From the June 2006 issue of Research Magazine • Subscribe!

Going Independent

Independent or wirehouse? The question used to be that simple for traditional advisors thinking about an independent alternative. But with multiple platforms gaining traction, advisors looking for the right fit are bumping up against something that once would have been unthinkable: multiple choices. "The power now lies with the advisor," according to Chip Roame, managing principal of Tiburon Strategic Advisors, the Northern California-based research and consulting firm. "Just look at the firms catering to them to create models for them. There's nothing black and white about it anymore. It's all about: 'Which shade of gray should I pick?' I think you're going to see more firms -- independents in particular -- offering more models. My advice to those who aren't? Innovate."

In the spotlight, at the moment: Raymond James, Wachovia and Ameriprise. Each one offers several advisory models.

As Wachovia Securities' Chip Walker, managing director of Financial Advisor Integration, with five different platforms for 10,480 advisors, puts it: "The more choices you offer to financial advisors, the better your opportunity one will strike a chord with them about what they are really looking for. Where have they been in the past? Where are they going tomorrow? We talk so much about the consultative process, the needs-based process, in terms of clients as we customize the best solution to fit their needs.

You would think you'd want to do the same thing with financial advisors themselves -- to custom-tailor the right solutions for their business. The vast majority of firms out there can ask all the questions they want, but they don't have but one solution to offer."

And, at Ameriprise Financial, Brian Heath, president of the firm's U.S. Advisor Group, notes: "It's all about offering people choice in affiliation. Some want to sign the lease and turn on the copier and run the business. Others would rather concentrate on the development of their practice. What we are seeing is people looking at choices and making decisions more around what best suits their business style and choosing less based on payout rates and whether that means going independent or not."

Ameriprise, focused on financial planning, has 10,500 "branded" advisors, including 3,000 employees and 7,500 franchisees, or independent contractors. The firm also owns Securities America, an independent broker-dealer with 1,750 advisors. Ameriprise, according to Heath, brought on its most hires ever in the first quarter, mostly into the independent space.

An important consequence of the multiple platform offering: succession planning.

"One of the things we really like about the platform offering is that people can develop the business with the support of the firm in a very intensive way. As they progress in their careers, they can move to an independent platform, have equity in their business and establish a succession plan," Heath adds. "I'm seeing more and more people looking for a combination like this. It's more textured. And, like any capitalistic pursuit, the more demand you get in a system, the more creativity the system delivers."

The move toward choice within a single firm -- a spectrum that swings from employee-based to semi-independent to all manner of independent -- has definitely lifted the conversation to a new level. Here's what insiders and pundits alike are saying about:

The "semi-independent" space. It may not have the numbers now, but at least conceptually, it's got some sway. As Roame notes, "Truly going independent is a daunting task. Going semi-independent with some kind of package or way station is a lot more reasonable and a lot more attractive to a lot more people." In fact, he suggests that independent firms without semi-independent components "start thinking backwards" and integrate them.

A career continuum. One of the chief attractions of an all-in-one shop is the opportunity to jump from one platform to another without changing corporate homes. "There's the ability to cycle through one firm," says Dick Averitt, chairman and CEO of Raymond James Financial Services, which offers three different independent platforms. Raymond James & Associates, by contrast, has two employee channels. "I know one advisor who's made two moves and a number of others who have made one. The switch I'm seeing now is from independent but registered to fee-only. Where there is flexibility, there is the potential for movement."

The wealth-management card. Historically, wirehouses have been the market leader when it comes to wealth advice. Across the independent channel, firms are rushing to provide wealth management training, services, products and support to advisors who want to cement relationships with the rising affluent. As examples, Raymond James Financial Services launched a new wealth services group in February. Ameriprise typically hosts two to three wealth strategies conferences each year for its franchisees. This year, there are eight. And Commonwealth Financial has just unveiled Wealth MAP, a financial planning process emphasizing wealth management as a business model.

Indies Have Momentum

Against this backdrop is the consumer's continuing demand for "objective" advice from "independent" advisors. A McKinsey & Co. study released last year showed independent advisors were viewed positively by 43 percent of respondents. The top five brokerages won a positive rating of 28 percent. On the bottom of the list were insurance companies, with 24 percent.

A new study from Cerulli Associates, due out this month, supports the notion that favorable public opinion lies with the independent sector. "The reason why they prefer independent shops as opposed to, say, wirehouses, is the fact that a lot of independents offer full-scale planning services where some wirehouse advisors are perceived to be more product-oriented," according to research analyst Joe Lamoureaux. "There's definitely a push toward more independent advice and with the wealth transfer that's coming, it's going to get even sharper."

