Now that we're in the fourth year of a bear market, it's getting more and more difficult for broker/dealers to make a buck. Data culled from Investment Advisor's annual directory of independent broker/dealers (which begins on the following page) confirms the bad news. There are many ways to gauge the health of the industry: gross revenues, fee revenues, gross per rep, excess net capital, and, of course, profitability. But one of the clearest signs of a B/D's health is whether its rep force is growing or contracting. Of the 66 B/Ds who completed our detailed questionnaire, 46 lost reps during the past year, and only 12 posted greater than a 10% jump in reps (see table on page 65).
One of the smallest B/Ds in the survey, GBS Financial Corp. in Santa Rosa, California, saw its rep force grow nearly 20% over the past year, from 46 to 55. President and CEO Dan Gloisten says nearly all his new reps were wirehouse refugees. "There's tremendous pressure being put on those brokers to increase production or push proprietary product," says Gloisten, himself a former Wall Streeter who founded GBS 21 years ago. It's not the biggest producers at the wirehouses nor the smallest producers who are attracted to GBS, Gloisten says, "it's the guy in the middle who's under pressure--they seek us out," noting that GBS can afford to be picky about who it adds to its roster: "only one in ten" who seek affiliation are accepted.
On the other end of the size spectrum, another B/D with growth in reps over the past year was LPL Financial of San Diego, which had a 12.2% increase, to 4,600 reps.
LPL chairman and CEO Todd Robinson argues that his company's success can be attributed in part to the $100 million he says LPL has spent on technology. That investment has helped build "a seamless interactive back office," and that "it's the blocking and tackling that at the end of the day makes a difference" to the rep and the client.
"Our focus has always been that these independent financial advisors are our clients and we need to earn their business every day," Robinson says. Since "a lot of senior management started out as IFAs," they know what the rep needs to be successful.
Management at NEXT Financial Services in Houston takes that concept a step further. "Our structure and ownership has made us very attractive" to prospective reps, says President Jeffrey M. Auld. Anyone who wants to become part-owner of the firm--reps and home office staff included--can do so through a stock purchase plan, regardless of their longevity with NEXT or their amount of production. While a majority of the reps haven't bought stock, Auld says "they like the fact that it is reps who own the firm," since management is more likely to focus on keeping the owner-reps happy. In fact, Auld notes that he reports to his board, which is composed solely of producing reps. "Reps who come from an independent B/D now owned by big insurance companies see that management's priorities have shifted to those of the insurance company," he says, which he argues militates against the natural "fierce independence" of most reps, who tend to "resist pressure to conform to a specific strategy or selling a specific product."
When Numbers Are Misleading
While increasing your rep force is usually a sign of a B/D's health, a decrease doesn't necessarily indicate weakness, according to Roland Brecek, president of Brecek & Young Advisors in Folsom, California. Brecek says the B/D made a decision to cut 125 reps during the first half of the year who were "below or near our minimums." (BA had 456 reps as of May 2002; it reported 363 this year). "It's also a litigious time period," Brecek notes. "We don't want to work with representatives that are desperate to do business, or do business only occasionally. They're more likely to make mistakes and more likely to misrepresent the product."
Gloisten says that while stocks account for the bulk of his business, some of his reps are offering separate accounts, and a few are offering hedge funds. But Brecek says his firm stays away from "exotic" investments. "We tend to be more conservative because we're seeing too much exposure." But even sticking to traditional products, Brecek forecasts a 20% increase in revenues this year.
A Golden Era on the Horizon?
Larry Papike is president of Cross Search, a B/D recruiting firm in San Diego. But he also founded Sentra Securities in 1981, and his research into the cultures of different B/Ds gives him a unique perspective.
"Service is still the number one issue for brokers," he says, noting that in the difficult market environment of the last few years, the "last thing" a broker wants is to have the home office botch a customer order. After service in order of importance comes the right products, but Papike agrees with Brecek that brokers are less interested in "esoteric" investment vehicles such as hedge funds. In fact, Papike thinks that the Wall Street scandals and the bear market is leading broker/dealers to shy away from alternative investments, since if those riskier investments don't deliver, it's the party with "the deepest pockets," the B/Ds, that will be held liable.
Papike is resolutely optimistic about the future of the independent B/D industry. "The wirehouse and regional firms have lost their luster," while better, cheaper technology has allowed the B/Ds to offer the same online reporting and account aggregation services that the wirehouses do "without the push of proprietary products, or quotas, or silly meetings."
Papike believes the industry is at the cusp of a new golden age. "The growth that's going to take place over the next five or six years is going to be amazing." If he's right, and if the markets return in that same time period, there will be quite a renaissance for independent B/Ds.