George Diachok is no stranger to the broker/dealer business. In fact, he retired from it in 2001 after selling the firm, Multi Financial Securities, that he founded in 1981 and ran with his son Russ. But changes in the marketplace, and particularly changes in Multi Financial after its purchase in 1998 by ING, shifted his retirement plans, and now father and son have launched a B/D called Geneos Wealth Management, based in Denver. While you might think that an extended bear market is not the best time to start a new B/D, let alone one that demands high performance from its reps, that’s exactly what the Diachoks have done. Their intent? Build a smallish B/D that rewards high producers, uses the best technology, and gives local branches autonomy. Oh, and encourage impartial attention to clients’ portfolios by prohibiting proprietary investment products.
“[ING] bought us for top dollar and we were very fortunate,” says George Diachok. “They made a lot of promises and paid us cash, and for the first two years it was like the proverbial honeymoon.” But the “impending divorce was worse, because a lot of relationships built up over the years were coming apart.”
The reason? ING grew so fast it put its reps into culture shock, Diachok says. Starting from scratch in 1997, ING was at 10,500 reps by the end of 2000. When the market soured, ING looked for ways to lower expenses. In the fall of 2000, it began consolidating; in the wake of a corporate mandate to cut expenses by 15% to 20%, it decreed all seven B/Ds it owned would be serviced by a single back office–Financial Network, acquired by Aetna in 1996 and thus acquired by ING with its purchase of Aetna in the fall of 2000.
“That was not the way we envisioned it,” says Diachok, referring to the establishment of a single back office for the mushrooming sales force. “It was done unilaterally without talking to anyone.” While he readily acknowledges that that was ING’s prerogative, “we knew there would be a lot of people leaving” because of it. Recalls Diachok, “Half [the reps] in ’98 were unhappy with the acquisition. They had been with PaineWebber and American Express and SunAmerica, and didn’t want [to be part of] a 5,000-man sales force and to be just a number. When ING bought us in April of ’98, we had 375 reps. At the end of ’01, we had 760.”
The Diachoks, not pleased, felt that the consolidation process wasn’t finished. George Diachok theorizes that the seven B/Ds under ING’s wing will evolve to “about three.” However, father and son decided in April 2002 that the company they had sold was going in a different direction than they wanted. And while they thought that the market “was going to turn sooner than it has,” George Diachok says, they decided that the time was ripe to do something about it. “We had already served our no-compete clauses in our contracts. [We told them that we felt] it was best if we got out of their way.”
The 44-year-old Russ and his 76-year-old father decided to take their years of pooled experience and start a new, truly independent company that would offer service at a new level to its reps. But it wasn’t going to be a megafirm, either. The Diachoks chose the boutique approach. In September 2002, Geneos was born.
What Geneos Wants
To be a rep at Geneos, the minimum is $100,000 in gross dealer concessions for an individual and $300,000 for an OSJ branch, “disqualifying 70% of Multi” reps, says George Diachok.
While the Diachoks are gaining reps through referrals and wholesalers, Bob Treadaway, of Irving, Texas, a 40-year veteran of the investment business, also recruits for Geneos. Treadaway says he’s seeking professionals with a broad range of experience, not just stockbrokers or advisors. Reps don’t want to be shifted constantly from office to office for service from their B/D, and do want people at the home office who know their names and are familiar with their businesses. In addition, Treadaway questions whether the huge firms are doing the right thing by their reps and by the reps’ clients. “The INGs and AIGs have bought wonderful firms,” he says, “and they’re turning them into slaves. They’re not letting them do what’s best for their clients” because of the pressure they exert on reps.
Dana Ripley, director of external communications for ING, declined to respond directly to Treadaway’s assertions, but did say, “While we wish the Diachoks the best of luck in their new pursuit, we firmly believe that ING is focused on its clients and we look forward to proving the success of that strategy in the marketplace.”
