From the September 2004 issue of Investment Advisor • Subscribe!

All Hail the Victors!

In a discussion of any vote held during a Presidential election year, it's hard not to compare that contest with the Presidential one. In that light, representatives rating their broker/dealer in Investment Advisor's 14th annual Broker/Dealer of the Year balloting enjoyed many advantages over the American electorate in 2004. For one thing, IA readers have more than two viable candidates to choose from--59 broker/dealers received at least one vote this year. Independent broker/dealer representatives can't be easily separated into parties, either: They think for themselves, are not shy in sharing their feelings--especially the negative ones--about their broker/dealers, and they're not averse to voting with their feet when it comes to leaving one B/D for another. So B/D management walks a tightrope--they rely on their reps for revenue and profitability, but know that good reps' first loyalty is to their clients and their individual practices, so management must continually earn those reps' hearts and business.

There's another difference to note: while turnout for Presidential elections has been falling for decades, more voters than ever are participating in the Broker/Dealer of the Year. This year, B/D reps cast 4,879 valid ballots by fax, snail mail, and at www.investmentadvisor.com, or 1,032 more than in 2003, as reported by Research Editor Liana Roberts, who again this year faultlessly coordinated tabulation of the votes.

The winners are as different from each other as night and day in many ways. Three of the four have won multiple times before, but Russ Diachok, president of Geneos, the Division 1 (fewer than 200 reps) Broker/Dealer of the Year, has no reason to apologize for never having won before: the company only began operations in August 2002. Division II (200 to 500 reps) NEXT Financial, led by President Jeff Auld, may be a few years older, but its unique ownership structure (more than a third of its nearly 500 owners are shareholders) and rapid growth sets it apart. Sigma Financial has now won Broker/Dealer of the Year Honors in three different divisions, this year in Division III, reserved for B/Ds with between 500 and 1,000 reps. It's also the seventh time President Jerry Rydell's firm has won--eight counting 1991 through 1994, the first four years of the award when we didn't separate the winners by size but simply listed the top five or six vote getters. Then there's FSC Securities, the winner in the largest category, Division IV, which covers B/Ds with more than 1,000 reps. As a member of the AIG Advisor Group, FSC is far from small, but its voting reps seem to agree with President Joby Gruber's characterization of FSC as an "entrepreneurial firm in a corporate wrapper."

Following are profiles of the winners and their leaders, along with some other data from the polls. Those broker/dealers who failed to reach Olympian heights this year should be consoled. Unlike the Presidential hopefuls, they can vie again next year.


Division I

Geneos Wealth Management

The New Kid, Sort Of

Geneos may only be two years old, but its principals--like russ diachok--are pros who understand what reps want

Unlike the award winners in the larger categories that follow, the B/D voted top dog in Division I this year is a newcomer both to the IA poll winners' circle and to the broker/dealer industry in general. Founded a mere two years ago--in August 2002--Denver-based Geneos Wealth Management garners top marks among its reps for communication with the home office, for the timely payment of commissions, and for the quality of its management team.

Frank Leyes, an Indianapolis-based rep who switched to Geneos a year ago from LPL, says he was particularly attracted to the firm's business model, which is small by design and tailored to experienced, high-producing reps. Reps with less than $100,000 in gross dealer concessions need not even apply, but reps who surpass that threshold have the opportunity to become part owners in the B/D through direct stock purchases and stock options offered to them on the basis of their production levels. "I was attracted to the potential to be a part owner in the broker/dealer I am helping to build," says Leyes. Ten percent of the B/D is currently owned by reps, says Russ Diachok, founder, president, and CEO of Geneos; by 2009, he expects that figure to reach 40%.

Like many of his Geneos colleagues, Leyes also praises the firm's home office for its excellent communication and willingness to help. "On more than one occasion, I have received a personal phone call from Russ Diachok, just proactively checking in to see how I'm doing," he says. The compliance department makes an effort to work with reps, rather than creating obstacles for them, he says, and they review reps' materials promptly. In addition, not long after he affiliated with Geneos, he asked the home office if they would consider working out a discount with Morningstar for the Advisor Workstation software application. The B/D sent out a survey to gauge other reps' interest, then promptly proceeded to work out a deal with Morningstar to offer a discount on the software. "This one issue saves me over $2,500 per year, so I greatly appreciate it," he says. Leyes says he hopes that Geneos will continue to invest in its technology offerings, and would especially like to see a link built that would allow the automatic downloading of data between Advisor Workstation and StatementOne, the account aggregation software provider.

