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Industry Spotlight > Broker Dealers

To Serve and Protect: The 2012 Broker-Dealers of the Year

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Not to take anything away from previous Broker-Dealers of the Year winners, but the interaction between this year’s honorees at our roundtable discussion in Chicago was top-notch, once again showcasing the passion and dedication that earned each of them the award.

All of this year’s participants were owners or part-owners of their respective firms. This meant that on topics such as service (“We look not at how many reps we have, but how many relationships we have.”), succession planning (“As much as we talk about wanting to keep this going forever, somewhere along the way we have tough decisions to make.”) and budgetary priorities (“When you’re spending your own money, you make decisions much differently from when you spend somebody else’s money.”), the entrepreneurial spirit was present throughout.

Initially seeded with questions from the host, each had so much to say that crosstalk dominated much of the day, and we were content in our role as “flies on the wall.” Their candid views on regulation, their competitors, the outlook for the independent space and technology continued into lunch and on breaks, which had us fearing some nugget of wisdom would escape and therefore kept us busy with constant recording.

As always, the interview was punctuated with laughter, good humor and mild ribbing. They engaged in a free-flow exchange of ideas and, although they were competitors, held little back.

This year’s winners (or their firms) aren’t new to the process, with three of the four capturing top honors over multiple years. They are David Stringer of Prospera Financial Services; Barry Knight of NEXT Financial Group; and Eric Schwartz of Cambridge Investment Research. The only newbie to the group, David Pintaric of WRP Investments, was particularly moved during the award ceremony for the validation it bestowed on his family-run firm.

[Learn more about how the winners are picked.]

Each had a lot to say and, as with every year, editing the transcript alone took a bit of doing. An excerpt is provided here, but the 22nd annual BDOTY celebration continues online at, where readers can find an extended version of the interview transcript, individual interviews with this year’s winners and behind-the-scenes video from the magazine’s photo shoot. Our archive of past winners, as well as their print and video interviews, are also available.

Regulation and Fees: How One Contributes to the Other

Jamie Green, Investment Advisor: The Financial Services Institute, an organization that lobbies on behalf of independent broker-dealers and their advisors, has come out rather strongly against fee increases that FINRA has proposed. Part of its formal statement suggested that the industry is facing a profit margin squeeze already, and these proposed fees might in fact push some broker-dealers over the edge, especially smaller broker-dealers. Is what FSI has to say true?

David Stringer, Prospera Financial: I’ve heard that argument, and maybe I’m naïve, but I haven’t seen it happening. We’re having record revenue, and as a firm we seem to be profitable. I do see there is a squeeze, and I understand that. I think we’re all going to be impacted. Many of these fees are increases at the individual rep level, so in many cases these are pass-throughs to the rep. I wasn’t happy when the SIPC charge went up. I do see those things happening, but I haven’t seen it put us in a position where we’re not able to compete.

Barry Knight, NEXT Financial Group: You got that part right. I don’t think that the FINRA fee increase in and of itself is catastrophic by any stretch of the imagination. I do have ongoing concerns about the margin compression for the industry over all. I suspect all of us here at the table are doing well because we’re doing things well. The reality in our industry is that margins have always been narrow. We try to serve the individual representative and give them back most of the money that they earn. Just the reality of FINRA fees or SIPC fees or the cost associated with meeting the increasing regulatory expectations over all, from a compliance standpoint, I’m sure has increased for all of us. All of these things collectively start to raise some concern; not from a survivability standpoint, but certainly from a margin standpoint.

David Pintaric, WRP InvestmentsDavid Pintaric, WRP Investments: Kudos, David. I was thinking of saying the same thing. I was asked this question at the end of last year about our size and viability. What prompted the question was that a firm similar in size shut their doors. My response was, “I don’t get it.” We do about $42 to $45 million in GDC; much smaller than you two big guys, but we’re having record profits and doing just fine. Now, maybe living where I’m living is different from somebody who lives in San Diego or Boston. We’ve avoided a lot of problems that some of our peers size-wise did not avoid, and that may have something to do with it. We stay out of the fancy investment products. We watch the pennies very closely. As you get bigger, you get sloppy when it comes to cost containment. My firm was started by my mom and dad, and my mom knows how to pinch pennies. I have this term that she could rub two nickels together and come up with 11 cents. Both of them are Depression babies. That has influenced how my brother and I run the firm.

