With the forecast for Santa Monica last October 15 showing pleasant skies and a high temperature near 70, the pool at the historic Fairmont Miramar Hotel was beckoning. But for the three dozen independent advisors affiliated with Royal Alliance Associates, work would just have to substitute for a California tan.
Summoned to the posh coastal retreat by CEO Mark Goldberg, the advisors, all of them ranking among Royal's heaviest hitters, would spend the next three days facing tough questions from company executives and industry experts about their business management skills. "I took out my plan, put it on the table, and had it field-stripped and put back together again," recalls Nathan Bachrach, a Royal Alliance rep and CEO of The Financial Network Group in Cincinnati.
Unlike many broker/dealer conferences, which are intended more to reward top-performing reps with a fancy resort getaway and golf than subject them to long hours working indoors, this program was all business. Attendees even paid their own transportation and hotel bills, as they might for a meeting of the FPA. But this was not just any advisor meeting. The session also marked an ambitious effort to shift Royal's and its advisors' strategies. The object of the effort is the OSJ (for office of supervisory jurisdiction) manager, a position that Goldberg views as the key to Royal's future success.
Many independent reps see their branch manager as just another practicing advisor, or sometimes a home office executive, who also serves as a compliance cop for a small share of everyone's gross revenues. However, the OSJ manager's role can and should be much broader. In the independent B/D world, where OSJ managers tend to be advisory practice proprietors as well, the challenge is to turn them into true business managers. "Any successful advisor today has employees and manages office space, time, and talent," observes Commonwealth Financial Network CEO Joe Deitch. "If they don't realize that they are business managers, they will limit their success."
According to an unpublished study by John Bowen, Robert Niederman, and Jeffrey Roush of the consulting firm CEG Worldwide, the industry's most successful managers also grow their practices through savvy marketing support and aggressive recruiting of new reps, while at the same time deemphasizing the time they spend serving their own clients' financial needs. To a great extent, notes Bowen, these ?bermanagers are creating "mini broker/dealers in a B/D," managing firms with seven-figure revenues and boasting a dozen to as many as several hundred reps. The overall independent B/D industry, by contrast, currently averages a little less than two reps per manager.
It is Goldberg's desire to refashion Royal's business around a network of such large managers, both to increase the AIG Advisor Group unit's revenues and its efficiency. The goal is not universally accepted: CEOs of several other independent B/D firms say they have no plans to cut back on recruiting individual reps or to change the way they supervise advisors. But Clearwater, Florida-based headhunter Mitch Vigeveno notes that other insurer-owned broker/dealers are striving to "build an organization, and they don't want to do it with a lot of Mickey Mouse offices with two guys doing $100,000 [in gross annual revenue] apiece." Royal, of course, is owned by insurer American International Group, although AIG seems to be content with giving its B/Ds considerable independence.
The campaign to change Royal's course dates back to October 2001, when the nation and stock market were still acutely feeling the pain of the 9/11 terrorist attacks. At the time, says Goldberg, "we made a decision. Instead of trying to recruit one rep at a time doing $100,000 or $150,000 [in revenue], we were going to take our branch manager system and help them recruit." Moreover, the focus would be on profitability as well as on revenues. "A [large advisor] firm that is struggling to make $100,000 is destined to cut corners," Goldberg worries. "It requires high service and attention levels from the home office and tends to be the practice with the most complaints."
Royal's strategic shift has led Goldberg to cull smaller advisor shops from the ranks. Some other B/Ds still go after reps with annual production of as little as $50,000. But Royal, whose $340 million in estimated 2004 revenues make it the third-largest independent broker/dealer in Investment Advisor's annual industry directory, since 2004 has been concentrating on solidly profitable larger advisor groups generating at least $1 million a year in fees and commissions. The result: a drop in the total number of Royal's advisor shops to 290 in December, from 334 in 2001, even as average gross dealer concessions per rep have nearly doubled, to $171,000. Goldberg sees the tally falling to 275. The number of Royal reps, meanwhile, has declined about 13%, to some 2,100, over the past three years. "We have a lot of one- or two-man practices who can't do this [$1 million target]," Goldberg says. "They'll either have to join another practice, grow their business, or leave."
