The More Things Change: The 2013 Broker-Dealers of the Year

“What was the question?” Russ Diachok innocently asked.

It wasn’t as if the president and CEO of Geneos Wealth Management wasn’t paying attention to the discussion before him. As other participants attempted to prompt him, they quickly ­realized they too had trouble remembering the original question. Backtracking revealed they’d jumped from compliance to social media to next-gen to ­succession planning, all without a question in between.

It was a stark example of the ­increasing interconnectedness of issues related to the independent broker-dealer ­business. It was one of many themes to emerge from our meeting in Chicago with the 2013 Broker-Dealers of the Year.

This is the 23rd year that Investment Advisor invited producing representatives of independent broker-dealers to rate their BDs on 14 specific categories and a 15th, in which we asked for a rating on each firm’s overall performance and service to reps. Those firms that received the highest overall rating in each of four divisions (by size of their rep force) are the 2013 Broker-Dealers of the Year.

The four men who lead the winners this year gathered for a nearly full-day roundtable discussion in Chicago on July 31. While the discussion was initially seeded with questions from the hosts—John Sullivan, editor in chief of Investment Advisor, and Jamie Green, editorial director of the Investment Advisor Group—we were pleased with the interaction, cross-talk and resulting passion each participant displayed.

This year’s winners (or their firms) aren’t new to the process, yet one commented that although some of the players had changed, the issues remained the same. Whether or not it would prove true piqued our interest as the discussion got underway.

The leaders of the 2013 Broker-Dealers of the Year whose comments are below were: Terry Frank of Century Securities; Russ Diachok of Geneos Wealth Management; Tim Murphy of Investors Capital Corp.; and Eric Schwartz of Cambridge Investment Research.

[Learn more about about how the broker-dealers of the year are picked.]

An excerpt is provided here, but the 23rd annual BDOTY celebration continues online at ThinkAdvisor.com, 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.

Regulation: The Never-Ending Story

Jamie Green, Investment Advisor: In October, the DOL is expected to release its fiduciary reproposal. What do each of you expect it to look like?

Tim Murphy, Investors Capital Corp.: The Department of Labor is introducing what they’re going to call the “conflict of interest rule.” The primary issue is no longer having the ability to charge commissions in IRA accounts. They’re introducing or defining fiduciary under ERISA separately from how the SEC is defining it. The Financial Services Institute has been active in meeting with folks on the Hill. [Editor’s Note: Murphy is a board member of the independent broker-dealer advocacy organization.] We’ve received positive responses. We’re getting support for our position. The primary concern is that the people who need the advice most aren’t going to get it. It’s typically a younger investor or somebody starting out; he’s encouraged to consult an advisor by a family member who just a left a meeting with their advisor. Well, the economics don’t work for the advisor. They may get an account open, but they may not get the appropriate, prudent advice to go along with it.

Green: You said you thought FSI was getting good response from folks on Capitol Hill. Do you expect the DOL will be listening to FSI?

Murphy: I can tell you the DOL will most likely not be listening to that. It’s our understanding that Phyllis Borzi and the DOL are headstrong in getting it done their way. They believe that what they’re doing is appropriate and the right thing to do. I think they’re missing the unintended consequences.

Terry Frank, Century Securities: I think that, philosophically, the senior people at the DOL believe that commissions are bad and fees are good. If they were able to do it, they would outlaw commissions in all accounts. They don’t have that power, so they’re taking a personal position. In many cases, a fee-based account is more expensive for the client. If someone has a relatively small amount of money, say $10,000, $20,000, and wants to open an IRA and doesn’t need any other advice for 10 years, can they pay a one-time commission and maybe a small trail that would allow them to call up the advisor and ask a question? Wouldn’t that be more appropriate than going to an advisor who says their account is too small to service? There’s somehow the assumption that commissions are evil and cost more and makes the advisor an adversary while a fee somehow automatically makes them holy.

[Watch a video interview of Division I winner, Terry Frank.]

John Sullivan, Investment Advisor: Can you give an example of a top performing advisor who has specifically rejected the fee route in favor of commissions and explain why?

Eric Schwartz, Cambridge Investment Research: I could list half a dozen, including one of my largest advisors. This particular lady has been with me a very long time. Her revenue is about $400,000 a year on almost $200 million of assets. You can do the math yourself, but if she was charging 1%, which most of her clients would happily pay, she’d be making $2 million a year instead of $400,000. She just doesn’t feel that it’s justified to charge that much, so she does it in a classic A-share and a trail model. Her husband’s been trying to convince her to switch for years, but in her mind she’s earning a reasonable income and they’re paying a fair price, and that’s the value she wants to deliver. The concept that if you’re doing fees you’re somehow a fiduciary, yet if you’re doing commissions you’re a salesman—it’s just not fair.

Green: Are you worried about the DOL rule, or do you think your reps are worried?

Russ Diachok, Geneos Wealth Management: I think our reps are worried. There’s a place for a commissionable transaction, just like there’s a place for fees, and I think it will be the clients that are hurt by this. It’s not so much us or our reps; our reps are trying to work with people who have money. If they can use a commission or a fee, then they typically go the fee route, but the investing public is going to be hurt by this more than advisors.

Green: What about the SEC’s fiduciary proposal? We assume it would state that anyone who provides advice has to operate under the fiduciary standard. Is that something you and your reps are worried about?

