a habit to follow the ups and downs of major companies, and if there's one thing he's learned from watching all the "hallowed names" that go out of business or fall on tough times or make a disastrous move, it's that "our fate is not guaranteed and we have to earn it every day. We take nothing for granted."

Deitch argues that there are very few companies who understand the importance of service. Whether a dry cleaner or a grocery store or a broker/dealer, he says, "we live or die by the quality of service." What it takes to provide great service is for the company to encourage its employees to do more and to go further. "People want leadership to say, 'We want to be terrific. We want you to be great. We want to be better than everyone else.'" Employees, he says, want management to allow them to unleash their passion and their talents. For Deitch, it's a mystery why so few companies provide that encouragement. Other broker/dealers, he says, may have conflicts of interest because of proprietary products, or have to make quarterly numbers as a public company. Deitch argues that such compromises will come back to haunt the company. By contrast, Commonwealth, he says, encourages its employees to do their utmost. "There are 220 people in the home office who invest their hearts and souls every day into Commonwealth and the reps."

Practical matters also play a large part in Commonwealth's success, Deitch argues. The company has created form letters, says Deitch, that reps can use with their clients. Commonwealth has enhanced its Web site for use by advisors and clients. The company offers continuing education classes for reps and has a Web marketing forum where advisors can "compare notes and tap the minds of some of the best and the brightest in the industry."

Two other areas Deitch mentions as offering additional value to reps are lower prices on asset management services and research bundles. The company has also increased its marketing and technology budgets despite the current economic climate.

Efforts to keep reps' morale high are a big goal for Commonwealth, too. The company began an "Indispensable" program last year designed to make the home office staff's services "indispensable" to reps. The initiative became even more important after 9/11, Deitch says, since Commonwealth wanted its reps to think of their relationship with the home office as an "oasis of sanity and dependability at a time when people felt that the sky was falling."

"Someone once said to me," recalls Deitch, "that people either grow or they die. The thought was that it's virtually impossible to stay in exactly the same position that you're in. You're either going to diminish or keep getting better. So we're going to keep getting better."

Bigger Is Better for Smaller: FSC Securities Corp., Division IV

One of the advantages that Atlanta-based FSC Securities Corp. offers its reps, says President Joby Gruber, is size in the form of its ownership by AIG. "There was a flight to safety following September 11," points out Gruber, "and AIG is one of the firms that has received the highest credit and debt ratings in the industry. If you have a client watching all these companies fall apart, and you can walk in and say that you can tap into AIG's financial safety and strength, that's great." There is an added deep-pockets factor, he thinks; with the backing of a company the size of AIG, FSC can offer specialty services that a smaller operation just can't.

Yet if you ask Gruber to list the main factors responsible for FSC's success, the one he keeps coming back to is that FSC recognizes that its reps are small business owners. With that in mind, he says, FSC provides its reps with certain services (not all of them intuitive) that help them to succeed as small business owners. For instance, he says, rather than creating a human resources manual for his practice, a rep can come to FSC and have one created for him, since FSC has the legal manpower on staff to do so. Or if a rep is contemplating moving from one location to another but has no real estate expertise, FSC is working on a resource where the rep could go online or call an 800 number, type in a Zip code and the type of property he wants, and be given a list of rents for the desired properties so that he knows what to expect.

Gruber thinks FSC's technology offerings also set it apart, citing ServiceNet, a client management system that allows reps to go online and request client account updates or account corrections, for instance. Particularly for reps on the West Coast, these requests are often taken care of during their off hours so that by the time they're back at their desks in the morning their requests have been fulfilled.

There's also an e-mail news group for the OSJs (offices of supervisory jurisdiction), says Gruber, that functions much like an instant messenger service. All 400 OSJ offices use the service, allowing the home office to keep its finger on the pulse of the field. "If the reps see something they don't like, trust me, that afternoon it is sitting on the system. It allows us to go back and respond," Gruber says.

Paying commissions on a weekly basis and offering a deferred compensation plan--the latter being one of the perks of a large organization, he points out--are two more benefits that FSC offers reps.

"I've been here for 18 years, and I can't imagine working anywhere else," Gruber says. "The firm is grounded in doing what's right for the producer. It doesn't mean we always execute it that way, but our hearts are in the right place. When people walk in here it's refreshing to them. It feels more like home than a business."

Top of the Heap

Such efforts to survive and thrive in more than two years of a tough bear market punctuated by the terror attacks of 9/11 tell a lot about the winners and the way they look at their businesses and strive to service their reps. The efforts of 2002's Broker/Dealers of the Year to help their reps survive in tough times have been appreciated, according to the voting. It will be interesting to see what our laureates do for an encore.

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