Where profitability and efficiency are concerned, size does appear to matter. In a project commissioned by Royal Alliance, CEG last year surveyed 536 OSJ branch managers at wirehouse and independent broker/dealer firms around the U.S. While a third of the managers reported pretax net income for 2003 of less than $100,000, only 19% of the managers brought in more than $300,000. But the average income for this upper-bracket group was a whopping $567,000 in 2003 and an estimated $794,000 for '04. In the independent B/D world, these fortunate few tend to be advisory practice entrepreneurs--the ones who pay the bills and shut the lights off at night. Some also supervise other independent reps who work in small offices and are willing to pay another advisor 4% to 6% of their revenues for oversight. However, what is most surprising about the high-income group is what they don't do.
According to CEG, these high-income advisors devote so much time to building their businesses that, on average, less than 6% of their firms' revenues come from their own time spent advising clients. By contrast, OSJ managers earning less than $100,000 devote themselves almost exclusively to their clients. More than 71% of their firms' revenues come from the managers' own production.
While the study showed that the vast majority of managers of all income levels are interested in recruiting other advisors to help build their business, there were clear differences in strategies between those at the high end and their smaller competitors. For example, high-income managers overwhelmingly troll for prospects at wirehouses and regional brokerages, where many larger advisors tend to work. Managers at the lower end of the income scale tend to recruit among other independent B/Ds and insurers, which many high-end managers eschew. Almost no one at the high end goes outside the financial services biz for recruits; more than 15% of lower-end managers see newbies as promising fodder.
Higher-income managers also say they need a more specialized approach from their broker/dealer. To be sure, nearly every manager at all income levels likes the idea of a B/D providing financial incentives to help convince reps to jump ship. But while low-end managers say they need their B/D to help them with basic product training, high-end ones favor lessons on working with more advanced products. A substantial minority of high-end managers--22%--also wants their B/D to help them forge strategic relationships with accounting firms that are not currently competing with them in the planning field.
There is also a clear divide in practice management strategies between financially successful advisors and those earning less. For example, the higher-income managers gravitate toward retirees, small business owners, and corporate executives as clients--the ones who would probably respond best to a wealth management strategy. Lower-income managers, on the other hand, have practices that are heavily skewed toward average employees and those contemplating retirement--individuals who probably have smaller portfolios and less complex planning needs.
The differences also show up in the way managers support their reps. Only 10% of low-income managers think that they need to provide marketing assistance to reps. But nearly three-quarters of those at the high end see this as a top priority. "I have always provided marketing machines to advisors," notes Kevin Myerhoff, a Royal rep in Mayfield Heights, Ohio, whose firm, NCA Financial Planners, has 10 reps and $500 million in client assets.
Marketing is not the only business-building strategy high-income managers pursue. Seventy-eight percent help solve problems reps have with financial product firms; nearly 70% devote equal effort to untangling problems with their B/D. Lower-income managers, perhaps because of their emphasis on serving individual clients over their firm, devote considerably less effort to problem-solving.
The gap in practice management strategies between high-end and other OSJ managers, of course, is what drew Goldberg to bring the advisors together in Santa Monica. By some measures, Royal's top OSJ managers, or managing executives in company parlance, are doing nicely. According to figures provided by Royal Alliance, the 34 managing executives at the conference netted nearly $500,000 apiece, on average, in 2004. While this puts them behind the $794,000 that CEG estimates the industry's most successful managers netted, they are still well ahead of the bulk of the industry. Top Royal managers rank with their high-income peers elsewhere in the industry in their focus on such typically wealthy client groups as retirees, professionals, entrepreneurs, and those receiving inheritances. Yet the system could use improvement, at least in Goldberg's view. More than 60% of Royal's recruiting is now done by its independent managing executives, rather than by the brass from the home office in midtown Manhattan. But Goldberg believes that his managing executives still need to "make a commitment to change their businesses--to meet a goal." Toward that end, he set into motion in Santa Monica a process that he expects to gain momentum as 2005 progresses.
