Close Close

Industry Spotlight > Broker Dealers

Independents' Optimism

Your article was successfully shared with the contacts you provided.

Since the leaders of the Investment Advisor Broker/Dealers of the Year last met with the IA editorial team for an intense roundtable, in August 2007, the markets have been volatile and the economic scene turbulent, to say the least, especially for many large investment and commercial banks, some of which have taken colossal losses and been forced to raise masses of capital. The stunning downfall of Bear Stearns, a clearing partner for some independent broker/dealers, was a freshly felt shock as well when the three men met with Editorial Director Jamie Green and Senior Editor Kate McBride in Chicago on April 18. “If anybody told me six weeks ago that we’d be sitting at this table and Bear Stearns wouldn’t be here–wouldn’t exist anymore–I’d have laughed at you,” Eric Meyers, chairman and CEO of Capital Financial Group/H. Beck, in Rockville, Maryland, and Broker/Dealer of the Year in Division III (500 to 999 producing representatives) told the group. Uncertainty at large firms has made recruiting easier, because “reps really want to be based with a solid firm, for net capital purposes, for independence, for everything that’s out there reputation-wise,” explains Chris Ranney, chairman and CEO of Brecek & Young Advisors, Inc., the winner in Division II (200 to 499 representatives).

But for independent broker/dealer (B/D) firms–which generally don’t participate in those troubled businesses–times have been good. Recruiting is healthy, margins are decent, and even regulation–which has been a distinct challenge in particular over the past five years as firms struggled to keep up with a flurry of new rules–has become a bit easier as firms put into place the procedures and technology to help them comply. “On our side of the business, I think 90% of the regulation that’s needed is there, and 90% of the regulation that’s there is good,” proclaimed Eric Schwartz, founder and CEO of Cambridge Investment Research, in Fairfield, Iowa–the winner in Division IV (1,000 or more representatives).

Treasury Secretary Henry Paulson’s Blueprint for a Modernized Financial Regulatory Structure is being met with a generally upbeat balance of hope for simplified regulation and skepticism that the reforms will actually happen. But one thing that’s made a clear difference in their attitude, the leaders say, is the advocacy of the Financial Services Institute (FSI), which has been lobbying with regulators and lawmakers on behalf of its independent B/D members. As Ranney puts it, “FSI, in the short tenure that it’s been around, has just done an outstanding job with lobbying efforts, with outreach to the executives, outreach to the representatives.”

Division I (up to 199 reps) winner Harbour Investments’ President and CEO Nick Sondel could not join this roundtable discussion, but did share his thoughts on roundtable topics in the sidebar on page 62. Here are excerpts from the roundtable; see for a podcast.

On Treasury’s Blueprint

Green: If the Paulson Blueprint goes through, what would the process be like, and how would it affect the way your firms operate?

Ranney: I don’t think it’s dead in the water; I think there is going to be some traction. For my firm it has to do with the proposal to have FINRA oversee the RIA business, and there are a lot of issues that revolve around that–as a dual registrant it’s confusing at best with all of the regulations that both entities now do, with the SEC on the advisor side and FINRA on the broker/dealer side. So we welcome the idea of bringing in a more streamlined approach to auditing and oversight.

Schwartz: You’ve got RIAs and broker/dealers in particular, but you’ve [also] got insurance; most of our reps are also insurance people, and more and more insurance is variable, which by definition integrates the two. I think most people, in theory, would say: Integration, simplification is good. Unfortunately, many times these kinds of projects are used to enhance regulation and actually make it more [of a] regulatory burden rather than less, so there’s a lot of devil in the details. There’s been a lot of talk about principles-based [regulation] and I think, in principle, most of us would agree; it’s the principle, not the arcane little thing–must dot this “i” a certain way to pass muster. The general principle of “Are you doing the right thing for the client?” is a great way to regulate. The problem with that is fear that it could lead to regulation by enforcement where basically there’s no law or rule that says you can’t do “A” but if you were a righteous person you wouldn’t have done “A,” and therefore we’re going to fine you $200 million. There was quite a bit of that going on five or six years ago. The FSI and other organizations have talked to the regulators about it.

Meyers: Frankly, I don’t think it’s going to affect our firm very much, maybe it’s because we have, truly, a vanilla milkshake firm, so to speak. We don’t even underwrite any securities in the mortgage-backed industry that Paulson’s proposals are taking care of. We have a small minority of our people who are outside mortgage brokers [doing outside business activities]; they’re going to be held to a higher standard as mortgage brokers, frankly. As to regulation of all RIAs by FINRA, it should better protect the retail client–it should even out the regulatory playing field somewhat, but who knows what’s really going to happen, because there are some constituencies that haven’t weighed into the fray yet. I agree with both Eric and Chris that this could emerge sooner rather than later.

Ranney: I really appreciate the leadership [role] that FSI has taken in taking a look at it. Dale Brown was talking about being open to the suggestion that FINRA would be the SRO for the RIA business and I think that’s the kind of logical research and decision-making that needs to go into these, as opposed to the states just saying, “No, this would be terrible for investors!” FSI takes a strong leadership role there, advocating both for the industry and for representatives.

