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Industry Spotlight > Broker Dealers

Around the Table

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It’s no surprise that regulation remains the greatest challenge for leaders of the 2007 Investment Advisor Broker/Dealers of the Year, flanked by recruiting, transitioning to the next generation of reps, training those reps, and technology. Following are excerpts of the discussion moderated by IA Editor-in-Chief Jamie Green and Senior Editor Kate McBride with Nick Sondel of Harbour Investments; Christopher Ranney of Brecek & Young Advisors; Eric Meyers of Capital Financial Group/H.Beck, and Eric Schwartz of Cambridge Investment Research.

These remarks made August 7 were not scripted presentations by executives remote from the day-to-day world of their reps. They spoke off the cuff but from the heart; we’ve attempted to retain the roundtable’s spontaneous nature in the following pages.


The Broker/Dealer of the Year leaders spend a great deal of time and energy thinking about, responding to, and even working to shape regulation and legislation that affects the independent B/D world. At the Chicago roundtable they had some very surprising things to say about what regulators should do if they really want to make investing better for financial professionals and the public:

Green: What do you all think about the legislators? Considering many Americans’ lack of preparation for retirement and the woes of Social Security and Medicare, down the road will someone decide to re-regulate the financial services business in a big way?

Meyers: I thought that’s what they’ve been doing for the last five years!

Ranney: I see where you’re going but I don’t think that it would happen to that extent; I think that it’s one of the most exciting times in our industry, to tell you the truth, as far as the opportunities, and they would have such a backlash trying to put broker/dealers or firms or anybody that’s trying to deal with the public with their money–to put more strings attached would be very difficult. There’s so much wealth transfer going on, that’s such a real, real issue and if they try making it harder for people, there’s going to be a backlash.

Green: Could they impose some kind of a forced savings system?

Ranney: They’re doing that to some extent with the 403(b) market, all these new regulations are coming out because they want to have it mimic a 401(k). They’re legislating the actual transfers, the way that people invest the money, and that is a legislative effort coming down in January 2008. It’s a big issue for the 403(b) market. There’s still going to be the need for advisors to work within the parameters of those accounts. They can’t legislate out help. The 403(b) is a perfect example, and they’ve made a mess out of it, actually.

Schwartz: They’re really going to make it impossible to in-service out [transfer using IRS Revenue Rule 90-24] to wherever you want it. You’re going to end up with two or three primary vendors–probably ING will be third; you’ll have Fidelity, and TIAA-CREF.

Ranney: They’re the biggest lobbyist [CREF].

Schwartz: They will get all of the business rather than half of the business because they’re forcing, in effect, the institutions to get involved rather than stay uninvolved. I look at the products we’re allowed to sell and they’ve almost outlawed every single one: they don’t like A shares unless you put them all into one family. If you go to the average sophisticated client and say, “Well, all the best funds are in one family,” you don’t get respect. They don’t like B shares, C shares, [or] variable annuities; they never have liked individual securities because they think they’re too risky. Okay, so what does that leave? Maybe A shares all from one family? They would like the advisor to sell Vanguard and charge no fee…If they want to do some good in changing the rules, in my opinion, they would merge the NASD and SEC into one regulatory body and make fees and commissions all one thing…

Ranney: Amen to that! [A chorus of agreement from all four B/D executives.]

Schwartz: …because thirty years ago, fees were these elite organizations managing money for a select few, the RIAs–very small groups of elite…and then there’s a broker/dealer selling stuff. In my broker/dealer about 55% of our revenue is [from] fees, 45% is commissions, and 90% of our reps do both fees and commissions. [More agreement from peers.] Certainly the public doesn’t understand the difference between an RIA and a broker/dealer, and why one’s a fee and one’s a commission, but the general feeling is that, that won’t happen anytime in the next 10, 20 years because of too much…

Ranney: Turf!

Schwartz: They did succeed in simplifying things when they combined the NASD with the New York Stock Exchange, however that didn’t benefit any independent broker/dealers. But to me there’s an artificial distinction between fees and commissions that could be fixed. For example, right now they’re very much focused on 12b-1s, which are typically 25 bps, but the same rep could go back to those clients and charge them 2% a year to do the exact same thing they’re doing for 25 bps, and [regulators] have no problem with that–fees are good; a trail of 25 bps is bad…The ultimate solution–which isn’t going to happen–would be to somehow combine the regulation of RIAs and broker/dealers into one organization, and have one set of rules for both because we’re serving the same clientele now.

All: Absolutely agree with that.