Ron Miller, a rep in Grand Rapids, Michigan, made the leap to Geneos only three months ago, in part because the firm offered "a much more attractive payout" than he had received at his previous firm. He's generally impressed with the level of service he's received from Geneos, and he expects that it will only improve as Geneos fills out its home office staff. "They are doing a great job with the staff they have," he says, "and I think service will improve as the staff grows larger."

At present, Geneos Wealth Management has 23 home office staff members serving 180 reps. Thanks in part to the growth of the rep force, gross revenues are expected to jump from $5.6 million in 2003 to a projected $20 million in 2004, and fee-based revenue is expected to increase from about $800,000 to a projected $5 million in 2004. But the increases can also be credited to greater revenues generated by each rep: While the average gross dealer concessions per rep were $75,000 in 2003, they're expected to reach $111,000 in 2004.

Russ Diachok says he believes that many reps are attracted to the quality of the broker/dealer's management team, which boasts a great deal of experience for a fledgling B/D. "My father (George) and I were the founders of Multi Financial, which we sold to ING in 1998, and then we left in early 2002," he says. "All of us have been with other B/Ds in the past, and our staff comes from varied backgrounds, so we have a very high-quality management team."

As he looks toward the future, Diachok says the firm will concentrate on increasing the firm's assets under management by helping reps make the transition to a fee-based business model. "We're really embracing the assets-under-management philosophy," he says. "We have several proprietary platforms that we make available to the reps, and we also have a very large menu of third-party money managers that our reps can utilize." About 25% of the firm's income comes from fee-based programs. -- Karen Hansen Weese


Division II

Next Financial Group, Inc.

Owner-Reps Vote for Themselves

Jeff Auld works hard to serve his growing number of Representatives at Next. those reps apparently appreciate the effort

When advisor Clive Cholerton of Boca Raton, Florida, heard that his broker/dealer was filing for bankruptcy in 2001, he found himself in the "worst possible situation anyone could imagine." Having to move quickly, Cholerton booked four separate flights to check out potential replacements. "NEXT Financial was second on the list, and after that meeting I cancelled the other two trips," he says. "I knew what I wanted and NEXT had it."

For four consecutive years, Houston-based NEXT Financial Group, Inc., led by President Jeff Auld, has received the Investment Advisor Broker/Dealer of the Year award in its division. In 2001 when NEXT earned its first award, it was home to about 160 representatives and it had gross revenues of just over $11 million. In 2004, Auld expects the firm's revenues to exceed $37 million, and as of August 1, it housed 500 representatives, a third of whom are NEXT shareholders. That news may prompt both joy and concern among NEXT's rivals for Broker/Dealer of the Year--if NEXT is over the 500-rep level by voting time in mid-2005, it will move up from Division II to Division III in the balloting.

Exuberantly humble would be the only way to describe Auld's reaction to the firm's latest award. "It's gratifying to see how excited the employees get each year when we win this. Nobody seems to be taking it for granted," he says. "The reps don't fill out the surveys because we ask them to. They do it because they really care about this place."

Illustrating that care is Kay Brown of Selma, California, who joined NEXT 18 months ago. In looking for a new B/D, she said she had very high standards: She wanted a conservative, smaller firm that was still flexible enough to support her needs. "They have a very strong sense of ethics and to me that is extremely important, especially after the debacles of the last three years," she says. "This is a very lonely business. We are with our clients all the time but may not have relationships with other representatives," Brown notes. At NEXT, however, "there is a sense of family." The principals encourage cohesiveness within the firm and maintain a strong level of integrity, she says: "I like that."

NEXT was praised particularly by its reps in the 2004 Broker/Dealer of the Year balloting for its payouts, product list, and compliance efforts, but Auld says there haven't been any major changes in the last year in any of those areas. "We've simply maintained the philosophy of putting our representatives' needs first," he says.

Over the last year, Auld says NEXT has added to its support staff and increased its recruiting staff from two to six people, but" we also have recognition activities to keep [current staff] focused."

With many broker/dealers there is a certain amount of pressure put on its representatives to sell proprietary products, explains advisor Glenn Wiggle of Williamsville, New York, but that hasn't been his experience at NEXT. Being able to own stock in the company and have a voice in its direction is what attracted him to join NEXT five years ago, he says. In weighing whether to affiliate with NEXT or another firm, Wiggle noticed that most of the other firms "were either owned by a larger insurance firm or a brokerage house, and you have the problem of proprietary products being forced down the pipe; or they were owned by one or a group of individuals who were padding fees to generate additional revenue for the one or few actual shareholders," he says. "With NEXT, I am an individual rep with a firm that caters to my needs and has me share in the process and the management of the company."

