Good Catch

What would be a juggernaut of a company today, when millionaires are more common than ever before? Imagine a company where motivated advisors did comprehensive financial planning for high-net-worth clients that included a top-to-bottom financial plan, money management, and insurance, tax, and estate planning. These advisors would work out of separate offices in the most bustling–and moneyed–metropolitan areas in the country, work on a fee-based model, and employ the very latest technology to achieve their goals. Most importantly, these advisors would not work independent of a larger parent company but actually be salaried employees.Whatever revenues they generated from the fees for assets under management would be funneled back to the parent company with the advisors themselves receiving only a flat salary with bonuses for good performance.

“That’s the dream,” says Brian Nygaard, president of ING Advisor Network, which has eight broker/dealers and 10,500 reps across the country. “But it’s really not possible. It’s been tried a myriad number of times and it always fails because the successful advisors will simply split out on their own and work independently once they’re good enough. And you know what? Most of their clients will go with them because it is the advisor they have a relationship with–not the institution.”

So broker/dealers have to settle for the next best thing, which is to take only a small piece of the revenues that such reps generate. But when considering what makes a very attractive broker/dealer in today’s marketplace, the aforementioned vision still to some degree applies. Just take all of the qualities associated with that firm, and in a more realistic fashion, put the reps out of house, working independently from their own offices. You still have young, ambitious CFPs and ChFCs doing comprehensive planning and money management for high-net-worth individuals who live in the most moneyed portions of the country. They are still employing high-tech partners like Advent Office and NaviPlan, and running Monte Carlo simulations from now until Sunday. They are still working on a fee-based compensation model. In fact, the only thing that has changed is who owns the offices. “If you can’t bring the first vision to fruition, you have to apply the same concepts to the broker/dealer model and provide services to such advisors,” Nygaard says. “To some extent, that’s what makes an attractive broker/dealer.”

Of course, none of this is relevant if the purchaser of a broker/dealer finds that the B/D’s reps have dirty U4 forms or that the overall firm has been cited by NASDR for a number of violations. A purchaser would also want to take a gander at rep loyalty and turnover ratios. But after that, it’s back to the vision of young CFPs doing their thing. But why young? “First, you’re going to want to have a broker/dealer with relatively young reps,” says David Goad, CEO of FPtransitions and B/Dtransitions, firms that attempt to match buyers and sellers of advisory practices as well as larger B/Ds. “The buyers we encounter don’t want the average age of the reps to be over 55 because then you’re going to encounter massive succession planning problems,” Goad says.

Many prospective purchasers of broker/dealers request demographic studies of the takeover target, wanting to know not only the age of the reps, but also the designations they hold, Goad says. “Buyers want to know how many of the reps hold the CFP or ChFC marks.” Take, for instance, the last B/D that ING took over that wasn’t part of a larger purchase of a parent company–Atlanta-based Investors Financial Group in November 1998. At Investors Financial, 70% of the revenue generated by the firm was from reps who held one of those two marks or who was a CPA. “It’s symbolic of the professionalism of the reps,” Nygaard says.

The designations are also indicative of the overall planning process. It’s no secret that the cold-calling, “I like Intel,” brokers are out of favor. “Buyers want product-neutral advisors who address the entire spectrum of financial advice,” says Larry Papike, of the San Diego B/D acquisition consulting firm Cross-Search. “That’s where the marketplace is heading.” For instance, a study by FPtransitions that analyzed the sales of individual investment advisory practices to which they were a party–”2001 Practice Value & Data Survey for Buyers and Sellers of Financial Services Firms”–found that 74% of buyers wanted their acquisitions to do financial planning and 48% wanted estate planning performed. The reason for this is twofold: Primarily and most easily understood is that it is where the profession as a whole is heading. “We are not looking for a uniform process or approach to investment advice by a network of reps when we purchase [a B/D],” Nygaard says. “But we do want them to conform to what we call the ‘trusted advisor’ model.” This model, he adds, is best exhibited by advisors who engage in everything from estate planning, retirement, and life insurance to money management–and do it in an objective manner.