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?”
There’s that level of commitment [we have] to our advisors; that we’re available to them, even on the weekends. I don’t get that many calls but we pride ourselves [on being] a boutique firm, the gold standard of boutique firms. I think it’s one of those things they recognize, that we’re going to do unique things for them on the service level.
To Eric’s point, if you’re going to do something like approve a special product or do those other things, you do have to look at it from a standpoint of, “Is this a process that we could extend to others that meet the same criteria?” Otherwise just the oneoffs, just because I like the person, I don’t think that flies in today’s world.
Wright: The due diligence process doesn’t change if you have to vet a product for one rep or a hundred reps. It’s still the same risk to the firm and you have to go through the same analysis, so if you are going to do it, it should be something that you could approve for the whole firm in general.
When we’ve done it, it’s been by client request not really by rep request. They’ll design that for that person, and we’ll do something similar to that. When we try to approve a product when a rep comes to us, then we look for, “Basically, is it good for the whole firm?”
Schwartz: This brings up a broader subject of flexibility and customization. We’ve built ourselves on the whole concept of flexibility. Where most of our larger competitors have built one box, we have this really big box with a lot of things you can plug in and out of it.
That’s expensive to us, but it’s also been fundamental to our growth, along with our expertise and fees and our commitment to staying independently owned, which to our reps is important. That flexibility in being able to figure out these kind of things is important, but it’s cost us somewhere between $7 and $10 million more than if we had a closed box.
Every time you spend $5,000 to research a product for one rep who changes his mind and doesn’t sell it, or even if he does sell it, you don’t recoup that. That’s part of the cost, but that is also what makes a broker-dealer great, in our mind.
That’s one of the ways that players like ourselves, especially if you’re not going to win based on having more money than everybody else and buying everybody, are going to win: by having a unique culture, and a lot flexibility and customization.
At least half of our offices, especially the larger ones, have some kind of customized situation with us. It might be technology. It might be a product. It might be how we supervise them. We take customization down to the individual, granular or one-person level, but we also try to say, “That was a good thing that we built for that one guy. Maybe we can apply it to all solo producers who have no staff.”
That’s things like answering their phone for them when they’re on vacation. We have eight people in the home office who do nothing but act as parttime assistants for our reps, particularly our solo producers.
Green: That customization, as I think you said earlier, it costs something. Are all the reps willing to pay for that? Is that part of what their contract is with you, so to speak?
Schwartz: Some of it is just part of the package and why they joined us. They joined us because they liked our culture or our values, and they knew that we have a reputation for being flexible.
As a result, we don’t pay the highest front money and the absolute highest payouts. We’d like to think of ourselves more as the Nordstrom than the K-Mart, so a lot of those things are built in and are free. If you need that, it’s not a cost.
Some things, like for example, this virtual assistant program, they’re going to pay for that. Most of the flexibility that I was talking about, I don’t consider that as an expense because we get that recovered. Those eight people are paid for by the reps directly who actually use them.
Green: Are all top producers the same? Do they become top producers because they’re just really good salespeople?
Bachmann: They’re all different. They’re in different markets, they’re in different niches, geographically, they have different systems. They sell different products. They’re wired differently. You have to be able to really be flexible. You don’t want to be cookie cutter, right?
We have to fit our broker-dealer into their practice, rather than having them fit into our broker-dealer.
Wright: They’re all different, and they all have different needs. You look at our top 10, every single one’s different.
Schwartz: I would say they’re not all demanding, if that’s the question you’re asking.
Bachmann: Some are.
Stringer: Some you never hear from.
Green: Let’s say that perhaps you’re going to pay more attention to those folks. Are they the kind of advisor who wants to be able to show to their clients, for instance, that here’s a new product, or here’s a new way to solve this retirement income issue that you have? In other words, are they looking for new products and that’s part of what they’re offering to their clients? That, if you come to David Stringer, you’re going to get the best: the most recent thoughts, the best products.
Bachmann: I don’t think they’re as demanding. There are some that are demanding, but I think a lot of them just want to be heard. They want you to listen to them, they want you to respond, and they’re good with a “No.”
