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Industry Spotlight > Broker Dealers

The Presidents Speak

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In each of the past 15 years, Investment Advisor has asked independent broker/dealers to provide information for the IA Broker/Dealer Directory, and last year started gathering information directly from the leaders of those independent firms for an exclusive IA Presidents’ Poll. We ask for candid responses from the independent firms’ presidents on a number of topics ranging from firm and individual registered representative challenges, to which entities they believe best represent their interests on Capitol Hill and with the regulators. We asked and, once again, they answered.

Of the 78 firms that completed the survey for the 2008 Broker/Dealer Directory, we were pleased to find that the leaders of 71 firms participated in the 2008 Presidents’ Poll. IA staff compiled the responses, but we granted the respondents anonymity to encourage their candor.

Short-Term Challenges for the Firms

As we have discovered in our roundtable meetings with the leaders of the Broker/Dealers of the Year who constitute our Broker/Dealer Advisory Board, despite their differences in size and business model, the independent B/D population is remarkably of one mind when it comes to their priorities.

For example, the presidents are united again this year on which issues constitute their biggest short-term (meaning over the next 18 months) challenges, with 53.4% saying that “recruiting high producing reps” that match their firm’s culture was their biggest challenge, while 27.4% say their top short-term challenge is “increasing margins.” In 2007, the presidents were even more emphatic about recruiting: 61.1% said that recruiting was the top challenge, and 21.4% indicated that the top short-term challenge was increasing their margins.

One president clearly is troubled by “reps going RIA only, dropping their B/D affiliation,” which another argues is hastened by “the appearance that the RIA world is better, when in fact it is just less regulated.” The fee-based model, argues one, “creates an additional barrier to entry for new blood. The dearth of qualified younger professionals in a time of an aging advisor force will further complicate the already murky succession planning particular to the industry.”

Many cited “regulatory uncertainty,” and “excessive rules, especially those that limit the ability” of their firms to compete as posing special challenges, making it harder to “keep up with changes in regulation while maintaining growth.” Among the one-word answers to the question of the biggest short-term challenge: “profitability,” “consolidation,” “independence,” and “over-regulation.”


Long-Term Challenges for the Firms

Recruiting was also the highest priority challenge long-term (over the next three to five years and beyond) for 45.1% of the firms, with one respondent noting that “there are fewer reps out there, [so it's] harder to recruit good quality reps.” The second most-cited long-term challenge was “increasing margins,” according to 28.8% of the presidents. While the presidents last year said “recruiting” was the top long-term challenge (42.3%), “improving clarity of regulation” was the top challenge for 26.1% of the firms then; understandable, perhaps, because of last spring 2007′s newly-proposed combination of NYSE and NASD regulation into one super self-regulatory organization, now known as FINRA.

Moving beyond the statistics, one president could have been speaking for all in answering an open-ended question about the most important issue facing the independent industry by saying simply: “Ever-changing compliance and regulatory legislation.” Another president took a broader view, worrying that “the confidence in our industry at the investing, public, and regulatory levels needs to improve significantly,” and hewing to the compliance theme, that “the cost of meeting the regulatory demands placed on independent B/Ds is significant and competes with the resources needed to achieve success from a competitive standpoint.”

Competition and margins were on the minds of another thoughtful president: “Firms need to manage the increased complexity of the business, especially in the issues of regulation and products. They also need to be able to provide expanded services in a way that allows them to operate profitably.” This president then concluded with the wry observation that “the cost of providing advice continues to rise while the cost of acquiring advice continues to drop.”

Also on many minds was the need for better recognition of the independent model. “It is critical,” wrote one, “that regulators and legislators understand the needs of the markets the independent broker/dealer industry serves.” In a similar vein, another president stressed the importance of “communicating to the investor that who we are and what we do as an independent broker/dealer is vastly different from Wall Street.” Yet some strains are evident in this competitive envirnonment, with another B/D leader looking to improve the “ability to supervise and service a complex product mix.”

Several presidents worried about, in the words of one, “The diminishing ranks of new financial advisors entering the field,” while another wrote of the “need to replenish the ranks of experienced financial advisors–as current advisors retire–to meet growing client demands for independent, objective,” and, tellingly, “local” advisors.

It will be a challenge, wrote one leader, “to remain relevant to advisors and the investing public.”


Short-Term Challenges for Their Reps

What about those reps who are the lifeblood of independent B/Ds? Offering “more sophisticated solutions for clients” tops the list of short-term challenges in 2008 for registered representatives, according to 32.9% of the presidents, with 27.1% of them indicating “other,” but not specifying what that challenge is.

Perhaps, though, it might start with the challenge that “investors’ faith and confidence in the markets and those of us involved in the markets needs to be restored.” More broadly, representatives will need to help their clients “plan for retirement income in a volatile world,” in which clients are “confused by all the different products,” partly because “it’s not easy to understand all the information that is thrown out at them.” This “need to be better educated consumers,” isn’t easy, several pointed out, because of “the media and its sensationalism regarding the financial markets,” along with senior scams, ID theft, and “discount do-it-yourselfers.” There is, wrote one, “too much information combined with too few consultations with valued advisors.” For middle-class consumers, noted one leader, there is a “lack of savings and lack of consistent quality advice,” while looking at the other end of the spectrum, another president said succinctly, there is a “lack of competent advice, especially for more affluent clients.”

Last year, 36.1% said “offering more sophisticated solutions” was the biggest short-term challenge for their representatives, and 24.6% said “other.”

The Long-Term Challenges for Their Reps

There was a significant difference in the 2008 findings for the long-term challenge (i.e., the next three to five years and beyond) for representatives, however. “Helping older representatives sell or transition their practices” garnered a 38.4% response as the top challenge, while “offering more sophisticated solutions for clients” received 26% of the presidents’ votes. But this is vastly different from 2007, when “offering more sophisticated solutions for clients” was the highest priority challenge, receiving 29.2% of the top ranking, and then “competing with wirehouses,” “helping older reps sell or transition their practices,” and unspecified “other” were all in a statistical dead heat at 20.3%, 19.7%, and 19.1% respectively.

Many presidents are worried about retirement planning, or better stated perhaps, the lack of retirement planning among the American public, and even among clients.

“Few have a remote clue how long their money is really going to need to last,” wrote one clearly frustrated B/D leader, so “consequently, very few have actually saved enough for the retirement of their dreams.” Moreover, that same president predicts “potentially modest equity and bond market returns in the immediate future will likely compound this problem.” There is a “disconnect between retirement savings investors’ delusional belief that they’re financially prepared for retirement.” Financial illiteracy and a lack of discipline among investors is exacerbated by “the improper selling of equity indexed annuities,” and the difficulty of “finding advisors who have the requisite training and credentials to service their accounts appropriately.”


Who Loves You

Once again, in 2008, the Financial Services Institute (FSI) was deemed by independent broker/dealer presidents to be the “association or entity that is most essential to advancing your point of view,” with 79.2% of the presidents selecting FSI, compared with 76.1% selecting FSI last year. NASD (now part of FINRA) was a distant second in 2008, at 9.7%.

When asked if they felt if “new legislation/regulation is needed to address the unintended prohibited transaction or principal trading rules?” most of the B/D presidents, 72.5% say no, compared with the 67.2% who said no in 2007.

E-mail Senior Editor Kathleen M. McBride at [email protected] and Research Editor Liana Roberts at [email protected].


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