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The Virtues of Independence

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Cambridge Investment Research, Inc. takes pride in being an independent broker/dealer. While other firms have sold out to huge financial services firms like AIG and ING Group over the last few years, Cambridge is determined to go it alone.

The Fairfield, Iowa-based firm’s “independent vision” continues to serve its 600 advisors well, says Eric Schwartz, president and CEO. “It’s our job to make our world fit to [advisors'], not make their world fit to ours,” he says, “and to figure out what it is that [advisors] need and want.” Schwartz believes independent B/D firms that have been swallowed up by insurers and banks have drifted from the practice of putting advisors first. These firms no longer view the advisor as a “customer,” he says. “When a firm is bought by another company, the management of that company does not understand the mind-set of an independent advisor.” The acquiring firm’s primary objective, he says, “is not to service the advisor, it’s to get the advisor to do what they want–sell more insurance products, [or push] a fee-based program that’s more profitable for the B/D.”

Jeanne Robinson, a CFP with Marshall Financial Group in Doylestown, Pennsylvania, knows all too well the differences between an independent B/D and one that’s been gobbled up by another firm. There’s a distinct difference, she says, between a “large corporation catering to the profitability of a shareholder versus a small one viewing the advisor as a client.” Her advisory firm switched from FSC Securities in Atlanta to Cambridge two years ago after FSC was acquired by AIG. “All of a sudden we came under the umbrella of a very large, insurance-based organization,” Robinson says. Her firm was not only less than thrilled with the new culture, but found it was spending an inordinate amount of time keeping pace with new technology. “We were constantly learning and relearning technology as the broker/dealer rolled out the most recent marvel from the back office,” she says. “When you have a large group of reps with very different types of practices, the technology is designed to do everything for everybody. A lot of times that becomes problematic for a firm that has a very focused practice.” Cambridge, on the other hand, offers technology that suits a particular advisor’s needs, she says.

Karen Morstad, director of marketing for AIG Advisor Group, which represents the six broker/dealers within its B/D network, says Marshall Financial’s dissatisfaction with the technology products and cultural environment following FSC’s merger with AIG is “the exception to the rule. We’ve had market growth at some of the broker/dealers, especially during these [turbulent] times, due to the positioning of the technology,” she says.

Still, Robinson says her firm knew it was time to leave FSC when it started “losing [its] independence as an advisor.” The handwriting was on the wall that Marshall Financial would soon be encouraged to push proprietary products, she says. But Larry Papike, president of Cross Search, a broker/dealer recruiting firm in San Diego, California, says that while firms like AIG and ING want advisors to promote their products, independent advisors are not “penalized” if they don’t. Sure, these financial services firms that have acquired B/D firms are banking on reps selling their products, he says, “but it hasn’t happened to a great degree.” Besides, advisors “are independent contractors,” he notes.

When it comes to recruiting advisors in today’s bear market, it’s crucial that broker/dealers provide products and services that outshine those offered by their competitors. Schwartz believes Cambridge’s focus on fees is contributing to the firm’s unprecedented growth. Over the last 10 years, the B/D has gone from a meager $5,000 in revenues to a whopping $70 million in projected revenues this year. “We have the highest percentage of fee-based business of any of the [larger] independent B/Ds,” he says, noting that 37% to 40% of Cambridge’s revenue comes from fees. Cambridge also has “an unusually large percentage of reps that are active in the fee side”–approximately 78%–”and an unusually large” 32% that have their own RIA firm.

Robinson is impressed that Cambridge is willing to “support a fee-only planner,” something she says is often unheard of in the B/D world. “Cambridge embraces all types of revenue generation,” she says. “They will work with an advisor if they feel that advisor is a quality person regardless if they are commission-only or fee-only.”

Schwartz says Cambridge’s open architecture allows advisors to manage money on a dozen brokerage platforms, a service not found at even the largest and best-run independent B/Ds like LPL, Raymond James, and Commonwealth Financial. “On the fee side, we offer many different platforms on which the advisor can work,” he says. Unlike the aforementioned firms, Cambridge clears through two firms, Fidelity’s National Financial and Pershing, Schwartz says. Cambridge also has “a very large amount of money at Schwab, Waterhouse,” and at least 10 other firms, he says. At LPL, Raymond James, and Commonwealth, if the rep is managing money, “the rep has to use their platform.”