Green: The people I know in Washington are very cynical about the ability of the government to get their arms around reforms like the Blueprint. Are you hopeful that there could be a better regulatory scheme that would both protect the end investors but also provide some clarity to the whole regulatory process?

Meyers: I characterize myself as a skeptic/realist as opposed to a cynic about what goes on in Washington. On the other hand, having been born, raised, educated, and spent my entire professional life in the Washington area, I tend to have a less jaundiced view of the process. Yes, from the outside–meaning the rest of the United States–it’s a whole different world in Washington, and it seems like it’s an incomprehensible fray that goes on, and to a great extent it is. On the other hand, over years and years and years, not just my own lifetime but as a quasi-student of historical issues, especially when it comes to the regulatory side…the process tends to work–that’s why I used the word fray and having all the constituencies weigh in.

Green: You mentioned the FSI’s leadership in this area–do you feel you’ve got good representation for the broker/dealers’ point of view, sufficient to help influence the process?

Ranney: Better now than ever before. [With a chorus of agreement from the other leaders.] FSI, in the short tenure that it’s been around, has just done an outstanding job with lobbying efforts, with outreach to the executives, outreach to the representatives, and they really do take a rational approach to it–that’s what I’m really impressed with. There’s a lot of strength there, and it’s going to get even bigger because the membership’s growing.

Meyers: One of the things we did, when the reps pay their [B/D] fees it’s a negative consent issue–we put it right on there and we deduct it and pay their [individual FSI membership] fees for them to bring up the membership numbers. That’s how important we feel about it and for the 700-plus reps that we have. There was a total of two who [opted out]. [Nods from the other leaders that they do the same.]

Schwartz: Before we had FSI…independent broker/dealers were pretty much assumed to be the people that were causing most of the trouble and the wire firms were seen more ideally by the regulators. I believe that we’ve leveled that playing field considerably as they’ve seen that the amount of [complaints] from customers claiming that we did something wrong is not all that high, and certainly the latest problems–since they are centered on the big wire firms versus independents–certainly that helps us. Most independent firms are going to ride right through this as if nothing really happened, unless the stock market crashes, which is a different scenario. [Schwartz is currently vice-chairman of FSI.]

I’ve been totally shocked at this mortgage meltdown–it seems inconceivable that firms were actually doing this–not even because it was not necessarily good for customers, but it seemed obvious that somewhere along the way they were going to be left holding the bag for billions of dollars. If we’d put little old ladies in hedge funds, we might make money for a little while, but eventually it would explode on us, so even if there weren’t any rules against it, you have to really think about doing it.

Subprime and Market Volatility

McBride: Do you think the independent broker/dealers will get more respect from regulators now because they weren’t in these types of businesses that have collapsed?

Meyers: It doesn’t hurt but it’s a byproduct–it’ll take years to evolve to that point. Independent broker/dealers weren’t even acknowledged…it’s going to take more than just being on the right side of the equation when it came to mortgage-backed securities to give them credibility in the eyes of the regulatory environment.

McBride: Is the market’s volatility affecting your firms?

Schwartz: All the effects on us are secondary–we weren’t involved in the primary businesses, but obviously if the market is off 15% from where it was six months ago, and we have fee-based revenue, we have trails, we have clients that may be a little bit nervous about investing in the market, it’s going to affect our revenues to some degree.

Meyers: We are up, substantially, because of the nature of the recruiting that we’ve been doing, but we’re impacted across the board, as everyone is, by what’s happening in the market; but we are asset allocators and that makes a big difference. Everybody’s affected by what’s happening in the market, but our long-term focus on managed futures–part of our offered products for years, as well as the direct placements, which are still about 16% of our overall revenues, have really helped to moderate the lows. So, if we keep our priorities straight, and if we keep our focus on what needs to be done, and we do the appropriate recruiting, and continue the asset allocating [for] the vast majority of our people, I think we’ll do fine as we go through what’s clearly a moderating time.

We had a direct clearing relationship with Bear Stearns for 23 years–and we were not unhappy with them at all; we like to say that (knock on wood) it worked out. My partner, Gary Hurvitz, is someone who understands that side of the business very well–I don’t profess to; we like to joke about his having to teach Bear Stearns what clearing was for the independent broker/dealer. It was only eight yeas ago, in 2000, that we looked hard at the merchant banking activities of Bear Stearns and decided that virtually everything they were doing was not directed at our particular business segment, while on the other hand, everything that Pershing was doing was. So we opened a separate clearing relationship with Pershing, and dramatically, over a very short period of time, giving the option of both to the registered representative field force, the business platform of Pershing just took over–dramatically overpowering what we had at Bear Stearns. But we kept Bear Stearns because we had access to bonds [among other reasons]. It was only about a year-and-a-half ago that when we realized that almost 80% of our business was at Pershing and about 20% of the clearing business was at Bear, and since everything they were doing was still directed not at our market segment but at others, we made the decision to consolidate.