Eric Schwartz, Cambridge Investment Research: Nobody who is regulated likes the idea of more regulation and more expense. Certainly over the last 10 years the regulatory burden and cost to our industry has doubled or tripled. Fifteen years ago we were a fairly regulated industry; now it’s much more. We would all like to see better regulation rather than more regulation. If it was better regulation, it wouldn’t have to cost as much, and we wouldn’t have to have as many of these increases. There’s been a discussion that the RIAs don’t want to come under FINRA because it would be too expensive. They’d rather just get an audit cost charged to them by the SEC. Well, the amount that [the average RIA] has to spend on regulation and fees is de minimis compared with what we have to spend to do a comparable amount of business. So it’s no different from any other industry. We’d rather have better regulation that costs us less but still does the job, rather than keep piling on more and more.

Consolidation: More or Less

Green: It was just announced that AIG Advisor Group will acquire Woodbury Financial from The Hartford. It seems that a number of insurance companies are getting out of different parts of their business. How will this bode for the industry consolidation we hear so much about?

Stringer: I think some of the small firms, especially the really small firms where senior management is also producing, are saying, “Does it still make sense to own my own broker-dealer?” We’ve had maybe five broker-dealers that fit that model. What we found is that when they shed the broker-dealer to become independent reps solely, their production goes up. There’s a strong case for some of them to decide if that’s in their best interest. A lot of the bigger firms are looking for scale, and that’s not something we’re looking for. We’re celebrating 30 years as a small firm and plan on continuing to celebrate years as a small firm. So I don’t see consolidation for the ones who are in it for the right reasons. The ones who wanted to be their own broker-dealer because they wanted that control, they’re having to reassess that decision. I think there’s plenty of room in the industry for the small boutique firms.

Barry Knight, NEXT FinancialKnight: I agree with your comments. I think there’s also room for, if there is such a thing, medium- and large-size boutique firms as well. I think that if you look around the room here today, there are four actual independent firms represented, which might be educational since that’s not the norm. I think that absolutely there is a market for truly independent firms, and we will continue to see that. Not all firms are going to be aggregated. Not all firms are going to be moved up into some larger conglomerate or entity because there’s a very important role in serving representatives. Clearly we’re able to do it in a way that those representatives appreciate.

Pintaric: I don’t think the trend that we’ve experienced over the last three years of roll-ups and reduction in the universe of broker-dealers is going to continue. Most of the firms that in the last three years have ceased to exist did so because they did something wrong; whether it was intentional or not, they brought something on themselves. Service is a very personal experience. It’s difficult to systemize personal service. There are some reps who want to go to the “big box” broker-dealers, and there are some who would rather avoid that and deal with the small family organization. I made a decision when I first got into this business that I wanted to be like LPL Financial. I always admired LPL and what they did. That was my youthful exuberance speaking. I still admire them, but I don’t want to be like them anymore. No disrespect to a firm like that, but I like what I have now: to be able to personally know the people we serve, and they know me. That’s going to come back in our industry more and more.

[If reps left their current broker-dealer, where would they go?]

Eric Schwartz, Cambridge Investment ResearchSchwartz: I think there are four categories of reasons for why you have some consolidation going on. Some of them go in cycles and some of them are ongoing. The first is the bad product/extinction level event. We saw 50, 75 broker-dealers go out of business because of Medical Capital and Provident Royalty, etc. Some smaller firms sold disproportionate percentages of those, but also they didn’t have the capital. Had LPL Financial been unfortunate enough to sell a couple of hundred million dollars in one of those products, it could have solved it. There’s going to be less of that in the near term because those products aren’t there.

The second issue is just that the four of us around the table are entrepreneurs who run our own businesses. Even if you decide you want to keep it going all your life, you still have an estate tax problem because somebody will sell at some point. The most common case is sometime between the age of 55 and 75, the senior people, usually one or two big dogs, sell because they want to cash out. And the only buyer that can come up with that much money is almost always an institution that already owns some other broker-dealers: thus, consolidation. As much as all of us at the table talk about wanting to keep this going independent forever, somewhere along the way we have tough decisions to make as to how we do that.

The third area is insurance broker-dealers. They were the main buyers a number of years ago. They’re becoming one of the main sellers now. I think the message they’ve gotten loud and clear is either get serious or get out.

