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A National Association of Securities Dealers policy that prohibits the use of block transfers of clients’ mutual funds and variable annuity contracts has helped stall recruitment in the independent sector and put brokerage executives on red alert.

“It’s really affected the ability of reps to jump from one firm to another. It’s an awful impediment to their ability to do business,” according to M. Shawn Dreffein, president and CEO of National Planning Holdings and CEO of National Planning Corp. “They feel trapped by the environment they’re in. It’s increased costs for the rep and for the [receiving] broker-dealer. I kind of look back and who is the person most harmed in all of this? It’s the client. We’re all buzzing about this.”

In fact, the Financial Services Institute, with 102 broker-dealer members representing 128,000 independent financial advisors, will push the NASD this year to rethink what is officially known as “Notice to Members 0257.” The notice was issued in 2002 and clarified in 2004.

“I can’t quantify it for you, but I do know from conversations with our members that it has had an impact on recruiting,” says Dale Brown, executive director and CEO of the advocacy organization. “I don’t mean to oversimplify it, but for any advisor with a significant amount of business, changing broker-dealers is not for the faint of heart. It is a monumental task and a drag on revenue production. Even with the best of transition efforts, it has an impact on clients. So to add on to that an inability or question mark about whether you can streamline the process of block transfers, it’s just going to slow things down. This will definitely be part of our broader, ongoing dialogue with NASD this year.”

NASD officials could not be reached for comment.

Up until the notice came out, advisors would simply inform mutual fund sponsors that they were moving to another firm and all of their client accounts would transfer over in a block or, as some put it, a bulk. Today, the advisor must contact each client individually and have him or her fill out a change of dealer form for each product sponsor. Last year, National Planning recruited an office of 70 reps that had roughly 13,000 pieces of paper to fill out that once would have been subject to block transfers, according to Dreffein. The process took three months. Previously, she says, it would have taken one week.

“Absolutely, this is halting movement. It’s a significant impediment to somebody making a change today,” adds Dreffein. “What you have is the rep is basically in a situation where all of the work is placed on their shoulders. We’ve had situations where reps really wanted to join the firm but have been overwhelmed by the complexity of making the change.”

To ease the pain, National Planning 18 months ago instituted a transition allowance, running up to 2.5 percent of trailing 12-month GDC, to be used by advisors to hire temporary assistants to help with the increased administrative burden.

The block transfer issue has had the most severe impact on advisors with a lot of direct business moving from one independent firm to another. Fee-based advisors have been affected far less.

As Janice Hart, vice president of national field development for Commonwealth Financial Network, notes: “This is so 2002 as far as I’m concerned.”

Hart adds, “The fee-based advisor today is using a separate account manager or third-party mutual fund programs. This isn’t part of their world — and this represents the majority of business that comes to Commonwealth. The business that is affected are people with large numbers of accounts with mutual fund families or variable annuity accounts. Industrywide, it’s probably slowed those types of planners down.”

Indeed, Mitch Vigeveno, president of Turning Point, a financial services recruiting firm, says he’s run into trouble with a large producer in the Northeast who has 2,000 accounts. “He’s dragging his feet and this is definitely playing a role. If you have a few hundred accounts, it’s one thing. But this guy represents everyone from CEOs to Grandma Moses,” according to Vigeveno.

“There’s no doubt it has made some people think twice. In the old days, you filled out a form, sent it in and you were off and running,” he adds. “And a lot of firms, especially the bigger ones, have geared up transition departments to prepare the paperwork for reps. Or they’re allocating some funds in their deal to compensate the rep for the extra work involved — or both. It’s got to be costing them some money. But they know better to play it that way than not to get the recruit.”

As an example, Raymond James now has 26 full-time associates devoted to transition management, and it will be expanding its services further this spring.

“We’ve probably grown by 50 percent since 2002. We work with every new office that opens, with support from both our home office and on site. When you look at a regulatory environment like this, you have to increase your resources. You have to be available,” notes Mark Jones, director of transition management for Raymond James & Associates and Raymond James Financial Services.

Jones says the block transfer matter has represented “a piece, but a small piece” in the firm’s decision to build up its transition management department. He adds that he would support any effort to allow block transfers.

“The rest is the competitive environment,” he says. “You have to offer something the other firms don’t.”

A Damper on Business

Early reports suggest that recruiting numbers for 2006 in the independent sector are largely flat or down. Industry experts attribute the malaise to an up-market that’s made advisors complacent and, in smaller measure, to the block transfer impediment.

“Sure, the firms have built up transition teams to help accommodate these people but you still have to go out to each and every client. So you’ve got to ask yourself: ‘Am I going to move? Am I really that dissatisfied with my broker-dealer that I’m going to repaper all my clients?’ It’s impacted the independent sector hard,” according to Larry Papike, who heads Cross-Search, an executive search firm specializing in the independent contractor marketplace.

“I think most of the firms will have down numbers for 2006 and I think the same will be true for 2007. In a situation where brokers could move easily, there was no problem. Block transfers did everything,” he adds. “Now, you have to have an overriding reason to make that move.”

Papike says he’s talked to “tons” of brokers who don’t even know about the block transfer change — then get cold feet when they learn what it involves.

“I get brokers calling from all over the place. When they start talking about moving, they talk about bulk transfers. They don’t know what’s happened. And when you tell them they’ll say: ‘You know what, it will take me two months to get in front of my clients and those two months will cost me X amount of dollars.’ Unless there’s a compelling reason, the conversation often stops there,” says Papike. “This has impacted my business, everybody’s business, it really has. I’ve become very proactive. When I talk to somebody who hasn’t made a move in a while, this is the first thing I discuss.”

Over coming months, the Financial Services Institute along with individual brokerage executives plan to lobby the NASD for relief. As Brown notes, “One of the first agenda items for us is making sure all of the regulators have a clear and accurate understanding of our business model. We know some of them have misperceptions and those misperceptions are never positive. In that context, we’ll be talking about the use of block transfers and how they are treated under the rules.”

Brown also plans to talk to NASD Regulation chief Mary Schapiro and her senior team about the “unintended consequences” the block transfer issue has had on clients.

“Our business model is not set up to handle orphan accounts. At a wirehouse firm, for example, if a Merrill Lynch stockbroker leaves there are several brokers waiting to take over those accounts. It doesn’t work that way in the independent business model. So putting roadblocks up to the efficient transfer of accounts ultimately has a negative impact on clients,” according to Brown.

Dreffein, too, says she intends to be proactive.

“We need to look at this issue as partners and hopefully come up with decisions that are in the best interest of clients. One of the things NASD has done very positively over the last 12 months is start an outreach program where they are finally encouraging us to open dialogues on issues of concern,” she says. “This is the perfect opportunity to pick up the phone and place that call.”

Ellen Uzelac is a freelance writer and contributing editor of Research.


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