Sondel: I don’t understand–and I don’t hear much about–market regulation. The auditors come–and they tell us that variable annuities shouldn’t be sold to anybody over 60 years-old–and [the auditors] don’t even know what a variable annuity is. We have people who are afraid to buy a stock because it’s so manipulated that you never know what’s going to happen to not only a stock, but the market, due to forces that are propping things up or keeping them down artificially. That’s one of the biggest areas that could instill more confidence, if they had some focus on regulation of the markets themselves, rather than on us as far as: Are we making a half-a-point or a quarter-point?


Competition for reps is another challenge for independent B/Ds. The leaders have clear ideas about cultural differences between wirehouse reps and independents, and what it takes to recruit larger, established practices into their broker/dealers:

Sondel: One of the things I’ve been wrestling with is how the wirehouses have continued to maintain the culture and stranglehold that they have [on reps], because I just don’t think that they can compete with us. I’ve been looking at this as the hugest opportunity, probably, since technology got up to speed. The wirehouse guys just haven’t been taking what I believe is a rational alternative and owning their own business, calling their own shots.

Meyers: It’s a different culture–they came in, they’re trained by the wirehouses; they’ve got their womb-to-tomb mentality, they get their benefits, their offices, they get everything taken care of–it’s a major culture shift to move out on their own. I don’t really worry about the wirehouses insofar as competition is concerned, as long as they’re wearing as many hats as they’re wearing. They can’t serve the independent representative with the independent client–there’s your match. When [representatives] get older, they get more entrepreneurial, they get more independent, you’ll see a switch. We’re already seeing it to a certain extent, it just hasn’t been as fast as we’d like it to be.

Green: So, the culture of the rep is different, too? How would you describe it compared to the wirehouse broker?

Meyers: It’s a W-2 employee culture as opposed to an independent, run-your-own-business culture.

Sondel: But what these guys don’t realize is that being independent is not that huge a jump, because these W-2s, they’re guaranteed nothing unless they bring in fees and commissions, so their desk won’t be there very long…

Meyers: But when someone’s coming out of college or out of graduate school, the wirehouses have the ability to bring them into the training programs, and the benefit programs, and you get stuck in that culture, and it’s a very different ball game–hard to break out of it.

Schwartz: Wirehouses have looked at this trend, and they don’t like the reps leaving and they’ve figured out things to keep them there–one of which is separate accounts. If somebody’s managing money themselves in mutual funds, and they move out to an independent broker/dealer, they’ll make 50% to 75% more take-home; but if they’re selling separate accounts, the way the pricing is structured, they’ll make the same amount or less than they do currently. So what are the wire firms pushing? It’s the primary product they want them to sell: separate accounts.

Meyers: [When those wirehouse reps go independent, therefore] They pay a heavy price for their independence.

Schwartz: One thing we’ve seen is, when we were smaller we couldn’t get wire-firm people to join us. Now they’re calling us. About 15% to 20% of our incoming calls now are from wire-firm people, while five years ago when we were $40 million in revenues instead of $220 million, maybe one out of 100 incoming calls was from a wire firm. Now about 10% or 15% of our people that join us are wire firm, while historically it was close to zero.

Meyers: I often describe our organization as an amoeba on the wart on the nose of the financial services industry. [Laughs all around.] But it’s a niche!


Retirement succession options for reps at independent firms are starting to become more structured as reps nearing retirement realize that their practice is a valuable asset that doesn’t get put back to the mother firm. That said, if so many reps come over to the independent side of the business from wirehouses and insurance companies, who will be left to train them

Ranney: The representatives we have, and I know all of you gentlemen have too, they are really good businesspeople, and that’s what we’re trying to do–to really let them, and help them, build their businesses. What’s exciting [is] that these representatives are out there really building businesses that they in turn can pass on to their kids. It’s a generational move, but it’s a small business that they own.

Green: Do you know what your average rep’s age is?

Meyers: Getting older and older.

Schwartz: The average in the industry I saw recently was 51 or 52; I think ours is running a hair less than that, around 47, 48. In the independent world it partially correlates with the age of the principals–10 years from now I suspect our average age will be more. Also, at bigger broker/dealers the average age would be older because you have more people who have been there longer, and bigger reps tend to be more comfortable with big broker/dealers.

Green: Does that worry you?