The fourth thing is that there is potential for somewhat of a middle squeeze. You’ve got niche players that can deliver the personal service like our two smaller firms here have done. They can survive as long as they don’t hit one of those extinction-level events. They have a level of commitment from their staff and from their advisors to personal service that they can’t get at a 5,000- or 10,000-rep firm. The top 10 firms right now control 55% of the GDC in the entire distribution channel. Fifteen years ago, I believe it was between 15% and 20%. The top seven or eight firms 10 or 15 years from now will control 80% of the business. But that means there’s still another 20%. That’s room for an awful lot of 200- to 500-rep firms.

David Stringer, Prospera FinancialStringer: I agree on a couple of those points. Just as with advisors, there’s an aging population of firm owners now who are looking to make difficult decisions. But one of the good things that’s come out of the financial crisis is that the survivors have gotten better at risk management. It doesn’t matter what size firm you are—risk management is not something that you can skimp on.

Schwartz: Traditionally, you were a commission guy or you were a fee guy. We were one of the leaders that said, “Well, why do you have to be one or the other? Can’t we figure out how to do both?” Now, of course, everybody does that. In the same way, it seems like the choice has always been be independent with the risks and rewards and benefits of that, or be swallowed up by the big conglomerate. I wonder if there isn’t an opportunity for small, midsize and even large firms to form some sort of joint venture or association where [multiple] firms work together. What’s the benefit of AIG adding another firm today? Now, they have four firms; they’re still only going to have one due diligence department when it’s done, but they’re going to have four firms benefiting from it instead of three. So why couldn’t the four of us in this room say, “OK, from now on we’re going to have a due diligence team that’s going to work for all of us.” We could become more cost effective and compete better with bigger firms who have economies of scale. Now you have five or 10 firms that collectively represent $1 billion of revenue that are not repeating the exact same process; they can have the best of being independent, but some of the benefits of scale.

Knight: I expect we’ll start to see what Eric’s describing, especially in the context of some of these private equity firms that are buying up individual firms, yet at the same time letting them continue to operate somewhat independently. I think it will look different from some of the aggregation we’ve seen in the past because of exactly what Eric is saying. I suspect that they will keep some personal identities and culture going, but start to really aggregate some of those back office functions, particularly around the areas Eric mentioned like due diligence, things of that nature.

Schwartz: The clearing business got started very similar to that. And, of course, the correspondents have tried to branch out beyond just clearing, because they can’t make a living on $5 ticket charges or whatever. They have to offer some other value-adds that you’ll pay for, so they try to step into that gap to some degree.

Service: And all it Entails

John Sullivan, Investment Advisor: As a midsize firm, how do you balance scale with the personalized service?

Knight: The key is the folks you service. That may sound trite, but the key to all of the success we have enjoyed is continually staying focused on serving our individual reps and how we can help them achieve their vision and success. Paying an awful lot of attention to them is the key. Now, of course, we’re also owned by our reps; if I ever forget, they’re always there to remind me. Eric touched on it earlier and I love his quote: He said, “Be big, but act small.” Even as the numbers get larger, if I don’t have a personal relationship with every single individual one of them, I make sure that somebody on my management team does. Also, absolutely providing forums for their voices to be heard and making it very easy for them to say what they need.

Schwartz: That’s exactly what I would say. One of the things we look at is not how many reps we have, but how many relationships we have. Interestingly, our number of reps has climbed by about 200 a year for the last five years, but our total number of branches has only increased about 15% during that time. We still have about 500 branches, but the average branch has gotten bigger, which means our number of relationships hasn’t increased that much. Granted, we’d like somebody to have a relationship with all 2,200 advisors, but we really make sure from the highest level that we know those 500 branch managers.

Stringer: I’ve participated in this roundtable a couple of times now, and the theme that I hear is that the winners seem to be very centered on why they’re in business and who they serve. I think that, at least at our firm, we know that our client is the advisor, whom we put first, and we ask our advisors to put their clients first. I think if we stay focused on who we serve and why we do it, we’re here to make a difference in their lives. The profitability and all the business aspects and all the metrics will show up if you’re doing your business well and you follow good practices. If you stay focused on why you’re in business and who you serve, I think good things will happen.

Pintaric: Barry made a comment about how his advisors are part-owners of the business and they keep you honest. I get that because even though [my advisors are] not formal owners of our firm, I’ve always felt that they’ve owned the business. The reason is that they own the relationship with the ultimate end customer. So keeping focused on who is the boss is very, very important.

[Learn more about what reps want.]

Budget Priorities: Getting Granular

Green: An old aphorism says, “Don’t tell me your priorities, show me your budget.” What’s in your budget tells me what you’re real priorities are. You’ve all talked about the value of service, but from the bottom up, how do you specifically make sure that happens?

