Secrets of Success

“LPL is different,” says McGinness, because “it does have proprietary managed account programs.” McGinness divides B/Ds into categories. There are the true independents, such as LPL and Cadaret Grant. There are firms that he characterizes as hybrids, such as American Express and Waddell & Reed, that “look like a cross between a wirehouse and an independent.” American Express, he notes, “has a big advisor force and a good bit of proprietary product on the mutual fund side.” A hybrid, however, “has a more diverse revenue stream than the true independent. That’s one of its strengths.” And then there are aggregators, such as SunAmerica and ING. Aggregators, he says, “know it’s a thin-margin business so they feel that scale is the only way to make it work.”

Regardless of the aggregators’ view of the business, says McGinness, “we’re not saying there’s not room for true independents. There will always be; successful advisors won’t work under any other model. LPL will be successful, and has been so far, but there’s a question as to how much room is left in that space.”

McGinness says that in general, B/Ds that are doing well look less like the traditional independent firm. “It’s difficult to run a traditional independent firm on thin margins inherent to that business model,” he says. “You give up a lot of things: no proprietary products, mutual funds, wraps, consulting. And also, true independents, or firms that don’t really attempt to pressure or encourage their rep force one way or another on products, have less ability to leverage asset managers and insurers for more lucrative arrangements–which wirehouses are able to do.” But some independents, he concedes, “have tried to forge relationships with asset managers and are doing quite well.”

When Putnam says of LPL that “Wall Street is moving more toward our way than we are their way,” he’s probably right. Says McGinness of B/Ds in general, “They are adapting. Most of the adaptation is occurring on the wirehouse side. Wirehouses are looking more like independents for autonomy, and more and stronger alternatives: fee-based and managed accounts, encouraging reps to transition to fee-based programs. The big question for the future of wirehouses is whether they will go so far at some point as to offer the multiple affiliation model that American Express has.” American Express, of course, not only has its own employees but affiliated offices as well; it both trains brokers and acquires them mid-career with their offices.

The Big Squeeze

Although many B/Ds are expanding despite the tough market, the industry in general is focusing keenly on costs in order to prop up the bottom line. The placement consulting firm Challenger, Gray & Christmas in Boston cites financial services industry layoff figures of 12,943 in January, 1,371 in February, 7,337 in March, and 8,648 in April. “It’s a harsh environment out there, and it looks as though it’s going to get worse before it gets better,” says CEO John Challenger. “Financial services cuts have been growing.”

While these numbers include not only broker/dealers but also banks and mutual fund companies, the trend is toward leaner and meaner throughout the sector. Echoing that view is Larry Papike, president of Cross-Search, a recruiting firm based in El Cajon, California, that serves broker/dealers, brokers, and recruiters.

The firms suffering the most, Papike says, are the transaction-oriented broker/dealers. “The firms doing more than 35% to 40% in stock and bond transactions are really having a problem,” he says. “Eisner Securities [which went into liquidation last November] did a lot of transaction-oriented business. The typical stock-and-bond business and independents concentrating in that area are off significantly. Packaged products and fee-based are still hanging in there. The broker’s revenue is down, and the firm’s revenue is down, too.”

When it comes to recruiting, this consolidation has made a difference in what reps are seeking when they look for a new B/D. “Registered reps used to call and want to talk about money and service,” he says. “What they really want to know now is about the stability of the organization. With firms going out of business, consolidating, and rolling up, they want to make sure that the name of the firm will be the same six months from now.”

Papike says that some firms are “stable and sound because they saw this thing [the trend in the economy] and they planned for it.” Revenues may be off, he says, but “it doesn’t concern me a lick. There’s still a continuous flow of people wanting to join the independent contractor environment.” And with the wirehouse firms continuing to increase production requirements and mandate product sales, he says, this “causes a movement to independent.”

Not everything has been rosy on the independent side, although there is hope for change. And results can be mixed within the same firm, as rising numbers of fee-based accounts struggle to stay afloat in a market that depletes the assets within them.

Mixed Bag

Texas-based Signal Securities, independent and small, with gross revenue of $3.9 million, has had its ups and downs over the last year. “Across the board,” says President Jerry Singleton, “people are tending to put their money in a coffee can and bury it in the backyard, as far as I can tell. People are afraid to make decisions. Hell, they’re afraid to get in a cab to go to the airport.” After a “horrible” March and April, “the jury’s still out” on what this year will bring. But Singleton is hopeful for the year, and pleased with the fee-based business his firm has done. “I’m still very positive on this market,” says Singleton. “We’re still looking for it to turn up before the end of the year. If you look, there are still more companies increasing dividends than cutting them; something like 65% of first quarter earnings estimates beat analysts’ expectations, and another 20% met them. So that’s only 15% of companies that didn’t meet earnings expectations. Given all that, and with this steady interest rate environment and no inflation, corporate earnings should follow by the end of the year.”

