From the August 2007 issue of Research Magazine • Subscribe!

August 1, 2007

Small by Design

As we confirm our lunch appointment, Ted Charles comments on the famous selection of wine at 21 Club. We commiserate with one another that we can't really have a glass of wine during work hours. 21 Club, one of New York's best and most venerable restaurants, may be the fanciest yet where Research has interviewed a guest, but then again, Charles has gone to the trouble of flying in from the Boston area, where Investors Capital is headquartered. Besides, with this interview, the "Lunch with Research" column marks its first anniversary.

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Who: Theodore E. Charles, President, Chairman, and CEO, Investors Capital

Where: 21 Club, 21 W 52nd Street, New York

On the Menu: Cold Senegalese soup with grilled chicken, Granny Smith apples and Ritz-Carlton service.

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Investors Capital may be an older institution, but not by a very wide margin. Charles founded the independent broker-dealer with $1.4 million of his own money in 1992.

What compelled him to take the risk?

"I wanted to give registered reps an opportunity to earn a fee based on their assets under management, not a commission."

In his own career selling insurance, annuities and other financial products, Charles had approached his managers with the idea of a fee-based practice, but it was promptly shot down. So he went out and found a better way. His experience, not just as a salesman in the field but in the regulatory area and in recruiting and managing a sales staff, has been an invaluable resource in the firm's growth.

Not that it has grown into a giant, even though the time of the firm's founding was auspicious (at the dawn of a long-running bull market in equities and runaway growth in financial advisory services).

In fact, the company has been getting smaller -- by design. The number of independent financial advisors it serves slimmed by 16 percent during 2006, from around 800 to 675 currently.

"We hired consultants and did a number of studies to review our business," says Charles. "We pretty much reinvented it, basically by cutting the bottom 10 [percent] of the rep base."

They culled those who did not want to expand their businesses or whose business model or production didn't quite fit with Investors Capital's long-term strategic plans. That was, in a way, Phase Two of the firm's development. In the beginning, Charles admits, Investors Capital took pretty much everyone who wanted to join the firm.

The remaining stable of reps is much more productive, asserts Charles. Gross revenues increased 43 percent last year, with an even faster growth on a per capita basis. Average payout per rep jumped 70 percent. According to Financial Planning magazine, it ranked No. 1 in the industry in terms of payout growth.

The remaining reps, Charles says, expect sterling service from the home office. The broker-dealer has gone out of its way to provide it. The rep-to-staff ratio was nearly halved last year, from 11.4 to 6.8, not only because the number of reps decreased but because the home office staff was beefed up to nearly 100.

It may sound a bit grandiose, but Charles wants to see Investors Capital as a Ritz-Carlton of broker-dealers, after the world famous hotel chain. The back-office staff, in fact, has gone through Ritz-Carlton training, to learn courtesy and efficiency and achieve overall improvements in all aspects of service they provide to reps.

"It is, as they call it, gentlemen serving gentlemen," says Charles.

Ritz-Carton training will be available to reps as well in the near future, since they too can benefit from learning how to serve their clients better.

This year, Investors Capital claims to have become the first independent broker-dealer to offer its reps the opportunity to buy group health insurance plans through Blue Cross/Blue Shield.

Charles dismisses the question whether, being a smaller operation, he is not able to invest enough in technology, in order to offer the kind of systems industry behemoths are now providing at great expense. "There is so much available off the shelf out there, so much new technology. I'm still amazed what I can download just on my cell phone."

Still, the firm's technology department, along with compliance, is the fastest growing at Investors Capital, which is in line with the experience of other broker-dealers, big and small.

The firm seems content with its size and market niche, but this doesn't mean it is neglecting recruiting efforts. Its head of recruiting is constantly meeting with successful producers at wirehouses around the country. Charles also appreciates the fact that someone who has worked at a large institution may find striking out on his or her own daunting. As part of its flexible partnership options, Investors Capital offers its reps an opportunity to be an investment center financial consultant.

"I call it a half-way house," laughs Charles. "It's great for those who miss that wirehouse feel, who like to work at an office with other people, but who still want to have a higher payout."

His payouts are higher, claims Charles, because there are fewer administrative mouths to feed than at a wirehouse.

Being an early believer in fee-based business, it is hardly surprising that Charles expects the fee-based part of the firm's business to grow strongly going forward. "Some of our reps," says Charles, "function almost as a home office for their high-net-worth clients. They pay their bills; they file their income tax returns. If a client asks them to do something they don't know how to do -- like windows -- the rep will probably find a window washer to outsource to."

Yet, out of the broker-dealer's $6.5 billion in assets under management, just over $500 million, or less than 10 percent, are managed on a for-fee basis, even though fee-based revenue has been growing faster than gross revenue. But there will always be room for commission-based business, admits Charles, no matter how much fee-based business will grow. An ideal ratio for a firm like his, in his view, is a third each. A third fee-based business, a third based on commissions and the remaining third devoted to insurance-type products.

Charles readily concedes that the industry is consolidating, with smaller broker-dealers being gobbled up by larger ones. But he doesn't think it is always a good thing.

"At larger firms, there has been almost a commoditization of financial advice. If you have $5 million in assets this is what you get, if you have $10 million, you get so much more, and so on. But these are highly successful individuals. They are highly intelligent and it doesn't take them long to figure out what's going on."

The same commoditization impacts the attitude toward brokers and financial advisors at large wirehouses. There is pressure to produce, and smaller producers, even if they have growth potential, are sometimes pushed out.

So, there will always be room for smaller players, who provide a more differentiated, personalized service. Besides, it is the American way, after all.

"You keep inventing a better mousetrap," laughs Charles. "Or at least you think it is a better one."

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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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