From the July 2010 issue of Boomer Market Advisor • Subscribe!

Retirement is job one

When First Midwest Securities says retirement is job one, they mean it. Go to their Web site and it's the first thing to pop up. They recognize where the industry is going in its distribution phase focus, and they are one of the few smaller broker/dealer firms with a dedicated program to assist advisors. Granted--it's a decidedly unsexy fixed income platform, but it suits the Bloomington, Ill.-based company, and its CEO Terry Buffalo, just fine.

With the firm since 2002, Buffalo can brag on close to 200 reps and a profitable business based on strictly organic growth.

"We haven't acquired a firm," he says. "We've been profitable for the last, gee, I don't know how many years now, and each and every year we have about a 20 percent increase in our revenues. We just keep growing."

Buffalo sat down with Boomer Market Advisor to describe the firm's retirement program, how he built the business and what's ahead for the market.

Boomer Market Advisor: With everything that has happened in the retirement market, how do you safely position your advisors and clients?
Terry Buffalo:
We suggest that five to seven years prior to a targeted retirement date they start moving more of their assets to the fixed income side. It's very easy to get that check from your employer each and every week in the accumulation phase, but once you make that transition you no longer can depend on it. You have to depend on your portfolio. What we try to do is look to bonds, tax-free municipals and the like because taxes are going up no matter what. And we look at corporate bonds. We have a site called It enables our advisors and clients to start to build a portfolio that will provide them either with monthly or quarterly checks. A lot of them wonder how the logistics actually work. Do they get it weekly, daily, monthly? How do they get money?

BMA: Do you find many are ignorant of fixed income alternatives in their portfolio?
I saw a survey just recently that found only two out of nine clients that are either close to or at retirement age really know anything about fixed income. More importantly, they're not sure where to get the fixed income advice. And that's one of the areas that we, as a broker/dealer, have specialized in. Equities, of course, have a major role, but fixed income is primarily our forte for retirement planning. It's mainly educating clients and preparing them for when they make the transition from getting their paycheck from an employer to having to depend on their paycheck from their portfolio. It's very difficult to shore up a portfolio that will last 20 or 30 years unless you're staying with good, quality securities. That's why we stay with the fixed income. We're concerned with rising interest rates, so we look at step-up bonds. We also look at floating-type bonds which will move based on the CPI.

BMA: Is there anything you are not a fan of on the fixed income side?
Not a big fan of the TIPS.

BMA: Interesting. So many advisors are pushing TIPS right now. Why not?
Well, TIPS go up in value with the CPI, but they also go down and that's something I have yet to see in any advertising or marketing material. If the CPI drops you actually lose principle. TIPS are good for the government; not good for the average citizen. We would rather stay with step-ups or floating-type instruments to provide us with protection against rising interest rates.

BMA: Advisors advocate a heavy investment in equities as a way to hedge against longevity risk. You don't believe that's true?
Let me ask you this. If you have a portfolio and it's all equities and you're retiring now, how are you going to have the opportunity to make up for any losses going forward? We're back to the old days where it's a return of my principle, not return on my principle. And yes, you have to be concerned with the longevity of the portfolio. When buying a bond, most people don't realize they're being paid let's say a 6 percent coupon right off the bat. So we take distributions, their mandatory distributions from IRAs each and every year. But they're sitting in equities. They would have to liquidate stock to be able to provide for their minimum distribution. If you're invested in fixed income, it's providing a cash flow and the bonds are paying a coupon that will pay for it.

BMA: Is it tough to get clients on board with a heavy fixed income allocation, especially those that want to quickly make back what they lost?
What I always tell everybody is you're being paid to wait. Bonds do appreciate in value. And if you sell the stock, you've got look to at the cost you're incurring with your transaction and maybe your selling the stock at a loss versus the bond coupon you keep clipping every month.

BMA: Are your advisors on board with your fixed income message?
For the most part, they are.

BMA: How does Social Security (or lack thereof) play into it?
I know a lot of people take their Social Security at age 62. However, if they would wait until age 70, the monthly Social Security check is a 75 percent increase over what they'd receive beginning at age 62. One of the biggest concerns we like to point out to our clients is that longevity risk. Health technology has increased to where the average age is age 78. The Census Bureau estimates that in the next 30 years there will be almost 600,000 people living over 100 years of age. As advisors, we have to account for that.

BMA: What are you hearing from them in general? Are they worried about a double-dip recession?
It goes both ways. Everybody's got an opinion. And we don't, you know, brainwash them like some of our competitors. We have one guy in the camp of yes, another in a camp that says no. It's funny, almost every call I take is the opposite of the one before. That's why we're an independent firm (and I stress the independent). Not every investment philosophy is the same for every client. It makes for interesting debates though at company meetings.

BMA: The recruiting environment is very good for independent firms. Will you grow the number of your advisor relationships or are you looking to stay boutique?
We don't want to lose the personal touch so we're targeted at about 300 reps. I think that would be our max. We could be at 1,000 today if we wanted, but we don't take every person that comes along. We're not at all interested in selling the firm or going public. And some of my competitors, well, that's pretty much their goal right now. We would rather just stay a small shop that has the personal touch with our advisors and provide them all the tools and services they need. That business model has worked very well for us. If you look at some of the industry surveys, we're one of the very few firms each and every year that keeps growing, is profitable and debt free. It's a nice combination.

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