Rock Solid: The 2017 Broker-Dealers of the Year

Diachok: The firms that are well-positioned today are the ones that started making the shifts that are being forced by DOL long ago. The firms dependent on commissions and transactional-based revenues, if you’re in that position, you’ve either been acquired, you’ve gone out of business or you’re hurting pretty badly right now.

The firms, frankly the ones sitting around this table, are the ones that really started seeing the shift in revenue trends years ago and were able to create different streams of revenue to offset some of the changes that have happened because of DOL and some of the other changes in the industry.

Amy, I know your firm is right there at the top as far as percentage of overall revenues from advisory [fees]. We’re right there as well. We have consistently tipped up every year. We’re approaching 60% of our total revenues from advisory fees. That’s up from 55% last year and 53% the year before.

It’s not just advisory revenue. It’s a much more macro question. Can the independent broker-dealer, as we see it today, even exist 10 years from now? I don’t think it will. I think we all are marching toward much larger RIAs with a broker-dealer component.

How do we provide the services, the technology, the platforms as we talk about DOL and the never-ending shift toward the advisory-fee model? The firms that have embraced that and are creating those solutions and platforms for their advisors are the ones that are finding other revenue sources, finding asset-based revenue sources versus transactional-revenue sources.

We had a dip in topline revenue last year. From the prior year, our profitability increased with a 6% or 7% topline decrease. That’s a function of some of those shifts that we started making years before, [such as] creating our own UMA platform, building all the technology underneath it to not be beholden to third-party technology and its cost. It has been extremely successful for us to create what we think is a very competitive managed-money, UMA, multi-manager, single-account platform at a lower cost than I think is available pretty much anywhere in the industry. Our advisors have really taken to that.

We’ve been able to take a shift in revenues — less transactional, less commissions — which drives that big topline number and may pull back a little bit, to embracing that shift, creating solutions, creating platforms that ultimately make the firm a little bit more money and revenue and profitability, while at the same time creating a less-expensive option for the investor and the advisor. If you can do both at the same time, you’ve found a pretty good combination.

Webber: It’s the same thing we’ve asked advisors when they convert to advisory accounts; maybe [take] a few steps backward before you propel forward. With 63% of our revenues coming from advisory and another 22% from recurring revenue, that leaves 15% transactional.

That said, a lot of our innovation around the product side has been in the advisory space. I still don’t believe transactional commissions are going away, at least not in my career, because there are just certain situations where an advisory account is not the most suitable for a client. I also do not completely buy into the “cheapest is best” scenario. The thing that gives me the greatest heartburn, honestly, are the DOL assessments around reasonable compensation.

Who should be determining it? There might be some outer bumper guards that need to be established from a regulatory structure, but the buyer and the seller should probably be determining that based on needs. Still, we do have to deal with what the rule is requiring us to do, so we are setting up reasonable compensation thresholds inside of each product category for that transactional side.

Then in the advisory space, all our discretionary retirement accounts will, by January, move into an asset-based pricing environment. Transactional fees are gone. All the clearing firm ancillary costs are gone. It is purely based on basis points. The clients are paying a programmed fee, just like they would in a UMA or a TAMP. In effect, our traditional asset-based platform fees that advisors pay are going away. They may use some of that to offset the clients’ overall fee.

The share classes potentially change. The revenue share goes away, and the clients pay a very transparent program fee. That’s probably the biggest evolution I think that we’ve seen in the product space. It has been very well received after we get through the five stages of grief. We go through every account and figure out exactly what it means to every advisor.

This is eliminating some of the disparity between the way that our pricing works as opposed to the institutional platforms. This is exactly what an independent RIA is getting when they go to Schwab and ask for a wrap account … .

With us, they’re getting our recent pricing — which is similar to institutional asset-based pricing that could be around 19 basis points — for our advisory business instead of ticket charges, and this is, all in, highly competitive depending on the size of the practice, average size of accounts and number of households.