At its current rate of growth, Auld hopes NEXT will have 1,000 representatives in the next several years. "We are going to take advantage of the momentum that we have, the interest in the firm, and continue to expand." But no matter how large NEXT becomes, Auld says the decision is not ultimately up to him. "Our representatives own this firm and will decide how large NEXT will become. If they feel our size has become too large and is negatively impacting our level of personal service, then they will direct me to change that objective. But for now, we are going to continue to grow as rapidly as we can manage it." --Megan L. Fowler


Division III

Sigma Financial Corp.

Not How You Start, But How You Finish

Sigma financial has come a long way since it was one of the first B/D of the year winners. But president jerry rydell says the firm still does the little things right

Jerry Rydell's Sigma Financial may have won the Broker/Dealer of the Year competition this year among B/Ds with between 500 and 1,000 reps, but it's not necessarily because he ran the fastest race. "Maybe it's a little quirky," he says, "but we've always used the analogy of being the fast turtle. We're not always the first one out of the box with an idea, but we're always focused on finishing the race, being financially stable as a broker/dealer, and planning for the next 20 years."

This year, the firm's representatives gave Sigma Financial Corporation of Ann Arbor, Michigan, top marks in 10 out of 14 service categories and applauded the broker/dealer as best in overall performance and service. This marks the eighth time since Investment Advisor began the B/D awards in 1991 that Sigma has grabbed the gold. Although he founded the company, remains the sole owner, and serves as its president, Rydell gives the credit for all those wins to those around him. "I'm very proud of our staff and their daily consistency," he says with obvious pride. "We really stress with our staff and our management team that they need to do the little things every day. They're all important."

As Rydell knows, equally important is how well you do those little things, and that's where the people at Sigma and the personalized service that they offer comes into play, according to reps.

"They're a pleasure," says Cecile Vogler, a Sigma rep in Cincinnati for more than 10 years, of her experiences with the B/D. "Because it is a smaller broker/dealer, I feel I get much better service from the back office. When I price trades, or when I have questions about managed accounts for my clients, I get the same person who knows who I am, and who my clients are."

The assurance that Vogler gets from being known by the back office staff stems in part from Rydell's desire that all the firm's reps should feel like Norm Peterson on Cheers, whose appearance was always greeted with a loud chorus of, "Norm!" That inspired Rydell when he founded Sigma Financial in 1983, the year after the long-running TV sitcom made its debut. He uses the closing line from the Cheers theme song, "You wanna go where everybody knows your name..." as a headline on his company's Web site. "It's not just a slogan," claims Rydell, "it's an attitude that's been internalized within our whole group's activities."

After the events of 2001, when the financial services industry was contracting and consolidating, Sigma expanded by adding staff to its case help and tech support departments. "Industry surveys and studies that I saw showed that after the WorldCom/

Enron/MCI debacle, clients said they weren't being called. I thought it really created an opportunity for a rep to go out and offer advice to clients who had these unfortunate investments. We probably increased the case help department by 50% because we wanted our reps in front of clients, not in front of computer screens. Reps don't need their broker/dealers in good times."

The personalized service that Rydell insists that Sigma offer its reps includes plenty of training and a variety of tools, including an integrated program called Systems for Success. It includes a marketing component, financial planning software, and asset allocation modeling, as well as proprietary software that combines tracking of regulatory requirements with a client communication function.

"The industry has become somewhat of a commodity in the sense that everybody is offering the same products," explains Rydell, "and I think that's why we have the opportunity to continue delivering personalized service." The challenge that he has identified for Sigma is helping reps easily integrate all the different services that the firm offers into their practices. "We look at everything as a joint venture and know that if we can help our reps increase production and achieve their goals, we're going to get our share.

"I really have a good sense of the difficulty [of being a rep] and what it takes to find clients, work with them, and maintain that business," he continues. "We really understand what our reps are going through. That's core to our culture."

It's certainly something that's been important to Michael Crowe, a Sigma rep in Springfield, Virginia. He's been with Sigma for about four years and has experience with several other companies. "One of things I like most about Sigma is that the CEO is still a producer. That's so rare these days. So many other firms are headed by executives who have no idea what it's like to be out in the field," says Crowe. "I can't emphasize that too strongly, it's just so important that a firm understand its producing agents. There's a disconnect from that with every other firm I've been with."