Industry experts say wirehouses have been proactive, creating "private client groups" and "wealth advisory groups" that directly appeal to consumers looking for objective, independent advice from a smaller shop. As Patricia Abram, senior managing principal for CEG Worldwide, the consulting and coaching firm, observes: "Wirehouses are figuring out one model does not fit all. They're getting creative and flexible." And she has a name for the advisor working in the private client construct: intrepreneur. "These are people who have found tremendous success doing their own thing inside the bigger model," she adds.

Mark Elzweig, who heads an executive search consulting firm in New York, believes multiple platforms will be the big winner as advisors -- and clients -- look for choice.

"There are a lot of very good people at the wirehouses who are not selling in-house products and who are really picking what they believe are the appropriate investments. But what the McKinsey study makes clear is that in terms of being viewed as objective, the independent channel has a very strong edge," says Elzweig, who has studied the data closely.

"I think these firms are very smart to introduce these multiple platforms. What they are successfully doing is basically figuring out how to retain a traditional advisor that otherwise might leave to go independent. What many big producers want is a feeling of total objectivity, and they want their clients to perceive them as being totally objective," he adds. "So you're going to see more firms offering more choices to their advisors, whether it's as a traditional advisor or as an independent advisor, and it's very wise on their part."

As for the numbers, it's clear that the momentum continues to build in the independent space. According to Cerulli, wirehouses experienced a 3.53 percent decrease from 2004 to 2005, leveling off at 70,805 advisors. By contrast, the independent channel saw a 31.05 percent increase, jumping to 106,688 advisors.

The most recent statistics from Tiburon Strategic Advisors, for 2004, are a little different but they deliver the same basic message: 68,000 wirehouse advisors compared with 82,000 independent advisors.

More Choices or Half Measures?

Not everyone, of course, is sold on the idea of multiple platforms.

As John Rooney, a managing principal at Commonwealth, puts it: "This is a very interesting trend we're seeing. The game in this business now is how do you service reps and incent them to stay with you? What a lot of companies are trying to do is stem defections away from their historic and core business model to other models by stripping services and relying heavily on their technology. For us, the rep is so important to us I wouldn't look at creating a stripped-down version. I don't see Ritz-Carlton and Four Seasons running out to downscale their brand."

However, he adds, "It certainly keeps us attuned to our reps' options. You have to balance their demand for higher services while remaining competitive on the pricing side of the business. If companies like Commonwealth and LPL can't demonstrate the enhanced efficiencies reps gather for being with us, then I am going to have a problem. It hasn't happened yet."

Bill Dwyer, managing director for LPL, the nation's largest independent firm, also rejects the idea that the multiple platform is an up-and-coming model.

"The reality is that with proper support and start-up experience, going from an employee to an independent-contractor advisor is really not that difficult. Halfway steps ultimately leave the advisor in a situation where they tend not to be that happy. Having a very consultative process and thorough transition can help an advisor demystify owning and operating a business. We don't see a demand [for alternatives] in our space."

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Rex Whiteside: On Cycling Through Platforms

There wasn't anything Rex Whiteside didn't like about his five-year affiliation with Raymond James & Association.

"I loved it. The culture was everything I wanted it to be. The traditional employee environment was what I was comfortable with at the time. I loved my job [as an assistant branch manager and producer.] Usually you leave a firm because you are unhappy. I didn't leave Raymond James & Associates because of any issues," says Whiteside, 36, an advisor since 1991. "I just had a change in mind-set about how I wanted to grow my business. I wanted to own it."

Whiteside didn't have to move far.

Last July, he joined Raymond James Financial Services, co-branding his Houston office as Whiteside Investments.

"It was amazing. When I moved over, everything stayed the same: The account numbers were the same for clients. The support staff [at corporate headquarters] in Florida was the same. The technology support staff was the same," says Whiteside, who has $50 million in assets under management with an average account size ranging from $500,000 to $2.5 million. "Sure there's a lot to do -- lease your own space, hire your own employees. But the home office walked me through a business plan. And once I got through the conversion process, every single client moved with me."

Whiteside consulted with clients prior to making the change. Their first response: What kind of corporate backing would he have? "That's where you capitalize on the Raymond James name," he says.

Whiteside has also found that his clients, mostly retirees and small business owners, like the idea that they are now working with a business owner. "I think they feel I'm more aligned with what they go through on a daily basis."

