Rough markets, rough times, and a catastrophe no one could have foreseen have driven much of the business world right into a maelstrom. The financial industry has been battered from stem to stern. Wirehouses have been laying people off for months. Stock trades are down. Portfolios are down. Broker/dealers are suffering.
Well, not all of them. Just as not all portfolios are down and not all businesses are hurting in a market that has been volatile, to say the least, some B/Ds have been doing very well in these turbulent days. Whether large or small, some companies have it together and are weathering the rough waters in fine style. How did they manage to do that? What worked for them that didn’t work for others? There’s no one-size-fits-all business plan; from the type of business they seek to the kind of technology they employ to the sort of rep they want to work with, B/Ds have varied strategies for success.
Running the Numbers
Each year, Investment Advisor Research Editor Liana Camporeale runs the numbers on the B/D industry to come up with our exclusive look at the state of the independents. Of the 70 firms responding to the 2002 survey, 43 have given us data for three years running. That information forms the basis for our picture of the industry.
Last year, gross revenues for the 43 B/Ds came to $2.71 billion, down 11.7% from $3.07 billion in 2000. But for 2002, the B/Ds foresee a sharp recovery, with revenues climbing 15.8%, to $3.22 billion. Only two of the 43 respondents think revenues will decline.
Thirty-nine B/Ds submitted three years of data for fee-based income. The big news is that the industry’s fee-based business is decidedly on the rise. Fee-based revenue for 2001 was $353 million, up 2.6% from $343.9 million the year before. But this year, the 39 B/Ds say fee-based revenues will grow 17.2%, to $426.2 million. Only three firms expect their fee-based revenue to drop in 2002. Last year, 14 noted a decline.
Even in the face of the most challenging investment climate in more than a decade, the industry is continuing to grow its rep force. The 49 B/Ds that gave us data on their reps for 2000 and 2001 reported that they had a total of 47,078 representatives at the end of 2001. That number is projected to rise by 0.7%, to 47,410, by the end of 2002. Four B/Ds plan to remain constant; 26 will add, and 14 expect to drop their total number of reps.
As for gross revenue per rep, it came to $138,194 last year. B/Ds think it will drop by a quarter this year, to $103,349. That’s not a rosy picture for individual reps, on average, despite industry expectations of increases in gross revenues. Yet for the B/Ds who are faring well, business remains brisk and recruiting continues. Indeed, gross revenue per rep is up at 34% of the firms reporting.
A Strategy That Works
If you want to see how a particular B/D is navigating around the shoals, take a look at Folsom, California-based Brecek & Young (BY). Its excess capital fell substantially in 2001, from $840,000 to $545,000, but that’s not a concern to President Roland Brecek. “We did lose money last year,” he concedes, “but the reason was the acquisition [Brecek & Young bought Donahue Securities last year]. Had we not had that, we would have been in the black. We’re expecting to make a reasonable profit this year.” Brecek explains that the acquisition and start-up phase, expensive in itself, was accompanied by expenses for technology, new employees, and an office building. “Not only did it bring down excess net capital, but it also hurt us on the cash flow side initially,” he says, noting that there was no revenue coming during the transition. In the fourth quarter of last year, however, he says, they did turn a “nice profit.”
In fact, says Brecek, “We’re having a lot of fun.” With $2.4 million in gross revenue, “April was fantastic; it was our best month ever,” he says. “I know that’s the opposite of what a lot of B/Ds are experiencing right now. A lot of our business is in retirement plans, and those plans are being funded every month regardless of market conditions. Tax-sheltered annuity accounts, 467 deferred compensation plans, and 401(k) plans [are funded with money] that employees have deducted from their paychecks every month, and it goes in regardless of market conditions. The amount of revenues we’re getting every month is actually increasing. We’re getting more and more under management, too–I can’t wait till the market rebounds.”
With gross revenue of $19.3 million in 2001 and an estimated $24.2 million in 2002, BY is still in expansion mode. Brecek expects to add more reps and increase revenues this year despite market conditions. The company is down by 70 reps–”A lot of firms have a lot of dead wood,” Brecek says–but BY is still looking to add more. “We’ll grow by a net of 100 reps,” he says.
BY devotes a lot of attention to reps, and that affects not only its recruiting strategy but its technology investments, expansion plans, and training. While BY’s minimum standard for producing reps is $20,000 annually, Brecek says, “we’re really seeking reps that do $100,000 plus. We normally don’t hire an inexperienced rep.” Yet having the $20,000 minimum allows BY to train a newbie with promise.
