Raising the Bar

For John Brackett, business isn’t all that bad. He’s at his vacation home in Mexico with a margarita in one hand and the phone in the other. In such a setting, relaxation would be the order of the day. But not for Brackett, who’s sounding off on the sorry state of the independent broker-dealer industry; sales of “toxic” investment products, lawsuits, firms shuttered with little or no warning and reps set adrift. He’s not happy.

“I’ve got 30 years invested in this business,” he says. “You’ve got guys who are just as hard-working as I am and have diligently built up their businesses. They suddenly find themselves out on the street for something that was not of their doing.”

Brackett is a regional director with Financial Network Investment Corporation and a partner with BAR Financial in Pleasant Hill, Calif. He’s certainly experienced his share of stress and business uncertainty in the preceding three decades, but the manner in which he and his Financial Network colleagues have handled it serves as a model for other firms and reps experiencing similar issues. It’s one reason he can enjoy the aforementioned (and well-deserved) margarita, even at a time like this.

Founded in 1983 and at various times run by legendary figures like Miles Gordon and John Simmers, Financial Network Investment Corporation was sold to Aetna Financial Services in 1997. Aetna was then acquired by ING in 2000. When the financial crisis hit in 2008, ING (like many financial services companies) found itself in trouble, and quickly shed what it considered to be its “noncore” assets, its broker-dealer book among them. In stepped Lightyear Capital, a New York-based private equity firm, which purchased Financial Network and its sister broker-dealers; Multi-Financial Securities Corporation and PrimeVest Financial Services. Lightyear then announced the broker-dealers would be rebranded as Cetera Financial Group, headed by Valerie Brown.

“Throughout its many corporate incarnations, Financial Network has remained independent, committed to client-centric services and the independent broker-dealer business,” the firm says on its website. Which is good, because attempting to keep up with its “incarnations” will give you whiplash.

Today Financial Network is largely a “field-owned” broker-dealer with 2,400 reps. Each of the firm’s branch offices is independently owned and operated, and is supported by the national organization.

It was the seats at the table that advisors like Brackett and Dave Hubbard—a regional director in the Chicago area—were able to negotiate early on that lead to the smooth and orderly transition reps experienced with each sale. Now, young guys like Kurt Opella and Scott Wallace, co-regional directors with Financial Network in Texas, are learning the lessons and reaping the benefits at a time when so many of their peers and competitors are starting over.

“We have a regional director advisory council,” Hubbard, who runs Exemplar Financial Network, explains. “We elect five people to represent the regional directors. We sit down with the management and we talk about every part of the company. The home office cannot decide to take a left turn and change things that affect the lives of our advisors unless they have us on board.”

The benefit, he says, is the consistency it allows “to protect our advisors’ interests. I feel like I’m independent, but not alone.”

For the Lightyear deal in particular, Hubbard and Brackett were two of seven regional directors who were voted in to represent the reps. They pooled their money and hired a Wall Street law firm (one of the biggest, according to Hubbard) as well as their own investment banking firm.

“We went and sat down with ING management and said, ‘You need to involve us in this process or you’re not going to have anything to sell,’” Hubbard says.

“We met with every single potential suitor,” Brackett, (left), adds. “One guy came in and didn’t even bother to put on a tie. That killed it before the meeting even started. We were able to have frank discussions with Lightyear about our business before the deal was consummated so they had a good understanding of us and we had a good understanding of them.”

If only this was the norm in times of industry flux, rather than the exception. Ameriprise Financial filed an 8-K statement with the SEC on April 21 announcing that it would pay $150 million to settle arbitration and lawsuit claims against its independent broker-dealer subsidiary, Securities America, over the sale of certain private placement notes from Medical Capital Holdings and Provident Royalties LLC.

In late April, boutique broker-dealer Omni Brokerage Inc. filed notice with FINRA that it intended to cease business operations as a registered firm. According to SEC filings, the South Jordan, Utah-based Omni was the subject of numerous arbitration cases for its involvement with DBSI Inc., a commercial real estate investment company based in Idaho that sold Tenants in Common (TICs) investments.

Most recently, just before press time, San Diego-based WFP Securities also notified FINRA of its intention to close. It too was the recipient of lawsuits related to private placement issues involving Medical Capital Holdings Inc. and Provident Royalties LLC.

