Just in time for this Broker/Dealer Special Report, Investment Advisor convened a conference call in May with the IA Broker/Dealer Advisory Board, composed of the executives who run the four independent firms that were elected by their reps as the 2006 IA Broker/Dealers of the Year. This year’s board includes Brian Murphy, president and CEO of Woodbury Financial; Barry Knight, president of NEXT Financial; Ralph DeVito, president of The Investment Center; and Scott Yamamura, group president of Contemporary Financial Solutions. These leaders shared their thoughts on a number of issues that B/Ds are dealing with.
Pressure on margins seems is always an issue for broker/dealers. At Woodbury, Murphy stresses “annual vigilance” in reviewing arrangements with product providers, with a view to the changes in selling patterns of reps. In addition, Murphy divides firm expenses into three layers: core functions that are essential to the business, made as “efficient and effective” as possible; expenses for items that differentiate the B/D and may “delight” reps, where money could be considered well spent; and then a third layer, extras which are nice, but not essential–less is spent on those.
At The Investment Center, DeVito ties keeping an eye on margins with recruiting by “making sure that the reps that we recruit now are within the right product mix, that it fits within the framework that we have set up for them, so that we’re not adding a lot of different expenses.”
As for long-term challenges–and opportunities–the leaders differ on what the most critical issues are for the business. Consolidation of the smallest of firms will be an issue, most agree. For Yamamura, the big industry challenge is supply: there are just not enough new reps getting into the business. That makes it harder for mature representatives to make a transition to retirement. “Most of the reps don’t really understand how serious an issue it is,” says Yamamura. “What happens if a rep passes away?” Not every rep can sell her book of business, or has a transition plan, and that’s what the unusual Contemporary Financial Solutions business model is built around. Reps can transition to CFS, semi-retire or retire, and they (or their spouse if the rep becomes incapacitated or dies) can be paid a portion of their trail commissions.
There’s also opportunity, says NEXT’s Knight, who spent 13 years on the buy side, to shift to an income orientation for the generation about to take up retirement, and he sees “real opportunities out there” for independent B/Ds to provide solutions for middle-market investors, the bracket below affluent, who generally get less attention from advisors.