New reps’ concerns include technical improvements that allow reps to be paid weekly, and back-office customization that allows OSJ [office of supervisory jurisdiction] staff to customize how they pay representatives. “We have a lot of happy reps right now,” says Brecek. “I want our reps to feel that the things we’re doing are specifically to help them to build their business, rather than to help us build our business.”
To that end, he says, BY will do a private-placement stock offering to reps to raise $1.4 million over the next couple of months. The firm is also meeting with an advisory group of reps to determine future technology needs. Already BY has upgraded software to allow reps to look up “any client they’ve ever worked with and print out whatever they need” by accessing their client database online. The software will also fill out forms for reps. Training will begin on the software upgrades in June. Another thing BY has done for reps, he says, is make it possible for them to earn CE credits on the BY Web site.
Another Happy Camper
Although its 2001 gross revenue and 2001 gross per rep numbers were both down from 2000 figures, if you talk to Jim Putnam, national director of sales and marketing at LPL Financial in San Diego, business is pretty handsome there, too. Activity, he says, has increased since last year, and he predicts that the trend will continue.
Putnam acknowledges that last year left a bit to be desired. “When you look at LPL’s business overall,” he notes, “we were down 9%,” adding that “while you never like to be down, considering what happened to the rest of the industry, that was a tremendous achievement.
“We believe that advisors in the future are going to be managing millions more of their clients’ money,” says Putnam. “Our goal is to provide them with the tools, research, and efficiency to be able to do so in their businesses profitably. So what we continue to invest in is automation and technology.” In fact, LPL’s spending on technology to support reps hit an all-time high of $35 million in 2001. Says Putnam: “The fruits of that investment will be borne out in the next bull market, when our advisors have millions more to manage and they have the tools to manage it with.”
Fee-based business is continuing to prosper at LPL. “I really believe that it’s a bull market for advice,” says Putnam, “and one of the things we experienced last year was that we had 65% more new accounts opened in 2001 than in 2000. What this tells me is that because of market conditions, clients are seeking a trusted advisor more than ever. The number of transfers of accounts into the firm is up 35% over 2000. It was one of the best years to get new clients and assets.” That’s one reason he expects this year to be so much better. “We’re now beginning to see the effects of all the new accounts and all the new assets.”
Putnam says that the last year “validated the business model of the fee-based business. Our number of fee-based accounts was up 13%, while all assets under management were down 3%. What that tells me is that everyone wondered what would happen in down markets with fee-based accounts. Now we know clients want the advice, and are willing to pay for it.” Fee-based business has been the fastest-growing area of the firm, he says, for a decade. “Ten years ago it was probably 2% of our business,” Putnam remembers, “and today it’s closer to 35%.”
Of course, LPL is not alone in finding value in advice. Jaime Punishill, senior analyst at Forrester Research in Cambridge, Massachusetts, says that “the Internet injected a shot of kerosene on the fire–it said transactions were worthless. It said you can’t charge [huge fees] for transactions. It forced advisors to shift, and at some point it becomes a competitive issue. If you haven’t offered a fee-based price, your client will go somewhere else.”
But Punishill cautions B/Ds that adding fee-based programs “changes the model and services you have to offer, and it’s accelerated planning. You have to demonstrate value in a different way. It has to be around portfolio analysis and planning simulations and such.”
Indeed, Putnam says that LPL is actively seeking out consumers, especially wealthier ones, who thought they could manage their own portfolios and now are hunting for advisors. “What we’re providing our advisors with now are tools to do portfolio reviews and proposals for high-net-worth clients.” At the same time, LPL is “concentrating on research. Especially with the headlines about research today, the fact that our research is unbiased makes it even more important than ever before. The fact that we don’t make markets in stock, we don’t have proprietary products, and we don’t do investment banking means that when our research department issues a report or recommendation, it’s without any prejudice or bias.”
LPL has been adding reps, too, at a pretty good clip: 400 last year alone. And Putnam says his firm is still looking for “people who put their clients first, who feel comfortable owning and operating their own business, and who have a long perspective about helping people manage their wealth.” LPL’s new reps are coming from wirehouses, regional firms, and other independents, according to Putnam.
Even though their independence and lack of market-making in securities are factors in their apparent success, according to Matt McGinness, senior analyst at Cerulli Associates in Boston, the very lack of proprietary products can make it harder for LPL–or any true independent, for that matter–to survive in the current marketplace.