But to Singleton, the jury has already decided in favor of fee-based revenues. Compared with last year, they’re up, says Singleton, “and that’s simply because we’ve captured more assets and have more money under management. This year we have picked up $3 million to $5 million in fee-based accounts, which is small as a number but a big percentage for us, based on the fact that we only had about $10 million under management. People are recognizing the value of hiring an investment advisor. It’s an admission that they do need help; they can’t go out online and do it themselves. They’re willing to pay an advisor for good advice. I think for the fee-based side of the business, it’s a very good sign.”

“People are always out of sync with the market,” he adds. “The traditional flag-waving American out there is always buying when he should be selling, and vice versa, because he’s a trend follower, he’s always too late, and never has the bravado to make a move when he should. You buy when there’s blood on the street.”

“Average folks wait until 80% of the market moves before they jump in, and the market turns on them and they jump out,” says Singleton. “And five years later they repeat the cycle. That’s why people need investment advisors, to hold their hands and steady them out. I have one man who calls me about once a month. That’s where financial professionals are so desperately needed in this environment. That’s when you make clients for life.”

Although times are tough, Signal Securities is upgrading its technology to make its systems simpler and more user-friendly. Singleton is looking for “new software, whether it’s for searching for good equities or doing asset allocation. Some software out there is fantastic, but you’ve got to have a Ph.D. in computer skills to use it.” The easier it is for reps to use, the more of an attraction it will be. At the same time, Singleton is moving toward a paperless business. Signal has done away with paying reps via paper checks, for instance, even though “the old-timers are fussing and fuming and having a fit.”

Just A Technicality

Punishill of Forrester zeroes in on the issue of technology, saying, “Increasingly one of the big differentiators between independents and captives [wirehouses] has been the technology provision. You get a lot of technology at Merrill Lynch, and [at the independents] you only get as much as you’re willing to build yourself.” While Schwab and such companies as Advent and TechFi have “closed that gap,” he says, “the captives, now under pressure, are busy building next-generation workstations, and will be focused on integrating data across the platform and using CRM to provide help to advisors.”

It’s a “huge transformation to fee-based planning; the market environment is only accelerating it,” he says. A broker at a wirehouse trying to go fee-based now suddenly must think about “planning, and insurance, and estates that I may or may not be expert in or comfortable with,” says Punishill. “How will I get there when it was hard enough managing the assets? A challenge [for the independents] will be competing with systems that will help the captives sound a lot smarter.”

The system will automatically bring up screens to guide brokers, offering suggestions on what to tell clients and providing contact information for outside specialists: “The screens will say, ‘Here’s what you need to say, and here’s the expert to talk to,’” he says. “Captives are not sitting around waiting for the indies to eat their lunch.”

As wirehouses up the ante on what they expect from reps, and as more and more of those reps decide that they don’t want to deal with the pressure or constraints imposed by wirehouses, more gravitate toward independents. Mitch Vigeveno, president of Turning Point, a recruiting firm in Clearwater, Florida, says he had an inquiry for a rep to go from an independent to a wirehouse. “We chased down the deal and he decided he didn’t want to do it. He found it difficult to have someone looking over his shoulder.”

For some, it’s tough to go to a wirehouse, anyway. Says Vigeveno, “The wirehouses have all upped their antes; in terms of the people they can pick up, they want $500,000-plus guys.”

The Last Word

Although many B/Ds on the prowl for new reps are promoting themselves as advisory and planning firms, Punishill at Forrester notes that the same percentage of households is using advisors now as five years ago. Moreover, “as the markets go further south, clients go into ostrich mode. They don’t pick up the phone; it depresses them. They’re not talking to the advisors they’ve got.”

Try telling that to the B/Ds that are making a success of themselves in hard times. Via aggressive recruiting, hefty tech budgets, and other means, they are keeping costs down and, Punishill observes, using the Web and e-mail to “reach out to folks and bring them back into the fold.”

When the going gets tough, companies need new tactics to succeed. The top players in our annual industry survey are certainly showing that they are up to the challenge.