In the in-person roundtable featuring the leaders of the 24th annual Broker-Dealers of the Year, we asked them to respond to common scenarios faced by independent BDs. Here’s how David Stringer of Prospera Financial, Doug Wright of The Investment Center, Kevin Bachmann of Questar Capital and Eric Schwartz of Cambridge Investment Research responded to Scenario 2 on how to keep their top producers at home.
Scenario 2: Keeping Your Top Producers
One of your top-producing reps has come to you asking that an alternative investment be added to your approved list. You’ve considered this investment two years before, and you know your biggest competitors have placed it on their approved lists. However, in your due diligence two years ago, you decided it was too risky. What do you say to this top producer, who is adamant about using this investment?
Eric Schwartz, Cambridge Investment Research: In recruiting, everybody is out after the same people more or less. They want highquality, sizeable producers.
We’ve created a little issue where the top producers are so much in demand that it makes them that much more demanding; when they believe they want something, they know that they can make a phone call and end up somewhere else–not that it’s something most of them are seriously thinking of doing. It’s a lot of work, and they value you. They hopefully will listen to the story.
First off, it’s a question of, “Why do they want the product?” Sometimes they want the product because a wholesaler came in and told them a good story, and they didn’t really research but it sounded really good, or a friend sold it, or a client brought it up and it looked pretty good.
Probably 80% of the time, we are able to show them, “Here’s our due diligence. Here’s the information. Here’s why we didn’t approve it. Here’s three other products that are like it that we think have a better track record, or more financial strength or better management team,” whatever.
Presuming that you’re doing a thorough due diligence and you have your story together, not just that you didn’t approve it because the brochure was the wrong color, then hopefully your advisors value you enough, and know that you’ve avoided Medical Capital and various other problems, that they say, “That’s a good point. I didn’t know that. Okay, I’ll pick one of those other ones.”
I’d say that in this day and age, people having seen the ugliness that can happen when products go awry, 90% of the time the advisor will say, “Okay, I see your point. I think I’ll do something else.”
To the other 10%, we have to agree to disagree, but we’re not going to approve it. I’ll say there’s an occasional exception to that because there are some products that are really complex, suitable to only certain types of people.
If we have an advisor who’s dealing with 10 clients whose net worths are over $100 million, and they want a complex product that we don’t think we should put out to our general advisors because most of them aren’t going to take the time to totally understand it, we may say, “We will allow you to place it for those four clients that you have in mind that have $100 million net worth, and are looking for a private equity program with a 10year tieup period, and blah, blah, blah.”
There’s a difference between a product that’s being turned down for the obvious reason, like Medical Capital, where they had no audited financial statements, no selling agreement. Most of them aren’t that simple.
[Then] there are ones that are perhaps good products but really for a very small market of appropriate people to sell it to. Those, you can say, “For those four clients, we will do that,” but we try to avoid doing it. If it’s a product that your own due diligence report says doesn’t meet the test, it’s pretty hard to approve it on an isolated basis.
If you look at it five years later and you say, “Well, we could’ve approved that one,” that’s like [saying] you could run across the road 20 times and not get hit by a car even if you don’t look, but it’s probably not worth taking the risk.
Doug Wright, The Investment Center: I’m on the product vetting committee where we go through and analyze these products (Wright, pinch-hitting for The Investment Center’s president, Ralph DeVito, is chief compliance officer of the firm). One thing that we pride ourselves on in our compliance department is that we’ll never say, “No,” and not give you a reason, and I think our reps really respect that. We’ll come back to them with similar analysis and tell them why we’re not approving it, and say, “Here’s an alternative. This is how you get to the point that you want to get to with your clients.”
We’ll put a number of different people and vendors in front of them to analyze that situation. I think that we’ve never, since I’ve been there, lost a rep over declining a product, and we’re pretty conservative as far as product buying. We won’t bring on the Med Caps and things like that.
We do REITs, we’ve done some of that, but we do a thorough analysis, just like all these other firms do. You have to be careful out there, and you have to make sure that it’s the right product and what training is involved; not only the rep’s [training] but also for the client. We’ve approved products with specific requirements that clients would have to come up to actually purchase that product.
We not only will put restrictions on some reps who may want to buy a particular complex product, but we’ll also vet the client too, make sure that everything’s matching so we don’t have an issue down the road.