At the Santa Monica meeting, managers were asked to make written commitments to improve their businesses in specific ways. Goldberg and several other senior Royal executives each took responsibility for a group of four or five managers, who agreed to post on an internal Web site their strategies and progress for the group to review. Among the commitments the managers made were to develop formal plans to build alliances with attorneys and CPAs--not just call up several of those professionals and see what happens--as well as build marketing plans, and pursue wealth management strategies encompassing trusts and estate planning. "Even the guy in the room who thought he was doing everything right?" notes Goldberg. "He wasn't."
How well this group of 34 fares will serve as a benchmark for five more sessions similar to the Santa Monica conference that Royal will hold this year. Goldberg says he hopes to attract another 80 to 100 "serious people" in the Royal managing executive corps for several days of coaching, study group sessions, and discussions of industry best practices. Some advisors say that the program has already prompted them to change the makeup of their practices.
Bachrach, for example, has seen his firm grow from "no reps, no revenues, and no clients" 14 years ago to one with $320 million in assets, 15 reps under the Financial Network Group banner, and another 15 independent reps outside his office for whom he acts as supervisor for an override, or percentage of their gross. While he had launched an internal review of his business in the works before traveling to California, the conference gave him the opportunity he was looking for to run it by his peers. The result: a more structured approach to a business that Bachrach and his partner, Ed Finke, had already segmented into three client groups: high-net-worth individuals who need a "steward" more than a financial planner; mass-affluent consumers who need financial plans; and middle-class folks, with less than $100,000 in assets, served by commissioned reps.
Bachrach says that among his first moves was to draw up a 28-word business plan and chart showing each of the firm's activities--wealth management, 401(k)s, OSJ management, and so on--showing who is responsible for each initiative. "I look at that chart each day," he says. He also has picked up the pace of efforts to expand into new areas, setting up an employee benefits business and exploring a venture into property and casualty insurance. In addition, he has been rethinking his role as a supervisor of outside reps. Bachrach feels that the 4% to 6% override he receives for supervision may not be worth the risk he faces if a rep goes awry. He says he would rather supervise outside reps who also want to receive marketing support from his firm--for a price. One recommendation of the CEG study that Bachrach refuses to budge on is dropping clients. However, Myerhoff, of NCA Financial Planners, decided to "dramatically cut down on the number of clients I work with," slashing his roster from 250 to 125 in favor of spending more time running his business. One way he is reducing his list is to raise the minimum asset level for his services from $500,000 to $2 million. "It'll feel great," he says. "I'll help my reps build their business and I'll be able to better serve the clients I retain."
Goldberg's quest to build his firm around a cadre of stronger managing executives acting like Myerhoff will clearly require some cultural changes. But it makes sense. New regulatory burdens are making supervising a network of small rep offices ever more costly. The Securities & Exchange Commission, for example, in 2004 approved an NASD rule change to tighten oversight of small rep offices. Industry executives say this will force broker/dealers to send more of their staffers into the field to act as OSJ supervisors. However, "the two-man shop that expects a B/D to do everything and doesn't have the resources to hire a dedicated office manager--this doesn't work," says Goldberg. "Firms need chief compliance officer type of support."
Pushing recruiting to the local manager level, meanwhile, may be more fruitful than the home office trying to identify reps from afar and picking them off one by one. CEG indicates that less than 30% of higher-income OSJ managers feel that a B/D brand name is important in attracting advisors to their practices.
In speaking to the first meeting of managing executives last October, Goldberg made an offer. "I gave them each a $100 bill out of my own pocket and said, 'Give it back if you think this was worth your time.' I got every bill back but one," he adds, "and that guy said he'd give it back to me when he sees me in February." Will the new role for managing executives make for heftier practices and a stronger B/D? It's a good start, but the effort will take lots of effort, and considerably more than 34 C-notes on the part of Royal Alliance, to bear fruit.
Editorial Director William Glasgall can be reached at email@example.com.