Small by Design

“It is, as they call it, gentlemen serving gentlemen,” says Charles.

Ritz-Carton training will be available to reps as well in the near future, since they too can benefit from learning how to serve their clients better.

This year, Investors Capital claims to have become the first independent broker-dealer to offer its reps the opportunity to buy group health insurance plans through Blue Cross/Blue Shield.

Charles dismisses the question whether, being a smaller operation, he is not able to invest enough in technology, in order to offer the kind of systems industry behemoths are now providing at great expense. “There is so much available off the shelf out there, so much new technology. I’m still amazed what I can download just on my cell phone.”

Still, the firm’s technology department, along with compliance, is the fastest growing at Investors Capital, which is in line with the experience of other broker-dealers, big and small.

The firm seems content with its size and market niche, but this doesn’t mean it is neglecting recruiting efforts. Its head of recruiting is constantly meeting with successful producers at wirehouses around the country. Charles also appreciates the fact that someone who has worked at a large institution may find striking out on his or her own daunting. As part of its flexible partnership options, Investors Capital offers its reps an opportunity to be an investment center financial consultant.

“I call it a half-way house,” laughs Charles. “It’s great for those who miss that wirehouse feel, who like to work at an office with other people, but who still want to have a higher payout.”

His payouts are higher, claims Charles, because there are fewer administrative mouths to feed than at a wirehouse.

Being an early believer in fee-based business, it is hardly surprising that Charles expects the fee-based part of the firm’s business to grow strongly going forward. “Some of our reps,” says Charles, “function almost as a home office for their high-net-worth clients. They pay their bills; they file their income tax returns. If a client asks them to do something they don’t know how to do — like windows — the rep will probably find a window washer to outsource to.”

Yet, out of the broker-dealer’s $6.5 billion in assets under management, just over $500 million, or less than 10 percent, are managed on a for-fee basis, even though fee-based revenue has been growing faster than gross revenue. But there will always be room for commission-based business, admits Charles, no matter how much fee-based business will grow. An ideal ratio for a firm like his, in his view, is a third each. A third fee-based business, a third based on commissions and the remaining third devoted to insurance-type products.

Charles readily concedes that the industry is consolidating, with smaller broker-dealers being gobbled up by larger ones. But he doesn’t think it is always a good thing.

“At larger firms, there has been almost a commoditization of financial advice. If you have $5 million in assets this is what you get, if you have $10 million, you get so much more, and so on. But these are highly successful individuals. They are highly intelligent and it doesn’t take them long to figure out what’s going on.”

The same commoditization impacts the attitude toward brokers and financial advisors at large wirehouses. There is pressure to produce, and smaller producers, even if they have growth potential, are sometimes pushed out.

So, there will always be room for smaller players, who provide a more differentiated, personalized service. Besides, it is the American way, after all.

“You keep inventing a better mousetrap,” laughs Charles. “Or at least you think it is a better one.”

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Alexei Bayer runs KAFAN FX Information Services, an economic consulting firm in New York; reach him at [email protected]. His monthly “Global Economy” column in Research has received an excellence award from the New York State Society of Certified Public Accountants for the past four years, 2004-2007