With the forecast for Santa Monica last October 15 showing pleasant skies and a high temperature near 70, the pool at the historic Fairmont Miramar Hotel was beckoning. But for the three dozen independent advisors affiliated with Royal Alliance Associates, work would just have to substitute for a California tan.
Summoned to the posh coastal retreat by CEO Mark Goldberg, the advisors, all of them ranking among Royal’s heaviest hitters, would spend the next three days facing tough questions from company executives and industry experts about their business management skills. “I took out my plan, put it on the table, and had it field-stripped and put back together again,” recalls Nathan Bachrach, a Royal Alliance rep and CEO of The Financial Network Group in Cincinnati.
Unlike many broker/dealer conferences, which are intended more to reward top-performing reps with a fancy resort getaway and golf than subject them to long hours working indoors, this program was all business. Attendees even paid their own transportation and hotel bills, as they might for a meeting of the FPA. But this was not just any advisor meeting. The session also marked an ambitious effort to shift Royal’s and its advisors’ strategies. The object of the effort is the OSJ (for office of supervisory jurisdiction) manager, a position that Goldberg views as the key to Royal’s future success.
Many independent reps see their branch manager as just another practicing advisor, or sometimes a home office executive, who also serves as a compliance cop for a small share of everyone’s gross revenues. However, the OSJ manager’s role can and should be much broader. In the independent B/D world, where OSJ managers tend to be advisory practice proprietors as well, the challenge is to turn them into true business managers. “Any successful advisor today has employees and manages office space, time, and talent,” observes Commonwealth Financial Network CEO Joe Deitch. “If they don’t realize that they are business managers, they will limit their success.”
According to an unpublished study by John Bowen, Robert Niederman, and Jeffrey Roush of the consulting firm CEG Worldwide, the industry’s most successful managers also grow their practices through savvy marketing support and aggressive recruiting of new reps, while at the same time deemphasizing the time they spend serving their own clients’ financial needs. To a great extent, notes Bowen, these ?bermanagers are creating “mini broker/dealers in a B/D,” managing firms with seven-figure revenues and boasting a dozen to as many as several hundred reps. The overall independent B/D industry, by contrast, currently averages a little less than two reps per manager.
It is Goldberg’s desire to refashion Royal’s business around a network of such large managers, both to increase the AIG Advisor Group unit’s revenues and its efficiency. The goal is not universally accepted: CEOs of several other independent B/D firms say they have no plans to cut back on recruiting individual reps or to change the way they supervise advisors. But Clearwater, Florida-based headhunter Mitch Vigeveno notes that other insurer-owned broker/dealers are striving to “build an organization, and they don’t want to do it with a lot of Mickey Mouse offices with two guys doing $100,000 [in gross annual revenue] apiece.” Royal, of course, is owned by insurer American International Group, although AIG seems to be content with giving its B/Ds considerable independence.
The campaign to change Royal’s course dates back to October 2001, when the nation and stock market were still acutely feeling the pain of the 9/11 terrorist attacks. At the time, says Goldberg, “we made a decision. Instead of trying to recruit one rep at a time doing $100,000 or $150,000 [in revenue], we were going to take our branch manager system and help them recruit.” Moreover, the focus would be on profitability as well as on revenues. “A [large advisor] firm that is struggling to make $100,000 is destined to cut corners,” Goldberg worries. “It requires high service and attention levels from the home office and tends to be the practice with the most complaints.”
Royal’s strategic shift has led Goldberg to cull smaller advisor shops from the ranks. Some other B/Ds still go after reps with annual production of as little as $50,000. But Royal, whose $340 million in estimated 2004 revenues make it the third-largest independent broker/dealer in Investment Advisor’s annual industry directory, since 2004 has been concentrating on solidly profitable larger advisor groups generating at least $1 million a year in fees and commissions. The result: a drop in the total number of Royal’s advisor shops to 290 in December, from 334 in 2001, even as average gross dealer concessions per rep have nearly doubled, to $171,000. Goldberg sees the tally falling to 275. The number of Royal reps, meanwhile, has declined about 13%, to some 2,100, over the past three years. “We have a lot of one- or two-man practices who can’t do this [$1 million target],” Goldberg says. “They’ll either have to join another practice, grow their business, or leave.”
Where profitability and efficiency are concerned, size does appear to matter. In a project commissioned by Royal Alliance, CEG last year surveyed 536 OSJ branch managers at wirehouse and independent broker/dealer firms around the U.S. While a third of the managers reported pretax net income for 2003 of less than $100,000, only 19% of the managers brought in more than $300,000. But the average income for this upper-bracket group was a whopping $567,000 in 2003 and an estimated $794,000 for ’04. In the independent B/D world, these fortunate few tend to be advisory practice entrepreneurs–the ones who pay the bills and shut the lights off at night. Some also supervise other independent reps who work in small offices and are willing to pay another advisor 4% to 6% of their revenues for oversight. However, what is most surprising about the high-income group is what they don’t do.
According to CEG, these high-income advisors devote so much time to building their businesses that, on average, less than 6% of their firms’ revenues come from their own time spent advising clients. By contrast, OSJ managers earning less than $100,000 devote themselves almost exclusively to their clients. More than 71% of their firms’ revenues come from the managers’ own production.
While the study showed that the vast majority of managers of all income levels are interested in recruiting other advisors to help build their business, there were clear differences in strategies between those at the high end and their smaller competitors. For example, high-income managers overwhelmingly troll for prospects at wirehouses and regional brokerages, where many larger advisors tend to work. Managers at the lower end of the income scale tend to recruit among other independent B/Ds and insurers, which many high-end managers eschew. Almost no one at the high end goes outside the financial services biz for recruits; more than 15% of lower-end managers see newbies as promising fodder.
Higher-income managers also say they need a more specialized approach from their broker/dealer. To be sure, nearly every manager at all income levels likes the idea of a B/D providing financial incentives to help convince reps to jump ship. But while low-end managers say they need their B/D to help them with basic product training, high-end ones favor lessons on working with more advanced products. A substantial minority of high-end managers–22%–also wants their B/D to help them forge strategic relationships with accounting firms that are not currently competing with them in the planning field.