From the December 2007 issue of Research Magazine • Subscribe!

2007-2008: Executive Perspectives

The past 12 months have been tumultuous for the financial-services industry, with the credit-related write-downs and related changes in leadership, mergers and acquisitions, and stock market volatility. How are broker-dealers assessing the latest developments?

Research asked several broker-dealer executives to share their views on what's most affecting the industry in 2007, and what's most likely to affect BDs in 2008.

Charles D. Johnston, president and CEO, Smith Barney"Our industry is never boring, so there's no shortage of choices here! We saw a lot of ink spilled over many issues including recruiting competition, mandatory arbitration, compensation issues and more. At Smith Barney, we saw more than our fair share of press, but I think the widest-reaching story for both firms and clients was the end of fee-brokerage accounts.

"This issue touches on the core of what we can provide clients -- advice -- and how that advice will be paid for. The issue required great planning and change across the industry and very directly speaks to the client/advisor experience. The issue was addressed in the press, in ads, in conferences and with regulators. It's was the biggest story of 2007.

"There won't be one story thread, but rather the interconnected relationship between the current credit situation, how that will impact investor confidence and the responses to this behavior from the Fed and others. These stories will weave in-and-out, impacting and changing each other and will likely determine the kind of year we'll have in 2008. Regardless, the industry -- as advisors -- had better be ready to speak to clients on these concerns."

Bill Dwyer, president, independent advisor services, LPL"While the Dow trending upward 10 percent to date for 2007 would make a nice story, the bigger story is the exploding demand for advice and the incredible growth that LPL advisors have experienced in 2007. This year alone, LPL advisors have seen an average growth of 23 percent in their businesses and are re-investing in their practices thanks in part to LPL giving back with their 2007 production bonus and reduced pricing programs. Over the last four years, our advisors have enjoyed a compounded growth rate of 87 percent.

"It will be a huge challenge for financial advisors to manage the increasing growth in their businesses and complexity of products and services while maintaining profitability. Advisors will have to increase their capacity and volume and broker-dealers will have to provide an even larger breadth of resources to help advisors meet this demand."

Chet Helck, president & COO, Raymond James Financial Services"The two biggest stories for 2007 were the A.G. Edwards/Wachovia merger and the credit crisis. Both left Raymond James in a position to demonstrate the validity of our commitment to conservative financial management as both a client- and advisor-centered business.

"With the continued consolidation in the financial services industry, and specifically Wachovia's purchase of A.G. Edwards, we at Raymond James probably felt even more impact than others in the industry, since that merger left us as one of the largest, publicly traded, independent brokerage firms. The news also provided an opportunity for us to reiterate our commitment to independence, something on which our chairman and CEO, Tom James, hasn't wavered.

"And, it has provided recruiting opportunities. Advisors are attracted to our firm, largely due to our respect for the independent decision making of advisors -- whether they're considering what type of practice they want to have or what type of investment products and services they recommend to their clients.

"In regards to the other big story of 2007, the credit crisis has affected everyone in our business -- some much more than others. While we weren't immune to the market effects, we are pleased to note that our fiscally conservative management approach kept us virtually unexposed to the subprime meltdown. As we've seen other firms take risks that have resulted in serious issues for their employees, clients and investors, our ongoing commitment to principled management, disciplined growth and client service has truly served us well.

"The rule books, and in some cases laws, will continue to change as we modernize our regulatory framework. To that end, we must continuously ensure our industry's rules are aligned with our clients' needs. Clients are looking for comprehensive, consultative advice, not just brokerage services and the regulators' concerns should continue to be driven by what is in the client's best interests.

"Raymond James has built our firm on the concept of valuing the advisor and the unbiased advice they can offer their clients. We plan to continue to be a leader with a seat at the decision-making table so we can ensure lawmakers and regulators hear all sides and can do what's best for investors, our firms and our industry."

John Rooney, managing principal, Commonwealth Financial Network For 2007, the major issue for us is that we're tied to the [stock] market in terms of revenue. We used to be tied so much to recruiting, the growth in production and the level of existing advisors. Now if we are 50 percent fee-based, we are up 5 percent if the market is up 10 percent. And the market has had some challenges in '07.

I was surprised to see Brookstreet Securities implode, and this speaks to uncertainty in the industry, the use of derivatives and the untended consequences of what happens with investments from time to time. Look at Merrill Lynch.

And there's another big story -- LPL expanding at such a pace, adding to its top-line revenue figures. Now, they have taken a business model in a slightly new direction ... Our decision is to distinguish ourselves in other ways, we're more comfortable with our business model.

For us, it's been a decent recruiting year, and we're still up 25 to 27 percent year over year in revenue, even with the markets as they are. The industry hasn't seen the end of the migration of advisors from commissions to fee-based. Many are doing this as they come to Commonwealth -- they revamp their practices.

For 2008, a significant issue will be the fallout from SEC Regulation S-P [which governs the privacy of customer information by financial advisors switching firms]. In the independent channel, it's quite a struggle to reconcile the wording of this regulation with the practical realities of the broker-dealer model.

Independent brokers are not thinking that they are employees of Commonwealth; they're independent contractors. One interpretation, though, is that they are deemed to be our agents; and this looks like they are employees with significantly negative repercussions regarding the transfer of documents.

The Financial Services Institute, or FSI, is doing a fantastic job, and it will be interesting to see how things shake out. If the SEC would interpret this strictly, it would change this model. And the FSI is lobbying furiously on our behalf.

Another important trend is that at Commonwealth more resources are being poured into succession planning; transitions need to be orderly, and we recognize that and are stepping up to plate.

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

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