This thing that we’ve been struggling with forever, how to compete with that model, is where the ice might be starting to crack. We might have some opportunities here.

Diachok: Sure. It’s driving assets away from the traditional TAMP model, which has traditionally been the most expensive model. With complete transparency on who’s paying what, advisors are saying, “I can access the same quality managers in a more transparent model. I can save my clients money. I can do it for less.”

Webber: What do they hate the most? The nickel and diming.

Diachok: Exactly. I don’t think in any of our lifetimes commission products will go away. There’s a place in a lot of circumstances that a commission transaction is more appropriate than just opening an advisory account for every client. But, I think we as firms have to adapt and see where those revenue streams are going and be able to operate with ever-increasing expenses, compressed margins and everything else. We have to be involved in providing those solutions on the advisory side, so that we are participating in that revenue stream.

Webber: We’re not just broker-dealers. We consider ourselves a financial solutions firm, so we might lead, not quite as vehemently as Lon does, with “technology for an independent RIA.” Or we might lead with, “We’re a registered investment advisor. Our corporate RIA is huge.” Or “We’re a registered investment advisor with a broker-dealer attached.” Or “We’re a fee-only corporate RIA.” I think that’s offering some opportunities.

Burmeister: We haven’t talked about … the product manufacturers. What share classes are they going to change? What fee structures are they going to change? It seems like they’ve been on the sidelines. I don’t know about all of you, but [manufacturers] have been coming to us, asking for our opinion and guidance.

Webber: “What do you want?”

Burmeister: Because they don’t know. We’re going to have to react rather quickly to make sure that we’re in agreement with what they’re coming to the table with.

Dolber: We came up with an idea that the decisions we make could have great impact on the advisors we serve. We didn’t want to make product decisions very quickly, like some firms that decided they weren’t going to allow commission-based IRAs. I thought, “Did they think about how that was going to affect their customers?”

Webber: They might be regretting that today.

Dolber: I think they are regretting that. I think also you could go to the end customer. The investing public should have choice.

I did not make a decision to tell advisors they couldn’t do commission business. I still have a book of business — not as many clients as I did when I started, but I have about 100 clients. I could relate to the things that our advisors are telling me because I have to deal with my clients.

If a client calls in and says, “Lon, I want you to go see my kids. They want to start a $2,000 IRA.” I’m going to put that into a fee-based account? Really? The regulators and people from DOL have never been in that situation. I’m not going to do it.

They’re going to go into a mutual fund. They’re going to go into a mutual fund probably with a 4% load. Because am I going to sit in a client’s house to make $10? This argument was made years ago. My dad brought me into the business. I remember he had to go in front of Congress to talk about why contractual plans made sense.

Webber: The share classes are insane. I’m not talking about what the compensation is necessarily, but we don’t need thousands and thousands of different share class variations. If they do need thousands, then maybe they could all name them the same letter … and have them look the same across the product sponsors because one man’s R shares are not another man’s R shares or I shares.

(Related: New Share Classes in a DOL Fiduciary World)

It’s really complicated because the amount of money that we must spend having human beings try to sort through our data to make sure that the right share classes are going through the right rules engines is obnoxiously inefficient.

As for T shares, I’m not a fan because if in fact we have to buy into the “cheapest is best” [scenario], there will come a time when T shares are no longer the cheapest. Then what do we do? Because there are no exchangeability or portability requirements for the client.

Then you go to clean shares, which, by the way, at least the ones we’re hearing are coming out, they’re not all that less expensive [in terms] of an internal expense than an I share. It’s just one more complexity.

Maybe it makes sense on the advisory side, but for every broker-dealer to have to develop a commission schedule like we did 25 years ago on the equity side, where does reasonable comp begin and end? That brings no consistency, again. I’m harping here, but this is … something that we agonize over because we’re not solving the issues. We’re just bringing more complexity.

Social Responsibility and Good Citizenship

Levaux: What are your views on social responsibility?