One of the biggest surprises has been a 25 percent hike in assets in the 11 months since he jumped platforms.

"I guess people who make this kind of change are motivated, on their game, and can't help but grow it. But I expected assets to struggle for a year or so," Whiteside says. "I suppose when you're exploring an option like this and spilling your heart out to clients, it lends itself to bettering the relationship."

Meanwhile, Whiteside says his own "happiness factor" is on the rise as he decides what's next: a continuing move to fee-based accounts, at 55 percent now; creating a client's bill of rights; and debating whether, at some point, to build an ensemble practice.

"Let's say I decide this doesn't work out. I can go back to RJ&A. It's such an easy flow," he notes. "I like working for them or with them. And I like the choice to do either."

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Fred Werner: On Going Independent

Every year, for years now, Fred Werner and his partner, David Daniel, have talked about taking their business independent.

"It's always been the business plan. We said that one day we'd go independent," says Werner, whose group in Lafayette, La., has $325 million in assets under management. "And every year, we'd ask: Is this the year?"

This year, the answer was yes.

The 59-year-old Werner, an advisor for 30 years, had been with Legg Mason since 1989. But after Citigroup acquired Legg last year, he and Daniel decided it was time to make the jump.

"The merger helped us crystallize our process. When you get right down to it, looking at the salary scale going from Legg to [Citigroup's] Smith Barney, my three assistants were making significantly more than Smith Barney pays for the same amount of experience," Werner says. "It caused us to make the final decision."

Meeting at Werner's house, over wine and hors d'oeuvres, each member of the eight-person team was asked to vote on the move. To a person, all eight voted to go independent and to do it with Wachovia Securities' Financial Network, or FiNet.

"What we wanted was to create something with our group that would just be representative of us," says Werner, whose new shop, Summit Financial, launched in February. "We wanted to own the business and we wanted to control the whole local environment. I now have the fun of paying the bills, but when it comes to allocating resources, all those decisions are made right here." Werner also wanted a platform that would accommodate his succession plan.

For two months prior to changing identities, FiNet consultants initiated weekly conference calls with Werner to cover all sorts of subjects: legal and compliance issues; how to set up a 401(k) plan; options for incorporation; hospitalization plans; recommendations on what check printers to buy.

"We got a little wrapped up in the minor decisions sometimes because you're trying to do everything right. More important was the letter we sent out to clients or the first phone call we made to clients," says Werner. "Over a three-day weekend, we contacted each and every major client. It's a big book to move."

Werner's initial goal was to transfer 80 percent of client assets over the first six months. Eighty-nine percent transferred in the first 60 days.

"FiNet is like a small firm within a big firm," Werner says. "The support has been incredible. We wanted to go independent but we wanted to do it with training wheels."

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The Semi-Independent Choice: If Advisors Can Make It Here...

What's an advisor in the Big Apple to do when office space in midtown Manhattan reportedly goes for $50 and up? Answer: Go semi-independent.

The Gateway Group, an independent affiliate of Royal Alliance and the AIG Advisor Group, has offices at 40th Street and Fifth Avenue, as well as in Garden City, N.Y.; Paramus, N.J., and Red Bank N.J. It recently relocated its Third Avenue office to Fifth Avenue in order to expand operations in Manhattan.

Royal Alliance Associate's Transition Suite option gives reps the convenience of working independently without all the costs - and headaches.

"We look for advisors with a yearly production minimum of $200,000 and go up from there," says Tom Santucci, who heads up the practice. "We want established brokers who understand the business, but have a desire to be somewhat more independent with the backing of a major financial-services firm."

Reps coming on board have to cover their own health insurance - which they get at group rates - as well as error-and-omissions insurance and ticket charges. Operating expenses, such as a sales assistant, phone line, computer, software and the rest, are covered by Gateway. And reps get independent-level payouts, while enjoying the products, infrastructure and support of a large broker-dealer.

"An advisor can come in here on a Monday, get a desk and chair, and do business," explains Santucci, who once worked for Smith Barney and UBS.

The group had 25 advisors earlier this year. That number's grown to 32 advisors and three pending recruits. The firm aims to grow to 45 in the next 12 months.

"Our goal is to get face-to-face meetings with advisors," says the Gateway Group executive. After that, the concept pretty much sells itself, he insists.

Recent recruits have come from Morgan Stanley, Ryan Beck and Smith Barney.

"There's a real market for this structure out there," Santucci adds. "We are definitely catching traction."

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