From the June 2011 issue of Research Magazine • Subscribe!

Indie Advisors’ Growing Pains

Adding clients, and finding ways to serve them efficiently, is key to business expansion.

Independent channel executives love to cheer their space — and no wonder. It continues to grab market share. It exudes a strong client-first mindset. And, according to Fidelity Investments’ new Broker and Advisor Sentiment Index, RIAs and the independent broker-dealer channel generate the highest levels of advisor satisfaction. These folks are happy.

But in corner offices, top leaders are grappling with a key question: As it faces revenue-building inhibitors and other challenges, what must the independent channel do to create sustainable success?

As Bill Dwyer, president of national sales and marketing for LPL Financial, frames it: “The cost of autonomy has gone up.”

For two decades, advisors were able to grow their businesses nicely as a result of market appreciation. No longer.

“From our perspective, it’s about getting to scale, to critical mass,” Dwyer adds. “It’s about adding more relationships to grow your business as opposed to watching your assets grow. And that drives your costs up.”

Moreover, the very nature of the independent business model is changing as first-generation advisors build out teams and infrastructure.

“In order to be sustainable, many advisory firms need to grow beyond themselves and in order to do that we need to invest in other people. For a lot of people, that means owners have to be willing to forgo personal compensation to invest in their team,” observes Rebecca Pomering, CEO of Moss Adams Wealth Advisors. “For 15 years, I’ve heard owners say: ‘When I was 30, no one did that for me.’ Well, get over it. People need to realize the model really has changed.”

And what makes an advisor independent? The definition itself is being rethought. Is an RIA today really all that different from an advisor affiliated with an independent broker-dealer? Is LPL all that different from Schwab or Fidelity or TD Ameritrade? Perhaps not.

“These are independent advisors. What’s the difference between an LPL offering and a TD Ameritrade offering? It’s subtle,” according to Chip Roame, managing principal of Tiburon Strategic Advisors. “They are all independent advisors at the end of the day.”

To the point, Tiburon plans in the next year or two to collapse its RIA research reports into its independent broker-dealer reports.

Other trends in the independent space that bear watching:

  • A rise in hybrid practices: The models, allowing advisors to combine traditional brokerage and fee-based advisory businesses, provide a soft landing for brokers transitioning to the advisory space. Notably, more than half the advisors who went independent with Schwab in 2009 and 2010 established a hybrid model. In particular, the dually registered advisor segment represents the fastest-growing sector in the independent channel, according to a Cerulli report. “It makes sense, that’s why it’s doing so well,” notes Sanjiv Mirchandani, president of National Financial, a unit of Fidelity Investments. “The church and state separation between commissions and fees is long gone.”
  • The absence of younger advisors: Fidelity’s 2011 Sentiment Index across all industry channels puts the average age of an advisor at 49 with nearly one-half over 50. Yet 40 percent haven’t thought out a succession strategy. “It’s definitely an issue,” says Mirchandani, especially when Generation Y, future clients roughly defined today as 16 to 33, number 77 million, the same size as baby boomers. “The good news is that it’s a great career for someone,” adds Mark Tibergien, CEO of Pershing Advisor Solutions. “The bad news is the industry seems to lack the mechanism to harvest the opportunity. The reality is we’re not doing much to change the equation.”
  • A flight to safety: The implosion of stalwart Securities America, the most highly publicized example of independent broker-dealers felled by private placements, gave many independent advisors pause. “Any organization, even those with sterling reputations, can have a major misstep. The bigger issue that an event like this creates is that advisors in demand put a lot more emphasis on examining the culture of safety within the firms [with which] they affiliate,” Tibergien says. “What it does is give them another box to tick in their due diligence.” As for the industry, he adds: “If you haven’t taken a look at your processes and protocols around prudent selection, the behavior of your advisors and whether you act with alacrity when you see a problem, you might want to do that.”
  • A new premium on culture: Raymond James Financial Services (“a sharing culture”) and Commonwealth Financial Network with its small but selective boutique framework are longtime standouts when it comes to community and culture. Imagine: When Commonwealth started 32 years ago with four employees, founder Joe Deitch brought in a bag of bagels for everyone on Fridays. Today, with 500 employees at two home offices on both coasts, Fridays are still bagel day. “How you get it right is not easy,” says Commonwealth’s Andrew Daniels, managing director of field development. “We work at it every single day.”

Other broker-dealers and custodians, as well, would be wise to follow suit. Race For Talent II: Ideas Without Limits, a Pershing Advisor Solutions white paper, suggests that a shared culture across a broker-dealer’s organization creates a sense of ownership, belonging, family and community — and that it greatly influences retention and recruitment. “As advisors get more focused on job satisfaction, we hear them saying loud and clear they want to work with like-minded people. It can be lonely to be a broker,” adds Mirchandani. “They need that sense of community and they need to feel their firm is a good fit. If you’re an independent broker-dealer, you need to be thinking about this.”