Schwartz: Our children could be retired before they sort all this out. There were 800 or 900 of our reps in a room at our national conference, and I asked, “How many people here treat both their commission-based clients and their fee-based clients in what they consider a fiduciary standard?” And I also asked, “Do you treat them one way or another?” There were a couple variations on it, but 100% of the reps said they treat their fee-based clients and their commission clients with the identical standard of trust and ethics. They already hold themselves to a fiduciary standard with both of them. Now, they couldn’t read out to you what the rules of a fiduciary standard are and check the list to show they’re doing it, but they don’t say, “Oh, here comes the commission client. We can take advantage of him,” and then, “Here comes the fee-based guy. I better be honest.” It’s absurd. Our advisors, on a theoretical basis, have no problem with it. They think all advisors should always hold themselves to a high ethical standard when they deal with all clients. I think the FSI would take the exact same position.

Those of us who have been through arbitrations over the last 10 years know that by the way they’re constructed and the way the complaints come in, they’re already holding us to a fiduciary standard. They’re saying, “You didn’t do what’s best for the client.” They don’t say, “You didn’t do what’s suitable.”

Murphy: I know a few firms that have gone through DOL audits. To Eric’s point, I think it’d be hard to find any advisor, whether or not they’re a fiduciary under the SEC’s current standard, who doesn’t act in their clients’ best interest. That’s how they get new clients. You don’t get referrals and build your business or stay in business, particularly in this environment, if you’re not acting in your clients’ best interest.

Green: The DOL fiduciary ruling and the SEC fiduciary ruling, those get a lot of press. On a day-to-day basis, are there other regulations, for example FINRA rulings, that are of more concern to you?

Frank: It seems like a lot of redundancy is coming out of the DOL. I don’t know why the DOL has all these different audits coming down when they can centralize some of them in an SRO. There might be a better way to go about it.

Schwartz: It’s certainly true that at any given moment, the only thing different between this year and next year will be a certain new regulation that’s coming down the pike. One of the newer ones that’s just showing its head is something that affects OSJs. If you are a super OSJ you will only be able to supervise two other offices. We’re certainly trying to figure out what that means.

Green: Is it important to be on those FINRA regional committees in order to have input into the process?

Diachok: I think it’s important, whether it’s at our level or compliance people, to participate in the FINRA committees and have a voice. We try to always keep somebody at our firm in the district committee queue. But what happens when you go to those meetings is not everybody is open and very participatory. Some people feel intimidated in that environment for whatever reason and don’t say much. That doesn’t really help.

[Watch a video interview of Division II winner, Russ Diachok.]

Schwartz: It’s certainly important because you have to at least try to influence things and have regulators better understand the membership. I think most people who have been doing it a long time would say that from the member’s perspective, the influence is much less than 10 or 20 years ago. I think it’s the opinion of most that calling FINRA a self-regulatory body is really not the proper terminology; 20 or 30 years ago it was a self-regulatory body. Today, the members have no power. It has more teeth in it than the SEC, which is a federal watchdog, as evidenced by the regulation of broker-dealers versus the regulation of RIAs; they can’t even get out there and audit 30% of RIAs. If the SEC was a branch office of ours, FINRA would shut them down for failing to supervise the people. 

Murphy: If we don’t stay actively involved and engaged, it will deteriorate fast in the future. To the question about regulation and consequences, there are new rules coming out, but we still have trouble meeting the ones that came out two or three years ago. What concerns me now are the consequences of not complying and the degree and amount of fines that are coming out; we’ve seen some astronomical fines. It used to be that a $100,000 fine was big; now it’s the minimum entry point. It’s not like, “OK, you stole clients’ money, so you’re going to pay a lot of money.” Instead, it’s, “You lost some emails,” and now you’re dealing with a multimillion dollar fine. It’s definitely not a friendly environment at this stage on the broker-dealer side. On the RIA side, it’s still relatively OK by comparison.

Advocacy: Into the Breach

Sullivan: What would you like to see FSI do better? Are they effective or could they be more effective?

Schwartz: I was a founder and on the board of directors for seven years, so I may be biased. I think they’ve stepped up compared to when I was there. The organization is multiple times larger and reaching its tentacles out a lot more, which is necessary since you’ve got all these new players: the DOL and the SEC, all the different states and all the moving parts. They’re as effective as they can be at what they’re doing. They’re getting the issues, they’re making a difference, but there are some items that are so big that no matter who you are, you cannot turn certain things. Thank goodness FSI exists because without it we’d have no representation at all. Regulators see the FSI as a level-headed organization that brings a balanced approach to things.

Murphy: I’ve been involved with the FSI board over the last few years, and we’ve seen the organization mature and develop. We now have 36,000 advisor members. That’s brought a number of resources to the table. We have a larger constituency with which to effect change locally, and it’s given the organization tremendous financial resources. We’ve relocated the organization from Atlanta to Washington D.C., which has been tremendously effective, and then hiring high-quality folks to be more effective. We’ve seen the organization grow and develop and move forward. Dale [Brown, FSI’s president and CEO] is always constructive and never wants to be an outlier. I expect you’re going to continue to see the FSI be a credible resource for industry regulators, and we’ve had responsible, constructive engagement with them.