The end of 2010 was welcome to broker-dealers and recruiters. It was a tough year for recruiting, although for some the pace picked up in the last quarter. But the competition for advisors is fierce, with many staying put. The reasons they stay highlight some past—and future—trends.
How Did We Get Here?
Advisors have moved steadily from wirehouses to independents for the past 10 years, says Larry Papike, president of Cross-Search, an independent BD advisor and executive placement firm in Jamul, Calif. Technology made it possible: Platforms and infrastructure gave wirehouse-like capabilities. Independents boomed as talent moved in. Only five years before that, however, says Papike, the movement of wirehouse advisors to the independent space “was almost nonexistent.” Wirehouse advisors believed going to an independent was the first step to going out of business. Independents were “stepsisters on the fringe.” And moving clients was challenging.
Then came the crash of 2008. “It was a huge confidence breaker with the general public,” says Papike, “with regard to stability and the strength of the wirehouse environment.” In 2008 and 2009, he says, brokers were disaffected; so were their clients. “It was easy for the first time,” he points out, “to move clients from the wirehouse to the independent space.”
Musical BDs, or, When the Music Stopped
Then came 2009. Art Grant, president of Cadaret, Grant in Syracuse, N.Y., points out that usually, when markets are down, “advisors … don’t like to change firms, because they fear if they give clients a choice, [clients] may look at their assets and say, ‘You’re not doing such a good job for me.’”
But the reputational damage from 2008 was huge, leading in 2009 to advisors bleeding from wirehouses—no, make that hemorrhaging as the brand names they’d stuck with were suddenly more liability than marketing tool. They left in droves, mostly to independents.
Papike cites two other factors: on-again, off-again machinations at such firms as AIG where, so to speak, one day the BDs were for sale and the next they were not, and the LPL merger with Pershing. “Advisors had to leave Pershing and come into LPL,” he recalls. “Many felt betrayed.” That made for a very mobile population.
All Locked Up and No Place to Go
All three factors led to a flood of movement, mostly toward independents, as advisors sought out places of stability and good reputation—or looked for the biggest checks. Wirehouses, rather than lose top talent, threw money at the problem: money with strings attached. In wirehouse mergers and acquisitions, too, acquiring firms had to offer retention bonuses to newly acquired advisors to keep them—but couldn’t ignore longtime advisors otherwise ready to jump ship. So, says Papike, those advisors got big packages just to stay put.
Now they were tied up for maybe 10 years, as those bonus strings became golden handcuffs instead. But as the economy improved, people began to think about investing again—so they stayed.
“[With] the market going from 7,400 to 11,000 this year,” says Papike, “for the first time in three or four years you have customers wanting to talk to their financial advisors about investing again. [Advisors thought,] ‘Yes, I have a problem with my BD, but I haven’t made any money in three years, so if [clients] want to talk to me I’ll stay. I have to be in front of my clients.’”
Gregg Johnson, senior vice president of branch office development and acquisition at Securities America, agrees. Advisors were “getting more into an ‘I’m just going to run my business and work on client loyalty’ [mindset],” he says. “Investment statements weren’t looking as bad as they had, [so they] hunkered down and took care of their practices rather than making a change.”
On the Road Again?
Papike doesn’t see any change for 2011, predicting “horrible recruiting numbers” and citing those golden handcuffs: “You’re not going to see much movement at all from wirehouses; the bigger producers are locked up, and the smaller ones have already gone.”
However, Mindy Diamond, president of Diamond Consultants, a Chester, N.J.-based search and consulting firm working with financial advisors nationwide, has a different view. While advisors for the past year, she says, were very content to wait and see what was next, in the last 90 days, “momentum and the wind have shifted.” Advisors find their golden handcuffs beginning to chafe as they realize their BD might be “very bureaucratic, or … not … the right place to service clients long-term;” so in spite of the money, they’re considering alternatives. “Our pipelines have increased,” says Diamond. “I expect we’ll see a lot of movement in early 2011.”
Johnson concurs, saying that pipeline activity at Securities America has “doubled in the last 90 days. … We’re also seeing some major wirehouses lower payments or increase client fees that are causing wirehouse reps to look around.”
Interestingly, Diamond is also seeing advisors leaving the independent BDs to go to, or return to, wirehouses “because the transition packages they’re offering are so astronomical.” Returnees also go back because “wirehouse guys like the idea of being independent. … But when the rubber meets the road … they don’t want to deal with all the everyday chores. … They don’t want to divide their time between managing the business and caring for clients.”
No Talking! Pay This. Make More.