Looking across the landscape, Pomering says there are individual advisory shops that are stepping up their performance. But, she says, “As an industry, I would put us at 3.5 or 4. Growing pains? Yes. I don’t think we’re very high on the evolution scale. There are no 10s on the board yet.”

Sustainable Success

The notion of sustainability is front and center today, whether you’re a Schwab or an LPL advisor. As Cerulli director Bing Waldert puts it: “The idea of creating sustainable growth is endemic across the industry right now.”
LPL, the largest independent broker-dealer with 12,500 advisors, offers a good example of how the back office has assumed a far more critical role in helping advisors achieve their best results.

In essence, Waldert says: “They’re a broker-dealer but really what they are is a business to business technology provider. If you think like that, it changes your perspective.”

The challenge: to help LPL advisors double and triple their number of client relationships. Not surprisingly, Dwyer says, “There’s a changing dynamic. What you’ve got here is a real shift. Many advisors grew their business over the last 30 years by acquiring clients in a growth environment in their peak growth years. Now they have to manage more and more relationships. We’re challenged by it, but it’s something the entire industry is facing.”
To address the issue, LPL corporate has developed economies of scale that have allowed advisors to push a lot of what they do locally — marketing, due diligence and portfolio modeling — back to the home office.

Essentially, Dwyer adds, LPL is helping advisors institutionalize what historically has operated as a “local key man” business. As an example, 9,000 advisors have taken advantage of LPL’s turnkey marketing program since it was introduced in 2009. “In the 1980s and 1990s, this would have been sacrilege to an independent advisor,” Dwyer observes. “They would have done it on their own.” An asset management platform, launched in 2008 and enhanced last year, is LPL’s fastest growing platform ever. In another behind-the-scenes move, the firm’s business consulting group in the last year helped 400 advisors establish or reposition their brand in the local marketplace.
In another sign of the times, Raymond James Financial Services has developed robust programming for support staff.

“We feel that by growing their teams professionally, not only will we have better retention but branch professionals will feel needed and recognize that they have a special role to play,” says Missy Escribano-Newlin, director of education and partner relations. “It’s the support staff back in the office who are serving the client and doing a lot of the legwork. They’re on the front lines.”

At Raymond James’ national conferences, the firm now includes a separate track for support staff. New this year: a virtual conference associated with other advisor workshops. If, for example, an advisor attends a presentation on client segmentation, the advisor’s home office staff participates at the same time in an online workshop that spells out what needs to be done to implement the project. “When the advisor comes back, they hit the ground running,” Escribano-Newlin adds. “It strengthens the team.” In the works: regional study groups for branch professionals.

While over 70 percent of independent advisors remain solo practitioners with some support staff, Tibergien looks for that to change. In particular, he says, there is a growing population of large RIA firms that are creating career paths and recruiting at all levels of experience.

“There’s a core group saying I have to get to critical mass in order to incubate the development of my people. What you’re trying to get to is: Can you afford to lose your biggest client and can you afford to lose your most important advisor? The notion is you want to get to total dispensability,” says Tibergien.

The Road Ahead

As the industry matures, the idea of being an “independent” advisor will lose its luster, according to Philip Palaveev, president of Fusion Advisor Network. The working definition going forward: business owner.

“There’s little difference between an advisor who is with LPL and an advisor who is with Schwab,” he says. “They’re business owners. And that’s more important than the nuances of what’s independent and what’s not.”

There are many moving parts associated with growing an advisory business: developing and retaining talent, creating equity ownership opportunities for the next generation, winning the confidence of clients.

“Clients want sustainability, too,” notes Nick Georgis, vice president of Schwab Advisor Services. “What will it take to create a sustainable business? I don’t think the principles have changed. You just have to think about so many more things. You look at things differently when you’re managing $400 million versus $100 million, when you have 30 employees versus 10. We have firms that have more than one location and that increases complexity. We have to learn to manage that complexity.”

As for the independent broker-dealer, Tibergien offers a cautionary note.

“The challenge for broker-dealers is to redefine their value proposition. The risk many run is just being a place where they process transactions and provide oversight. Those firms that still kind of operate that way have failed to recognize the changing dynamics of the independent advisor. If the focus is on how I give them more products to sell, not how do I help them serve their clients more efficiently, that old model runs the risk of becoming obsolete,” he says. “You’re dealing with a pretty smart population. The vast majority have already proven they can make money. The question now is: How do I get to the next level in my business?”

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