Meyers: I’ll tell you what I’m most worried about: with the mutual life insurance companies exiting the field, and the training, and camaraderie, and culture that came out of that, which is where so many of our people have come from–where’s that training, where’s that mentoring, where’s that program going to come from? That’s our biggest issue long term: making sure you have transition programs set up and books of business and programs within your own firm to make sure you can move practices one to another. If you don’t do that you’re going to lose that business to another firm.

Ranney: That’s a really good point.

Schwartz: To me, the number one [worry] is still regulatory because I can build succession-planning programs. We have a program where a lot of our larger offices that are in multiple states are signing agreements so that if somebody dies unexpectedly, for example, it goes into effect and something happens right away. We’re trying to get 100% of our reps under a program with somebody.

I agree with Eric [Meyers] entirely [on worrying about] who is going to be training high-quality financial advisors–that is becoming less and less common because the big insurance companies were the main [firms] who did it, and they can’t afford to, because once they do it all, they all leave. They can’t lock them in for 10 years based on all that money they’ve put into them–that’s a challenge.

The biggest challenge for me is the regulatory burden that we’ve talked about before–where [the regulators] get to saying, “Fees are good; commissions, bad.” If you really want to serve the public interest you might say you can’t do any front-end commissions and everything should be a trail. Everything you sell should just be 1% a year. Everything would be the exact same, no one could say you sold one product over another because it made [you] more money; the client never has any surrender charges. But they’re almost going the opposite way and saying “No, we’re going to get rid of anything ongoing because we certainly wouldn’t want you to service the people long-term.” Or are they saying you can service them, but you’ve got to give up your broker/dealer license and become an RIA? Certainly every pendulum does go back and forth so hopefully that one will, and hopefully before too long.

Sondel: I hope so, because that’ll give people more security. We talked about the average age of a broker, and I see that going up as well. People enjoy the relationships, they like their lifestyle as brokers, being close to their clients, and we find that normally as people get to the ages that they’d want to retire, they don’t–they enjoy it too much–they value those precious relationships. If someone wants to slow down, they might keep their top 50 clients, and bring in someone else to handle the rest of the business, and that’s their transition plan. But with over-regulation [regulators are] forcing things that cause insecurity not only among professionals, but investors, who won’t be able to get help if the professionals aren’t paid.

Ranney: That’s my concern.

Sondel: It’s not conducive to an orderly transfer of wealth, orderly building of wealth for retirement, and building of trusted relationships between the clients and the advisors.

Ranney: If you over-regulate you can scare some of the best people out, and then it’s an ironic situation where clients can be more in harm’s way.


Technology vies with compliance as one of the top expenses for independent broker/dealers, but the efficiencies that technology offers are being realized, allowing B/Ds to focus on training, recruiting transitions, and helping reps to grow their businesses.

Ranney: One of the biggest challenges we all see here is the data that we have to collect. At a time when there’s so much data, the clients and representatives want simplicity–the consolidated statements which we have with our different systems. But the regulators, they want to see data at our fingertips. That’s one of our projects this year–getting a couple of systems in place. We’re dually-registered, so the SEC and NASD want to see different things, so that’s a big challenge.

Schwartz: Our head of technology can spend an hour with an office and probably save them a huge number of mistakes in which direction to go, not even related just to our technology but to all the other technology they need: what financial planning software, what server to use, and what not to use.

Ranney: Technology by itself is not effective until you train–that’s where the value-added comes in: when you provide the training on that technology. We all have technology but it’s how to make it work for the representative–that’s the value-added part.

Meyers: What’s emerged is our broker transitioning group–it’s getting larger, and larger, and larger because you have to–once you’ve done the recruiting process, once you’ve brought someone in–it’s worth nothing if you don’t have the appropriate transition team to take hold and bring them through all of these different areas, and that’s probably more important than anything else in terms of bringing them onboard, including technology, compliance, everything.

Ranney: Our transition manager says: “Transition is like a car that’s going down the road, and you’re trying to change the tires.” You want to keep that business moving for the representative because that’s his or her livelihood, so that’s a big part of ours too.

Sondel: I think the cost of technology up front is kind of painful…There are needs for more unified technology where one entry is not only going to solve the problem of the client, it will solve the problem of the regulator, back office, and eliminate duplication. In spite of that, technology has gotten so good–I used to worry about how we’re going to continue to grow and maintain efficiencies, and the technology has allowed us to become so efficient that we’ve developed a firm where over half of our people are principals…That’s a very good thing for the small broker/dealer in that we’re able to focus on getting our in-house staff educated on how to help our brokers, get [staff] out in the field, and that’s the thing that small broker/dealers didn’t use to be able to do so much.


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