Angela Rooney, an independent recruiter in Florida, says she too saw the slowdown in early 2010—but also experienced a “loosening up” in the last 30 days or so. Wirehouse advisors, she says, are moving “because of the grids.” She explains that if a client doesn’t have the required minimum investable assets, “the wirehouses … don’t want their reps talking to them.” This, she says, bothers reps. “If they have clients they like who don’t fall into the right income bracket, they can’t service them any more; they’re told, ‘Give them the call center number,’ and those clients are transferred to a call center. Or, if the reps do talk to them, they don’t get paid. It’s emotionally disturbing to them.”
On the independent side, she sees advisors moving because of back office service and “nickel-and-dime fees. Every time you turn around there’s another fee for this or that.” Quotas play a role, too; people thinking of switching are concerned about how much they’ll have to bring in, since many firms are looking for higher numbers. “Advisors don’t like quotas,” she says, “especially the older ones. If they’re thinking about retiring in the next three years, they don’t want to be kicked out the door in the last year or two because they don’t meet production quotas.”
Opportunity Calls … And Calls
Mitch Vigeveno, president and CEO of Turning Point, a recruiting firm in Clearwater, Fla., says the whole environment right now is so competitive that advisors are practically besieged. “You not only have all the independent BDs and recruiters vying for a lot of the same people, you have the custodial firms: Schwab, Ameritrade, Fidelity and Pershing—all aggressive in their recruiting efforts.” In fact, he says advisors are getting tired of all the phone calls. “They get two or three a week,” he says; “that’s a lot. [Everyone’s] working off the same lists.”
Grant can vouch for that. “A lot of firms recruit … aggressively,” he says, “… and we know they call our reps all the time. They tell us.”
How do recruiters or BDs get through that deluge to make an impression? Vigeveno says they have to have a unique value proposition or an interesting market niche. Currently he’s working with firms looking for advisors who want to be acquired or are looking for a succession plan. He adds, “State that [value proposition] very clearly and concisely; it has to be different. It’s not enough any more to say you give good service.”
BDs can add value, he says, by offering practice management programs or helping their OSJs recruit; perhaps forgoing advertising and instead giving that money to help their bigger offices recruit locally. Some insurance company BDs, he relates, “can say … ‘Let us help you do more insurance business with clients you’re already doing investment business with.’” Most advisors, he points out, “don’t have the advanced insurance knowledge these companies bring to the table.” That can leverage an existing relationship.
Grant says, “for a while, it seemed people were … considering becoming investment advisors and dropping their FINRA licenses. But the latest suspicion is that FINRA will take over compliance duties on independent investment advisors.” He points out that that eliminates one incentive “for [advisors] to strike out on their own and leave the independent BD community.” He adds, “I think FINRA will get that responsibility, and if you haven’t dealt with them in the past, you don’t want to without experience. It’s a lot better to have a corporate relationship so someone else takes the lead on that.”
Johnson points out that in acquiring Brecek & Young, which Securities America did in 2008, the company has integrated BY’s supervision model. “It was much more relationship driven,” he says; “not to say that ours was not, but BY asked their supervisors to do a lot more in terms of spending time in reps’ offices and interacting with reps, so the culture of BY supervision took ours to the next level.”
That’s probably been handy, since Securities America has acquired a couple of smaller BDs that “decided to get out of the business, and kept the group intact, but became a branch of Securities America.” He adds that the company has seen more such activity, and chalks it up to expense: “There’s pressure on earnings. All BDs are seeing increased technology costs to comply with new regulations for encryption and privacy,” he says, on top of regulatory costs. All that has put pressure on BDs and for the smaller ones it’s become impossible to do business. “So they look at alternatives.”
Papike predicts more BD closures in the year to come. Some firms, he says, are thinly capitalized; some will not be able to afford technology and other necessities. He’s also concerned about some sour partnerships, and the advisors who worked for BDs that sold them. “Once those things start hitting, and I believe in 2011 they will, there will be serious court actions against thinly capitalized firms that don’t have the money to defend themselves, and they’ll throw in the towel. The problem there is Joe Blow, who sold Provident Royalties [one of the partnerships that went bad]. And his firm goes out of business. Who will take that advisor? He has no E and O coverage any more, and no one will take him. He has exposure to something he sold in the past. So that will have a negative impact on brokers; if their BD goes out of business, they will be hampered.”
Even in such a fiercely competitive environment, BDs are doing more careful screening—of compliance, of credit records (and in today’s economy that’s a real issue), and for practice specifics that mean an advisor will be a good fit. Says Johnson, while Securities America has a “diverse advisor sales force,” with some advisors using equities, “that’s not our sweet spot. If we get someone calling in who does all his business in individual equities, it’s probably not a great fit.” Securities America “ask[s] a lot of questions” to get it right.
Marlene Y. Satter can be reached at firstname.lastname@example.org.
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