If you’re transparent, and you tell them why and explain, “We just can’t do that,” they’re good with that, and some top advisors just want to be left alone. They want to do their thing.
Wright: The entrepreneurial spirit comes out. They want to be their own entity and they just utilize you for back office servicing, and that’s fine. We can be whatever you want us to be. We can be fullblown marketing, helping you recruit, everything, or we can be handsoff and talk to you once a year.
Stringer: I would say that our industry is not an innovative industry. If something comes out, it’s commoditized pretty quickly, so everybody’s got it. Our advisors won’t want for anything. As far as products, I think we have a robust set, just like everybody else.
I think our top producers are becoming better business owners. They have better processes in place. They’re not trying to be rogue, “find the innovative solution.” They’re just finding out ways to build their practice in a more effective way.
Schwartz: If you looked at our top producers, if anything they are less interested in the innovative product than the smaller producer. They’ve been around a little longer; they know that innovation is good, but maybe the barber should shave on somebody else’s face first.
They’re also very successful, and they know what’s tried and true, and they’re not needing to come up with a hot product to get new clients. Those are the people you have to watch more carefully, train more carefully, because those people should really have a mentor that can say, “Slow down. Let me tell you what happened in the ’80s, or what happened in the ’90s, or what happened in the 2000s.”
Stringer: In our case, it just wouldn’t be a good fit for our firm. The guys who are brand new, trying to learn the business, cut their teeth, find an innovative product, we’re just not the best fit for them. We’re dealing with the seasoned people who are trying to scale a business or even have a lifestyle business that they’re very comfortable with.
Schwartz: You can’t have no young people in there, but we want them in with somebody who’s seasoned because then we don’t see that pattern. If they come in direct to us, we’re going to suddenly see they’re selling just this one product. That was how the business was 30 years ago, 25 years ago. That’s really not the business that I think any of us want to be in.
The worst is when these products work really well. I’m joking a little bit here, but some of these REITs have done really well where they were bought right at 2008 or ’09, and now they’ve flipped and made money.
Now all of a sudden a younger buyer looks at that and says, “Wow, this is a guaranteed money machine,” and they want to triple their sales of that, and compliance has to watch that. We all have to watch that.
Even successful guys will fall into it sometimes. We’re all human. None of us are as worried about our businesses and about the stock market as we were five years ago because it’s further away. We’ve forgotten a little bit. It’s not just the young guys that can make these mistakes.
Wright: We’ve actually had to go to some vendors to create a special limited partnership for a client. You have to do that sometimes just to retain the assets and to help your rep recruit new assets.
Green: It benefits you because that rep is growing.
Wright: Then you have a sophisticated client, so the compliance concern is a little bit less because you have someone who’s very knowledgeable in that space and knows what they want, and you can design that around their needs.
Schwartz: It’s a doubleedged sword. The person who has a large net worth supposedly knows what he’s doing, but if it goes the wrong way, he still lost $25 million and he isn’t necessarily not going to sue you.
Wright: That’s where the product really has to be vetted, and you have to know what you’re doing. The transparency, and knowing exactly how to vet that particular product, is key.
Schwartz: It’s good because ultimately, the risk to the firm has made us have to do what we should have done just out of responsibility to the public. When you’re trying to make enough money to pay the rent, you aren’t always thinking about, what can I do to save the world?
None of us are big fans of regulation, [but] to some degree, the pressure they put on us has forced us to be better people, has forced us to do what this industry should be doing, which is giving true advice.
The survivors 10, 20, 30 years from now will have a lot of other features, like flexibility and other things we’ve talked about today, but they will be the ones of the highest ethical standard, who holds themselves and their advisors to the highest standard.
Click here to read the Broker-Dealers of the Year’s discussion on “Scenario 3: SEC Imposes Fiduciary Standard on Reps.” Visit the 2014 Broker-Dealers of the Year home page for more coverage. Click here to view the complete rules for voting in the Broker-Dealers of the Year.