David Stringer, Prospera Financial: Part of our vetting process on the front end is to share our philosophy around compliance. It really is to protect our advisors and our clients, so we really frame it [that way] on the front end.
This is the advisor’s biggest asset in many cases, so we’re on their side, and I think they recognize that.
We’re a small boutique firm, but the product providers that we choose are the bigscale players, so it’s our job to really make sure that we do not allow a fraudulent product on the platform.
To Eric’s point, if somebody were to come to us, we’d share our due diligence with them and the effort that we went through, and we really try to get a deep understanding of why it’s important for them to have this product. If it is one of those special circumstances, it’s really around suitability.
First, we have an obligation to make sure we’ve tried to vet out any possible fraud, and we are going to turn down any products that don’t meet certain standards, but if it does meet that standard, as Eric put it, that it’s a unique situation that’s unique to that client or that advisor, then we would paper it and make sure they’re highly suitable, highly accredited, and make it available just to that advisor and their specific few clients.
I would say 90plus-percent of it is not going to happen, but if it were to be that rare occasion where someone was just adamant and we just agreed to disagree, we would say, “Maybe our firm is no longer a good fit for where you’re taking your practice.”
Kevin Bachmann, Questar Capital Corp.: We’re going to look at it again. If two years ago we didn’t look at it and top rep asked us to look at it again, absolutely. That’s the relationship side of it, so we’re going to look at it again, see if something’s changed.
If it hasn’t changed, we are going to be very transparent with them about, “Here’s why we’re not comfortable with it.” You have to give them alternatives. There’s plenty of products out there that are not that different.
I think Eric said something else about it’s easier for the reps nowadays. You’ve got more examples to say, “This product exploded. This one went bankrupt. Just look at what happens to the advisors in the companies who sell this stuff.”
There’s still going to be cowboys out there who are going to put product on the shelf that many of us aren’t going to agree with or won’t pass our due diligence. We’re just going to be straightup with them.
We do now have productspecific training on that product, so the rep has to go through that specific training, and then we have productspecific disclosures outlining that REIT or whatever that product is.
Schwartz: We were mandated to [do that] by regulation to some degree. There’s always somebody that’ll interpret it differently and say, “No, no, that’s not what it means,” but the rules are pretty clear on that.
Danielle Andrus, Investment Advisor: When you re-evaluate an investment or make an exception for a certain client, does that ever cause tension between a topproducing rep and other reps who might think someone’s getting special treatment?
Schwartz: I would say that most of the time it’s an isolated case and it’s not like we make a public announcement about it. To me, I think the nature of running a brokerdealer these days is that you have to assume that anything you do could…
Stringer: Could be in the “Wall Street Journal,” right?
Schwartz: That too. I was just saying it could be…
Jamie Green, Investment Advisor: It could be on Twitter.
Schwartz: Yeah. It could be in the hands of all of your reps.
Wright: Everybody talks.
Schwartz: If we’re going to give somebody that’s doing $2 million of business a higher payout than somebody else that’s getting t$2 million of business, we have to have a reason.
When we look at anything that we do at a brokerdealer, we’re always saying, “Let us assume that every single one of our reps is going to know about it and perhaps the Wall Street Journal as well. Are we making this [decision] at the highest level or are we making an exception just to get it of the way?
Green: You could justify it to the media too, or in a court of public opinion.
Schwartz: All of that. Certainly the regulators are going to want to know why [you approved that product.] They won’t know about it until it blows up, and then of course you’re already behind the eight ball because why did you approve this product that blew up just for this one guy?
Bachmann: You better have a reason.
Wright: Better have it welldocumented, too.
Schwartz: One of the things that top producers expect and want, and small advisors want too, is to be a partner; that it’s a twoway street, that you’re flexible, that you’re kind. We have four values, and the two that come to mind are flexibility and kindness. If you try to remember that you’re treating people that way–and that’s advisors and clients, as well as anybody else you’re dealing with–it tends to sort out a lot of this.
Stringer: We had an advisor who was talking about how he wanted a special [insurance marketing organization] just for him because it brought leads to him or something like that. We were trying to get to a spot where like, “How important is this to you?” He said, “I’m not going to leave the firm because where else am I going to find a firm where I have an issue and I can pick up the phone at 7:00 and talk to one of the executives while I’m making dinner?”