Cambridge’s open architecture platform is a great recruiting tool, Schwartz says. “When advisors have picked us over our three largest competitors, it’s usually because they see that, especially if they’re doing fee-based business, they have more choices.” If an advisor is from the West Coast, for example, “Schwab is a very big name, and they may have clients that already use Schwab, so the ability to use Schwab is a big factor,” he says. “And if a rep is coming from a firm that already uses Pershing or National Financial, they don’t have to change that.” This flexible platform has attracted “bigger and more successful” independent advisors to Cambridge.

Cambridge’s pricing is attractive as well, Schwartz says. Reps are offered up to a 90% payout on mutual funds, variable annuities, direct investment programs, and securities. Up to 95% payout is offered on fee-based programs, and 100% on insurance products.

Cross Search’s Papike says Schwartz is “one of the smartest securities minds I’ve ever dealt with.” Why? For one, Papike says, Schwartz has made it a point to carefully examine each of his competing B/Ds’ specialties. For instance, after looking at LPL’s fee-based Strategic Asset Management, or SAM, program, “he designed a program that was similar and undercut the price.” LPL charges 20 basis points for its SAM program, whereas the Cambridge Managed Accounts Program only charges 5. Strategic moves like this have made Cambridge “really attractive to other entities,” Papike argues.

Cambridge’s Midwest attitude is often a refreshing change for brokers who are used to dealing with surly and unresponsive firms. At Cambridge, the advisor is “talking to somebody with a smile on his face and also somebody who’s going to help them with their problem,” Papike says. “Unfortunately with all of the consolidations that have taken place, sometimes at other firms when you call up you get a voice recording that says, ‘Tell me what your situation is and I’ll get back to you,’” he says.

But one of the challenges Cambridge has had to overcome is it location, Papike says. While being based in the Midwest helps Cambridge keep costs down, Iowa is not known for harvesting the best securities brains, and enticing qualified candidates hasn’t been easy. But “I think they’ve overcome it,” Papike says.

Cambridge is also helping advisors with one of their biggest challenges: technology. “We believe there is a growing need, due to client sophistication, new increases in regulation, cost concerns in a down market, and declining fee pricing, for integrated, inexpensive technology,” Schwartz says. While Cambridge’s technology kitty can’t match that of larger firms, Schwartz says advisors can gain access to all of their technology needs through Cambridge’s 12 trading platforms. “Schwab and the other [large discount brokers] have spent a lot on their trading systems; naturally, by using 10 or 12 different platforms, each rep cannot only take advantage of the really great technology of one, but they can choose which one to use.”

But Cambridge is also working on internal technology that “augments the external technology of our clearing firms,” Schwartz says. A year and a half ago, Cambridge started using account aggregation software from StatementOne that creates consolidated client statements. Cambridge calls the service “CIR Statements.” And within the next few months, Cambridge plans to release an imaging system that will create greater efficiencies between the advisor’s office and Cambridge’s home office. When an advisor opens a new account, rather than sending the paper form to Cambridge, the advisor will scan the document and send an electronic file to Cambridge. The imaging system “reduces paper and makes electronic file cabinets rather than paper ones,” but that’s only the first step. Historically, imaging systems have created a file, which is basically a photocopy of the document, but someone still had to enter data separately, he says. Under the new system, the scanning system populates the database itself. “So the client fills out one form one time, and the data goes into the system without anyone entering it, which changes the job description of many people at our home office as well as many people at the branches,” Schwartz says. “And not only does [the advisor] not have to enter the data three different times, but five new sets of forms for all the possible kinds of accounts the client wants to open are filled out automatically.” Cambridge’s average advisor pulls in about $500,000 in revenues per year, Schwartz says; “the imaging system could save each $25,000 or more a year.”

Cambridge hopes to release the imaging technology to its rep force sometime this year. “At least a dozen different financial planning software and CRM solutions will ultimately be able to work with [the imaging and CIR Statements] programs,” Schwartz says.