Dolber: I think the corporation has an absolute responsibility to be a good citizen and to do good work in the community, and it starts with the internal community. For me, our value proposition is very simple — we put our employees first [and] customers second. That gets some arguments from some of my advisors, but I tell them, put your employees first and they’ll go to the end of the world for your customer. Chicken and the egg. Community and shareholder value.

What we do is we have initiatives on a corporate level, and then I will allocate funds for advisors for their projects. We allow advisors to call and say, “We’re working on something,” and, up to a limit, we’ll support them. We have core things that we stick with every year, like Virtual Enterprise, which is an internship program. We put high school interns into our offices, and we pay for the six-week program. It’s a substantial commitment for us to do it.

Or World TEAM Sports, which I’m involved with, working with individuals that are physically challenged. I integrate these things into our culture where employees get involved, advisors get involved, people in my community get involved.

Webber: Happy associates make happy clients. Part of that, on the giving back side, is taking care of your own. If one of our employees is experiencing — and we have 736 — a health problem or an accident or their house burns down, it is amazing to watch how quickly our organization pulls together as a family. That’s a part of our culture.

We take care of each other, and then the board matches. They’ll do fundraisers. They’ll do whatever it is that they do, serve lunches, and then we match what they raised for that cause.

We created the Cambridge Foundation several years ago. We have associates who feel that this is a satisfying activity for them, and they can suggest that they want to be on the board of the foundation, so it isn’t just the senior leadership. It can be other employees. We look at hundreds and hundreds of requests every year.

Part of our core values is giving back to our local community. Every city that we go to and have our national conference in, we have significant fundraising efforts, and we’ve given thousands and thousands of dollars at our national conference. We also have what’s called the Cambridge Community Kindness Matching Gifts [initiative] and Dollars for Doers … for employees and for advisors.

Dolber: We have a full production studio at our office, so we produce content all day long and incorporate this, the social fabric, the CSR, into what we do. I think advisors have joined us because of it, quite frankly. A lot of the advisors are in their 50s. They’re making money, but they’re at a point where they want to do something more than make money. They want to give back to the community.

Diachok: The question about culture and what makes each of our firm’s culture unique, it’s pretty evident there’s a clear, common theme of why the four of us are sitting here today as winners of this years’ Broker-Dealers of the Year. We all share very common themes on culture — family culture amongst your employees, amongst your advisors.

I’m a third-generation family member, so we have true family running … through our organization. That’s been one of the key cornerstones of our firm from day one, and that’s really attracted a lot of the advisors to us, as it has to your firms. At the end of the day, these independent advisors are out there a lot of times on an island, and they really are just looking for true partners.

They get caught up in acquisitions, as we’ve talked about, forced transitions, and all the things that they’ve had to do. When they find a firm that has that real culture — not a manufactured culture, but a real sense of belonging, a sense of family starting at the employee level and translating down to the advisor level — I think that’s the most critical piece for all the people that look at and ultimately join our firms.

We decided to do away with any type of plaque or any type of recognition from that perspective, and instead, we created a program for the top 15 advisors and top five branches. We set a pretty significant dollar amount and donate to their charity of choice in their community. At our conference, we give them a chance to come up and talk about it to the group.

Burmeister: What you have put together, I’d mirror that as exceptional. I went out to our advisors and said, “What charities do you work with?” and I was blown away. You talk to the advisors, and they do charitable-organization work where they’re helping the charities themselves save money, whether it be through insurance planning or wealth management planning. The one that we have multiple employees in Austin involved with through a committee, as well as some of our owners, is the City of Hope Foundation.

Webber: One of our fastest-growing solo [advisors] was in last week. He said one of the best things he did — he’s in Texas, Austin, actually — was to create a client advisory board. The clients drive where his charitable dollars go.

— Read Helping Clients Be Charitable Is Good for Advisors’ Business: Foundation Source on ThinkAdvisor.