When asked about what’s to be done, Hubbard, (left), isn’t at a loss for words.

“It’s due to a change in the way the companies [perform] their due diligence,” he says. “A lot of firms hired out due diligence to third parties staffed with attorneys that looked at legal issues as opposed to business issues. Those products are now wiping out their net capital and, seemingly overnight, reps are being released. They’ve spent their career building up an independent practice that has value. They’ve invested in employees; they’ve got overhead and now have to scramble to find somebody else who will take them. We’ve been able to jump in and help them. We’ve been able to get a handle on what their issues are, bring them on board with our firm and help them not skip a beat.”

OK, but if they act too quickly, won’t they sacrifice the quality of the due diligence process, potentially exposing themselves to the type of risk from which they are now supposedly rescuing other advisors?

“We have great networks among the industry,” Hubbard says. “A lot of it comes through the product wholesalers that are out there. They tend to know the reps with which they’ve had good and bad experiences. I’m involved in a lot of associations where you know people’s reputation on the street. I have full-time recruiters and full-time transition people. If I’m sitting down with somebody and they’re even remotely thinking about joining us, we have a whole process to quickly look at their business. We don’t look at their clients and of course we respect privacy issues, but we look at their business from the products they’ve sold and perform the necessary background checks.”

The West Point-educated Hubbard makes one final point.

“I have a military background, so having a contingency plan is always important. In military operations, they’re always looking at a contingency plan and asking themselves, ‘If things don’t go right, how do we make them right?’ We’re able to do that for our advisors.”

Young Guns
Landmark, the firm operated by Opella and Wallace, is really the culmination of three separate regions within Financial Network, according to Opella. Their primary offices are in Dallas, Houston and San Antonio with just under 100 representatives in five states. One of the unique factors about Landmark is that both the Dallas and Houston offices are founding offices of the firm.

“Scott and I are both succession planning recipients for those founding regional directors,” Opella, (left), says. “And, coincidently, we specialize in two things; one is business building and the other is succession planning. This is where we spend the bulk of our time with our existing reps and any potential advisors we’re looking to bring on board.”

He actually started out with John Brackett, but says even though he was part of Brackett’s region, he was able to work across regional lines. He got to see how a number of great offices were operated. When he returned to Texas to take over that region, he had a broad range of experience from traveling the country “way too much for way too many years.”

“About five or six years ago, the two co-regional directors at the time were interested in calling it a career,” Wallace adds. “The individuals who wanted to take over for them were not well-received by the other reps within the region. There was a fear that the region may crumble based on the new ‘owners,’ if you will. So we stepped up to the plate.”

What the negative industry news (and resulting broker-dealer closings) has done is to cause people “to stop talking and start moving,” says Wallace. They were having conversations prior to any of the recent headlines, but the sense of urgency has caused reps to act.

One well-known case, in particular, illustrates the point.

“Here in Houston, we are two streets down from Allen Stanford,” Wallace, (left), says, with a rueful laugh from Opella. “When Stanford closed his doors we had a lot of reps flood our door. We weren’t able to help them, with the exception of one. He was in the process, the poor guy, of going from Merrill to Stanford. He hadn’t moved his book, so he hadn’t yet done any business with Stanford’s firm. I mean he showed up, everyone was ushered into the conference room and the doors were basically locked and he was told to stay put until we were able to help him.”

Somewhat surprisingly, Opella feels recent events have changed recruiting for the better. In past years, the recruiting environment was one in which people were “sold” on a broker-dealer. They were handed a brochure, given the highlights and if they agreed to the payout amount it was “pretty much a done deal.”

“I really believe those days are over,” he says. “They have to do their own due diligence and look beyond the brochure to see what’s really underneath the hood.”

The first place too many advisors go, says Opella, is the payout. He notes Financial Network historically has never been one of the higher paying firms. If that’s the first question the prospect raises, “the meeting’s over,” Wallace adds.

“I’m actually stealing this quote from somebody else, but it goes to the culture of the firm and why it’s so important,” Opella concludes. “The whole idea of why the relationship with its advisors is so successful and about having a seat at the table in negotiations; that’s not simply an accommodation, it’s in the culture.”