The Harvard of Broker-Dealers

If you want to know what a broker-dealer is like,” says Joseph Deitch over a cup of first-rate lobster bisque at the Harvard Club on Boston’s beautiful Commonwealth Ave. (a.k.a. Grand Boulevard), “you need to understand the personality of its top management.”

This may be particularly true of Commonwealth Financial Network, which Deitch founded in 1979 and built into a Top 25 independent broker-dealer. The choice of the Harvard Club, where Deitch is a member, is no coincidence. His retail financial planning practice, out of which Commonwealth eventually grew, was called The Cambridge Group. He also will have you know that the Boston Latin School, where he went as a kid, actually predates Harvard, having been established a full year earlier, in 1635.

It may be a stretch to say that Commonwealth strives to be the Harvard of broker-dealers, but you can’t shake off this impression. The firm produces a print publication whose name — perhaps not coincidentally — is Commonwealth Business Review.

Deitch puts it a bit differently: “We want to be the Four Seasons, the Ritz-Carlton of the industry.” But it is the same idea.

Talking about how Commonwealth differs from its competitors is his favorite subject, says Deitch, and he can get quite enthusiastic about it. With around 1,100 financial advisors, Commonwealth is clearly not the largest broker-dealer, but it positions itself as a high-end player. While it ranked 19th in terms of the number of reps on Investment Advisor’s 2005 list, it occupied a much higher ninth spot in terms of gross revenue, and higher still, fourth, in terms of average annual production per advisor. Commonwealth advisors, Deitch claims, now average some $300,000 in production.

“We are virtually alone among our competitors to have no conflicts of interest. We do not have a parent company, we manufacture no products and we are privately held — which means that we don’t have to worry about our share price.”

This is indeed becoming increasingly rare in the age of industry consolidation, but Deitch sees no need to alter the situation. Commonwealth, he claims, is large enough, and financially strong enough, to undertake all the projects it needs.

Luxury to Cherry-Pick

“When I started in this business as a budding entrepreneur, I thought it was all about growth,” Deitch says. “Now, I realize that if you focus on quality, on what is important to your clients, growth will follow naturally.”

Growth has been organic, with only one small acquisition back in the 1990s, but Commonwealth has been steadily adding new advisors. Growth averaged around 40 percent per year, measuring 27 percent last year. The attrition rate has been low — in 2005, the firm dropped fewer than 90 advisors.

While talk of being the best may sound like a fairly standard marketing ploy, Deitch insists it is not. “We may not be the best in everything we do, it’s the real world, after all,” he admits. But like a professional sports team, it sets out with its eyes firmly on the top prize.

The eight partners in Commonwealth get together for lunch every Thursday, which, given the company’s dual location in Boston and San Diego, typically involves teleconferencing. It is a stable group, having been together for at least a decade

To emulate Harvard, you have no choice but to discriminate. After all, the real Harvard accepts fewer than one in 10 applicants for its 1,600-strong freshman class.

“We are fortunate to be selective as to whom we accept as our clients,” says Deitch. The minimum production for new advisors is $200,000. Of those who contact Commonwealth, it turns away something like 70 percent to 80 percent after the first telephone interview. Of those who are invited in for a personal conversation, about 70 percent to 80 percent get hired. It works out pretty close to Harvard’s level of competitiveness.

“We have the luxury to cherry-pick,” says Deitch. “It’s a nice position to be in.”

But if you get into Harvard, you probably expect to be taken care of better than at a run-of-the-mill state college. Accordingly, Commonwealth ranks very high among independent broker-dealers in terms of the ratio of reps to home office staff, at 3.3. It is, in fact, the lowest number among the top 25 independent broker/dealers.