But for those who do join Geneos, it’s not all going to be a bed of roses. Not only must reps be top producers to get in, they must stay that way. “When we started Multi we would take anybody with a license,” Diachok recalls. “It can work that way, but you’re never going to hit the big time.” Diachok says Geneos’s policy is to terminate the bottom 5% to 10% of reps every year, and that that will lead to a higher-producing company over time. Geneos will review reps’ production, and if they don’t make the cut, they’ll be offered a block transfer to another B/D–everyone owns his own accounts at Geneos and a rep can take them with him should he leave. Diachok says there are no proprietary products that must be sold to satisfy quotas, but he theorizes that the entrepreneurial spirit is much more likely to reside in a big producer than a small one.
“We would like to have a group of advisors with an average of $300,000 to $500,000″ in gross dealer concessions, says Diachok. That, he says, will lead to branches with an average of $1.5 million to $2 million in revenue. “We’re going after the upper-middle-income to high-income clientele,” he points out. Approaching clients through financial and estate planning is one way to build business; Geneos also plans to offer general advisory and asset management services. Diachok says Geneos primarily wants as reps those CFPs, CFAs, and CLUs already at the upper end of the client market.
Stand and Deliver
A B/D that demands so much of its reps must be able to deliver on its promises, or those reps will be very unhappy. Diachok acknowledges this: “You’ve got to deliver. That’s why technology is so important, because it can make [a B/D] so much more efficient,” especially in areas such as management and recruiting, and enabling Geneos reps to compete with reps from bigger B/Ds.
Each branch office will be a mini home office, Diachok says, with the ability to enter orders, supervise individuals at the branch, supervise bookkeeping and recordkeeping, and check on pending business written, status of accounts, and commissions due. “They can run reports any day they want to,” using Web-based software, says Diachok. The main database is Oracle-based Bonus; a system called Mercury ties together the branches and the home office. Through Mercury, OSJ branch managers can enter orders, review compliance requirements, approve an order, and print a daily blotter. That information also goes to the home office live throughout the day, so that if an auditor wants to check anything, all transactions are available.
Geneos clears through Pershing, and Diachok says that Pershing’s full range of services is available to Geneos reps. “The primary [service] we use is NetExchange Pro,” which offers live quotes, news, and the ability to enter any orders placed through Pershing. More complicated trades, such as futures or options, are checked by a compliance officer at Geneos.
The offices will also be paperless, with all documents being scanned right off the bat. Geneos has an in-house programmer and technicians, Diachok says, and boasts that the firm’s technology allows reps to “go head to head with the LPLs or Raymond Jameses or SunAmericas or American Expresses.”
Diachok says Geneos is also planning within five years to have a product mix of half commissions and half fees. He points out that reps with fee income who are managing assets will be truly independent, since there are no proprietary products to sell.
Stock ownership is another feature offered by Geneos. Diachok says that at least 35% of ownership will be held by “people who produce business” for the company. Starting in the first quarter of 2003, reps at Geneos will be able to earn shares of Geneos stock. In addition, he says, reps will be able to buy shares directly. The stock option plan for the field force, says Diachok, is weighted heavily toward the first year of the plan, so that those who join early on, say in 2003, will earn almost twice as much in 2003 per dollar of GDC as they will in 2005. This, says Diachok, is to reward foresighted individuals for taking on the risk of joining a new B/D.
There are only about 30 registered reps with Geneos now, but Diachok expects that by July 2003 there will be between 110 and 130. “The pipeline’s filling up,” he says, but stresses that Geneos is not looking for huge growth in numbers of reps. “We’re looking at 400 within three to four years instead of a thousand-man B/D,” Diachok says. “We want to deal with full-time professionals and service the hell out of them.” Referral is a very big part of its method of recruiting. “If we get someone from Lincoln Financial Advisors or American Express or SunAmerica or ING and they have the guts to join a new B/D, and we deliver, they’re going to talk about it,” says Diachok. Or at least that’s what Geneos is hoping for.