If you consolidate two platforms into one it takes time, effort, and planning, and you finally get it done, and I’ll tell you that our clearing relationship with Bear Stearns with the conversion ended November 15, 2007. Never once in all the years we were dealing with Bear Stearns, and certainly as we were going through all this analytical process, did we ever think–it never crossed our minds–that the financial underpinnings of Bear Stearns were at risk here. If anybody told me six weeks ago that we’d be sitting at this table and Bear Stearns wouldn’t be here–wouldn’t exist anymore–I’d have laughed at you. Again, I’d rather be lucky than smart, but it’s amazing how all this has happened.

On the State of Recruiting

Ranney: Where we are with the markets [is] we try to look at them as an opportunity; we’re pretty close to our plan for revenue; we noticed a little bit of a dip in the fee-based side as Eric and Eric had mentioned, but what’s interesting is the activity we’re seeing with our representatives. We always say to our reps, “When the market’s bad, make sure you’re talking to [clients] even more.” Our recruiting numbers are up. We’re above plan on recruiting because there just seems to be much more of a flight to quality–to the firms that are doing well. There are other firms that are not doing so well and reps really want to be based with a solid firm, for net capital purposes, for independence, for everything that’s out there reputation-wise.

Green: Where are the recruits coming from?

Schwartz: The wire firms are still vulnerable, and have been; there are a couple of large insurance-owned broker/dealers where their future is in question, whenever there’s change, there’s opportunity.

Ranney: We’re seeing reps coming over from more of the captive organizations and I think it’s a byproduct of our industry and the age of the representatives out there–representatives are finally understanding that they need to own their business, and that they need to have a truly independent contract where they can then grow that asset and if they want to they can pass it on to their heirs or sell it.

Meyers: Our biggest challenge is keeping a high level of advisor service and staying relationship-oriented as we continue to grow, and that means maintaining and expanding the open-system products and services; we have to continue to find and hire service-oriented employees who are going to take ownership of the problem that the advisors have.

On the Product Platform

McBride: Is there such a thing as too much open architecture?

Schwartz: When you give a client a choice from a menu of three things instead of from 20 things, the likelihood of satisfying the client is a lot less, so the move to more freedom, open architecture, and independence is a move toward what’s good for the client as well as the rep. However, the more open the architecture is, the more there is a chance, from a regulatory point of view, that maybe something slipped through the cracks–and therefore that great new product wasn’t so great after all. There’s a lot of different definitions for what too much independence or open architecture really is, but certainly the public and the advisors are demanding it.

Meyers: Another way of saying that is: Your architecture is too open if your systems do not allow you to manage your regulatory responsibilities in an efficient manner.

McBride: When you take a new product onto your platforms–how much due diligence do you have to do? What if you take on a new product and something happens in the market and it blows up?

Schwartz: You’d better have a thick file to show that you had exercised adequate caution, but that it still blew up. [Nods all around.]

McBride: Are there firms not doing enough due diligence?

Schwartz: It’s one of those things that you could argue that no one’s doing enough–because how much is enough? You only know after something already blew up! The NASD made it clear a couple of years back that due diligence, for example on separate account managers, was something that people should pay a lot of attention to, and before that everyone just figured, “Oh, we’ve heard of those guys, they manage $30 billion–yeah, no problem, we’ll sign off.”

On the Future

Green: What are your major challenges?

Ranney: Challenges–obviously there’s financial, there’s profit margins–making sure that you’re making a fair and equitable profit for your company, and that you continually try to bring in the top representatives that are going to match your culture. That’s always a challenge because there are other really good firms out there. The other challenge is regulatory compliance: making sure that you’re staying ahead of the curve, proactively with your compliance matrix, to make sure that you are doing the best thing for our reps and our clients. Succession planning–is a challenge [for] the representatives that may want to exit the business: We want to make sure that we provide as much help to them both financially, and guidance-wise. Succession planning is dual purpose–if you can do that and keep [the clients] in-house, that’s better–very, very important. If you don’t do that, [that business] is going to disappear.

Meyers: You talk about razor thin margins, scale, consolidation–okay, so what else is new? Obviously scale is very important, but you also have to be aware that there comes a point where you become too big to maintain those close, personal relationships that you’ve built up with your advisors. Culture is so critically important in each of our firms and it’s getting more, and more difficult for me to look at my firm and realize, as we’re getting larger and larger, how big is too big? When do you cross that line? That’s why we think that having a niche in the mid-sized market is really a competitive advantage, because we’re small enough to have those close relationships, but we’re big enough to afford good people, good technology, and hopefully the good process that allows you to increase the critical base while maintaining those relationships.

Schwartz: I believe that every challenge is the opportunity, and how you deal with those challenges is what determines the great firms versus the firms that don’t make it.

Editorial Director Jamie Green can be reached at [email protected]; Senior Editor Kate McBride can be reached at [email protected].


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.