The challenge for Rydell and Sigma Financial is to stay true to the principles that have brought them so far. "While we feel we have very good personal relationships and communicate very well with people, that is still the primary challenge," says Rydell. "As we grow, we don't want to lose that very personal touch." --Robert F. Keane


Division IV

FSC Securities Corp.

The Advantages of Size

Yes, FSC is part of a much bigger company. No, that doesn't mean it isn't rep-centric, says Joby Gruber

ameron Bell was leery about AIG acquiring FSC Securities. As an FSC rep, he worried that being owned by a huge financial services firm meant that his concerns would fall on deaf ears or that he'd spend hours on the phone being bounced from one person to another to get a question answered. But it turns out that both of his fears were unfounded. FSC "has stayed true to form in that it listens to our operational concerns and acts upon them as best as it can," Bell says. And "when I need to get stuff done, there's only one person at FSC that I need to call."

Bell isn't the only rep that's pleased with the AIG/FSC merger. The proof? For the sixth year, FSC reps have given the broker/dealer the nod as best in its class in Division IV. FSC reps say the marriage between FSC and AIG is good for business, but outsiders still mistakenly believe that FSC is a "parent-company-run broker/dealer," says FSC President Joby Gruber. To the contrary, Atlanta-based FSC is a "broker/dealer run by the reps," he says. FSC likes to say that it's "an entrepreneurial firm in a corporate wrapper."

Gruber is quick to point out that FSC operates "based on feedback that we get from its field of reps," either through the firm's field advisory board or via a Yahoo! instant messaging service that allows reps to share their questions and complaints. "Every one of the other 400 branch managers affiliated with FSC can see [the messages] and choose to respond," Gruber says. Senior management--Gruber included--along with other staff members can view the messages as well, which "gives us an opportunity to know instantly what's happening--what we are doing well, and what we are doing that's totally screwing up [a rep's] world."

The feedback FSC receives helps the B/D provide the tools reps need to become better business owners, Gruber says. For instance, FSC can leverage AIG's resources and provide its 1,700 reps with discounts at stores like Kinko's, Staples, and UPS, which help reps reduce their operating expenses. "Given the size of AIG, there are resources that we can bring to bear that a smaller organization can't," Gruber says. "We have the strength and power of the eighth largest company in the world to support the things that our field force needs." Reps are also offered a deferred compensation plan, so that they can "take a part of their earnings and defer it for tax purposes," he says. FSC also pays commissions on a weekly basis, Gruber says, which provides reps' small businesses with a steady cash flow.

Helping reps' businesses run smoothly also means providing them with cutting edge technology. That's why FSC is working to ensure that its technology allows reps to "spend more time working on their business and less time operating it," Gruber says. FSC has a system that allows reps to go online "to make a request for just about anything" so that they don't have to call the home office, he says. "I don't want the reps calling the home office because every time they're on the phone with someone here, that means they're not in front of one of their clients."

Compliance is also an issue for small businesses "that's here to stay," Gruber says. So a rep's B/D must be "in a position to help [the rep] run his business successfully," he says. One of the most important questions a rep should ask, says Gruber, is whether the B/D has the proper amount of E&O insurance. "A corporate policy at a small B/D might have a maximum $2 million worth of E&O coverage," he says. "So one $2 million case totally takes out the policy." Because FSC is owned by AIG, its E&O coverage is "20 times" the size of that $2 million policy.

Planner Bell says he gets the most help from his FSC regional business manager--a position he says is rarely offered at other B/Ds. "I don't have to waste time going through a bunch of different departments," he says, because "there's one go-to person that gets things done." The regional manager also tells Bell about FSC services that he may not have known about.

Bell also likes FSC's Insurance Services Division (ISD), another service he says is hard to find at most other B/Ds. Bell is looking to help business owners with their insurance needs, and "ISD is a resource to help me get there," he says. "I think that a lot of reps are missing out on doing comprehensive planning if they don't have a strong insurance background. FSC gives me that."

For James Kettwig, a planner with Diversified Financial Group in Owatonna, Minnesota, the best part about being an FSC rep is that the B/D allows him to maintain his independence. "I like the fact that [FSC] lets you be the entrepreneur that you want to be," he says. Another plus, says Kettwig, is that FSC has "great back-office support and their due diligence is the best in the industry." --Melanie Waddell

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