From the June 2007 issue of Research Magazine • Subscribe!

June 1, 2007

Among IBDs, a Blue Chip Choice

Breaking with an already established tradition, I meet Larry Roth not at the restaurant where we were going to have lunch, but at Royal Alliance's new office in the World Financial Center, where the company has recently moved from a less glamorous address in Midtown.

"We wanted to get a bigger footprint, and more visibility here in the Wall Street area," says Roth, explaining why the AIG-affiliated broker-dealer chose this particular location.

The move has certainly increased visibility in more ways than one. Roth's corner office now offers one of the more spectacular views of the New York harbor.

The relocation is a consequence of the fresh look which, according to Roth, AIG took on in its strategic plan for its broker-dealers about a year and a half ago. Although the thinking reflects that of the senior management, the timing seems to be no coincidence. It is when Roth was brought in from his previous job as managing director at Berkshire Capital Corp. to head Royal Alliance.

What the company is trying to do, he asserts early on, while still waiting for his tuna carpaccio appetizer, is "to build the best open-architecture financial platform in the business." The move not only expanded Royal Alliance's office space from over 50,000 square feet to 85,000 square feet, but provides room for the company to grow from its current level of 2,600 financial advisors nationwide.

Looming Consolidation

Roth sees this as an especially propitious time for independent advisors and for the kind of platform AIG is building.

"Demographics favor an independent advisor," says Roth. "People who have been accumulating assets in defined contribution plans over 20 or 25 years are getting ready to retire. They have other types of assets, and a variety of different needs. They are not comfortable going to a wirehouse broker, but are likely to feel at home with an independent advisor residing in their community."

Another factor playing into the company's hands is that some important competitors in the independent channel have been reducing their financial and intellectual commitment to their business. Across the industry, there has been concentration either on retailing products or on manufacturing. AIG has the advantage of focusing on both.

But, Roth is quick to assert, the parent is committed to developing and strengthening its broker-dealer operations and brands as stand-alone businesses, not as channels to distribute products it manufactures. "Our focus is on our client, on the financial advisor" says Roth. "When we feel there is a need for a particular product for our clients, such as a particular form of variable annuity, we talk to the market, not to AIG."

Roth, who is also a CPA and early in his business career worked at Deloitte & Touche, sees a looming consolidation in the industry, which he expects to mirror what happened among large accounting firms. There will always be room for a boutique, he admits, but eventually the segment, thanks to attrition for some and growth for others, will end up being dominated by a handful of firms. He sees one or two traditional broker-dealers, and a couple of mavericks who redefine the business. Needless to say, he expects AIG to be among those still standing once the consolidation smoke clears.

Growing the Fee-Based Business

A key challenge in developing this platform, says Roth, is to provide enough flexibility to accommodate a straight commission business as well as the transition to a business model where the advisor's business becomes almost completely fee-based. Right now, Royal Alliance, as well as its competitors, has a difficult time meeting the needs of an advisor who is 85 percent to 90 percent fee-based -- in large measure because of a more restrictive regulatory environment.

Increasing the proportion of revenues coming from fee-based business is a key objective of the company's strategic plan. Right now, it derives one-third of its revenues from fee-based business. However, the goal is to move to a point where well over half of revenues are derived from a fee-based platform, says Roth. In five years, the company intends to reach a 60 percent target, by maintaining the current 20 percent annual growth rate for fee-based business. The rest of its business has been growing at a 7 percent rate.

A fee-based business entails a far broader and more flexible array of services to be provided by the broker-dealer.

"Twenty years ago, if you could help your rep sell more products, you did your job," observes Roth. "Now, advisors see themselves as business

owners, entrepreneurs, members of a community. They are looking to the broker-dealer to help them develop and maintain a lifestyle."

Luring Entrepreneurs

Royal Alliance has been growing internally, with well over half of its growth coming from advisors already on board. But the environment of continued industry consolidation and narrow specialization Roth envisions going forward will provide opportunities for acquisitions.

Nonetheless, the need to attract quality teams of advisors, especially from wirehouses, remains acute and right now it happens to be a difficult time for recruitment. The problem is that with the stock market rising to record levels and the mass of baby boomers nearing their retirement age, FAs are in harvesting mode. They are too busy making money so that, despite Roth's belief in the superiority of Royal Alliance's platform and business model, and its high potential for the future, it is difficult to persuade people to move.

Roth is very much at home among entrepreneurs -- since he belongs to that particular breed himself. His career is divided pretty much equally, he says, between the world of the large corporation and the start-up. For example, he led the U.S. Retail Group at ING, but he got the job after selling Vestax Securities Corp., a broker-dealer which he owned, to the Dutch financial services conglomerate.

He credits his entrepreneurial experience with his ability to understand the client, the independent FA, but he also appreciates the matrix reporting system and the resources that the large company puts at its executives' disposal. AIG, which has built itself as a collection of medium-sized entrepreneurial businesses, seems to be an environment that is well-suited for his kind of experience.

But what about the other three broker-dealers which coexist under the AIG umbrella? Do they tread on each others' toes? They may share expenses, such as the $26 million outlay on technology last year alone, legal expenses, etc., but each maintains its own distinct identity.

The difference is mainly in geography, says Roth. Advantage Capital and FSC Securities are located in Atlanta, while AIG Financial Advisors focuses principally on the Southwest and the West Coast.

Although all broker-dealers have their top producers, says Roth, Royal Alliance may have slightly higher expectations as far their FAs' production levels are concerned. Or at least this is what the new headquarters seem to imply. He may shy away from terming his firm the blue chip of the bunch, but it is certainly what Royal Alliance's new headquarters seem to imply.

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Who: R. Lawrence Roth, President and CEO, Royal Alliance Associates

Where: Acappella, 1 Hudson Street, New York, NY

On the Menu: Tuna carpaccio, pollo alla sausage and industry consolidation.

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at abayer@kafanfx.com. His monthly "Global Economy" column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past four years, 2004-2007.

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