Pintaric: I think Eric and I share the same challenge. We’re in Youngstown, Ohio; he’s in Iowa. There’s not a large population of people who have experience in the securities business running around looking for jobs. So we’re forced to hire people by attitude rather than skill set. So many people have come to WRP with no clue whatsoever of what a stock and bond is, but they have blossomed as people that made WRP successful because they had the right attitude. There are a lot of educated idiots out there who can’t do anything, but you get somebody with a “can do” attitude, and they’ll go far.

Knight: I’ve certainly made hiring mistakes. I’ve hired some brilliant people who really knew their subject, who were true subject matter experts in their specialty, but didn’t understand our service culture. Somebody with the right attitude and the right heart of service toward our representatives—I’ll take them every day. The subject matter specialty is fine and understandable, but you can teach that. You can’t always teach the right attitude and heart of service toward people. It absolutely starts and ends with having the right people and having the right process in place.

Stringer: Even though we’re a small firm, we adopted initiatives to systemize our business and put processes into place. All of our departments have operation manuals. Even though those same people are doing the same job and have been doing them forever, we refreshed it last year. We have our “Service First” standards. If an advisor doesn’t feel that we met the standard, we have a feedback loop that goes to me and senior management. I think that’s a best practice whether you’re a big firm or a small firm: Institutionalize your processes so that you’re scalable.

Knight: Another reason to institutionalize processes is because it’s really hard for a good company to become a great big company. Growth is absolutely the enemy of service and culture, but it is doable. One of the other things that we’ve done is (and I think a key point to add here is to let the employees do it) to create a Commitment to Excellence committee. I try very hard not to go to the meetings myself. Let [the employees] create the standards and create the metrics and create the rewards process for it. So I have group of terrific employees that voluntarily serve on a six-month basis to keep it fresh.

Schwartz: Traditionally, you’ve got quality, service and price. The rule of thumb is you can only compete on two out of those three. We’ve talked a ton about service, and I think in our world, certainly for the people around this table, service is put first; basically, we are a service business. I think quality is so closely associated with service. I think price is the tricky one. My guess is that none of the people in this room are winning primarily with price. In this industry, the biggest firms that used to be considered for quality are often now focused mostly on price, as in “we’ll pay you 30% or 40% up front to join our firm.” Every recruiting meeting we’ve had this year, at least one or two other firms offered substantially more up-front money than we offered and in many cases higher payouts, as well. Yet for the last four years we’ve recruited more advisors and more GDC than any independent firm other than LPL Financial. So you can win on quality and service.

Knight: I can’t recall a single instance where we’ve [recruited] a quality rep [just because] we had the biggest pile of money on the table. Ever.

Pintaric: I can guarantee that’s never been the case with us. In many instances, for those who are owners of the firms, we’re spending our own money. When you’re spending your own money you make decisions much differently from when you spend somebody else’s money. My mandate is to stay in business, stay out of trouble and survive.

Schwartz: We’re running our businesses the way we think maybe Warren Buffett would run it. We’re saying, “Show me the money over the next 20 years,” rather than looking at each quarter and saying, “Why didn’t you hit your numbers?” When you’re a public company or owned by a parent company, sometimes you get forced to do things that are of a shorter scale.

Green: LPL Financial released their quarterly earnings recently. The problem was that they had plenty of new reps, but the cost of that recruiting pushed down their earnings.

Schwartz: They have their own challenges, and one of them is the law of numbers. I’ve seen this with the wirehouse firms as well. There’s never really been a broker-dealer that’s had much more than 12,000 to 20,000 advisors. No matter what you do with your advisors, how long can your average advisor stay with you? I think we’d be pretty happy if every one of our advisors stayed 20 years, but that means you’re losing 5% of your advisors every year. Their revenues last year were about $3.4 billion. So 5% is $160 million of GDC a year. If they’re losing 7% or 8%, which is certainly possible, they’re losing $200 to $250 million of GDC every year. I don’t know what the real numbers are, but if you’re losing that amount of GDC a year, you’ve got to recruit $250 million just to hold even. We find at our firm that a 7% to 10% growth rate is possible. As a public company, that growth rate is not a very good story. They’re looking for that 15% to 25% growth rate.

When you get to a certain size, you’ve got to do things like acquisitions. Some of those acquisitions aren’t just for the number of reps; rather, they’re for related businesses like a trust company or a bank. Now, I don’t mean to pick on them, because the whole industry does well if LPL Financial does well. Obviously, they are extremely smart guys. They’re doing a lot of creative things, but you’ve got to find a different way to do it when you get to something north of 10,000 [reps]. I can imagine that at the management level, they have some serious challenges because they’re not going to end up with 40,000 reps 15 years from now.

Stringer: They’re not serving their advisors, they’re serving their shareholders. In your case, your shareholders are your advisors. That’s one of the things that goes when you go public; you shift who you serve.

Knight: As you should.

Stringer: It makes sense; that’s what public companies do.

Pintaric: I make that comment every time I’m in front of a potential rep and he’s deciding between us and a larger firm. I don’t have shareholders to answer to; I am the shareholder. We all experienced 2008 and 2009 when we had to reduce [expenses]. We knew that’s the game we signed up for. But they have shareholders whose only commitment to their enterprise is that quarterly dividend. If that dividend shrinks or disappears, they want changes. But we can say, “OK, we have to ride this out. We know things will be better.” It changes the culture dramatically. I hope I’m not making a target of myself, but I think there’s going to be some changes at LPL when this happens. The shareholders will say, “This isn’t working.”

Social Media: Advisor Utilization

Stringer: We’ve embraced social media as a firm. One of the things we’ve tried to do is get good guidance on best practices on how to utilize it. I would say we have a low adoption rate in our firm of people actually using social media. The side we as a broker-dealer have to look at is how to comply with the rules and how to monitor it. We’ve had to put a lot of structure in place to make sure we’re catching those guys on LinkedIn and Facebook and that we’re engaging with them on the right way to do it.

Green: And you pre-approve a Tweet or a Facebook posting?

Stringer: Fortunately, we haven’t seen a lot of Tweets, but we’ve seen some blogging and some LinkedIn and Facebook, and tried to give guidance around the tools that are the most effective. We’ve had speakers at our compliance hours, so a lot of this is educating our advisors. It’s an opportunity, but it’s something that you really have to do in the right way.

Knight: The first job was getting our arms around the regulatory aspects of it. After we got past the abject fear, we figured out the right tools.

Green: Because a “like” on Facebook could be counted as some kind of a testimonial.

Knight: Or a recommendation from a FINRA perspective. The area certainly has its challenges from a regulatory standpoint. But we engage partners to work with the surveillance and rule-making process, and then we’ve gotten very involved with our marketing department to try to optimize it. We had to figure out best practices. First, we defined the terms of what can be done and how it has to be tracked, and we then pulled in those resources. Now, we’re pretty actively engaged in trying to come up with best practices in terms of optimizing the efficacy of the process.

Pintaric: I’ve been an advocate of social media. My first exposure was on the personal side. My wife and I have a 20-year-old daughter, so for the last five years she’s been on Facebook. I was supervising my daughter, and I saw some potential for a practice to use Facebook to promote itself. We’ve had low adoption, similar to [Stringer’s]. I think a lot of the reason why is because of the age of our advisors. The average advisor is in his 50s and they look at it as a toy for teenagers. The truth of the matter is there are a lot of organizations and companies outside of the securities business that use it to connect with their customers and prospects. I try to tell guys that they could tell their clientele things they’re doing that will generate interest in their practice. They could do it in ways that are unique. Tell them you’re going to a CE meeting. How many of your customers know that you have CE requirements? Most of them don’t. [Customers] look at it and say yeah, maybe that’s a good thing that we have CE requirements. It means you’re a professional rather than just a guy out there. You are maintaining standards in your practice. When you throw that on Facebook, or maybe that you’re going on a due diligence trip, it generates interest in what you’re doing and at least adds some more credibility to your practice. Convincing people to do that is a challenge.

Schwartz: We were very early adopters of the social media thing from a compliance point of view. We have this New Century Council that Amy Webber, our president, runs, which are advisors in their early 40s or younger. There are about 20 of them on that council. The problem was there was a small number of young men and women who knew what to do with [social media], and then everybody else started figuring out they needed to do it, but didn’t know how. Broker-dealers need to do more than just the minimum, which is the compliance tool. It’s really about helping them be successful at it because a lot of people did it for six months and said they didn’t get anything out of it. Well, you didn’t get anything because you didn’t do anything. This is all part of that value-added piece that 10 or 15 years ago none of us would have been asked to do. Reps would have been insulted if we suggested that we could help them. The world’s so complicated; this is just one of the ways that we can help our advisors.


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