INDEPENDENT-BROKER DEALER ROUND TABLE: The following is an edited transcript of the round-table discussion.

The following is an edited transcript of the round-table discussion.

InvestmentNews: As we go into the second half of the year, is it getting more competitive to recruit advisers?
Mr. Flynn: I don’t get any calls from traditional wirehouses being on the independent channel, but we do, from time to time, get calls from other independents.
InvestmentNews: Is that more aggressive these days than in the past?
Mr. Flynn: I don’t think it’s any more aggressive. I would say it’s been pretty steady, but we’ve never been approached by a traditional wirehouse.
InvestmentNews: Bill, what do you think about the second half of the year?
Mr. Van Law: The first half of the year, the activity level was quite a bit stronger than last year for us, and that has increased even further, beginning in May, not in June. I think largely that was in anticipation of this latest acquisition of A.G. Edwards by Wachovia.
Mr. Rooney: We’re seeing a similar thing. With the event-driven recruiting, a lot of advisers are standing back and saying, “Am I going to have my future dictated for me, or actively seek out my next home?
Am I comfortable with the direction?” That’s who we’re talking to primarily these days.
Mr. Grant: There are cycles in this business, and maybe the initial cycle a long time ago was to see that we drew brokers from wirehouses and sometimes insurance companies.
We trained them, and we helped them rise to the level that was fruitful for us. The current wave seems to be that recruiting is better when there’s instability.
Right now there is a lot of stability. Business is good, and I don’t think recruiting is all that great except for the opportunities that come from instability. I don’t know what the next wave will be, but this wave is basically taking advantage of those moments of opportunity in the unstable sectors.
InvestmentNews: You can’t bet on instability, or maybe you can.
Mr. Grant: It’s perverse. Waves of layoffs and economic insecurity usually lead to lots of rollovers and things that help us.
Recruiting cost
InvestmentNews:Joby, is the cost of recruiting advisers now more than ever, and is it out of control?
Mr. Gruber: Traditional recruiting in our world has been steady throughout the year. You need a change in the environment, and the change that’s been out there is regulatory.
What we’re seeing is a pickup in interest of those small broker-dealers, $5 million to $15 million in size. A handful of advisers who are the owner/operators of the firms are taking a step back and saying, “I run my own broker-dealer, I have a cost of running that broker-dealer, if I go to any of the firms represented at the table I’m going to take something less than 100% off the table.
What’s that cost savings going to be? How much would an FSC or a Raymond James or an LPL bring to the table from a leveraging economic standpoint, a regulatory environment standpoint? So maybe I’m willing to give up one, two, three, five percentage points to do that.” We’re seeing a pickup in that arena.
That for us is a real positive business. When you have something like Brookstreet [Securities Corp. of Irvine, Calif., which shut down operations in June] that blew up, you’ve got all these advisers running for the hills. They’re trying to get together and say, “Hey, if you take the 10 of us, we’ll do X.”
You find small broker-dealers that are $5 million to $10 million in size, three to five principals that run the entire operation, they sit at a table, and they make a decision. You’re done.
[There is] very little ego that you have to deal with there. In that part of the marketplace, there’s not an out of control pace with the pricing in the traditional environment. It depends on how far you want to come up. You [have] firms that [to recruit brokers are paying upfront bonuses of] between 40% plus and 29.5% [of a broker’s production in forgivable loans] to recruit brokers. My theory is, they don’t have anything else on the table to really add value.
So if I want to create a million-dollar producer and put 40% up front, I could do that. But if I want to recruit a million-dollar producer, and say I’m not going to pay 40% [upfront], let me tell you what I could do with your business. In the end, I could get you north of 40% and that becomes very positive.
InvestmentNews: AIG, Royal and FSC, you’re focused on those smaller broker-dealers it seems. Are you the only guys out there in that market? What’s the thinking behind that?
Mr. Gruber: There are a bunch of firms out there that do that sort of business. The reality is, it’s a lot of leg work. … There are thousands of firms that go out into the marketplace and tell your story for you. We’ll see that’s a positive way to grow the broker-dealer. It’s quality business in addition to the volume [of business] that comes with this.
Mr. Lally: I’m seeing that the small boutique broker-dealer is not the attractive acquisition that a larger broker-dealer is going to want. There is also concern among the adviser network, because the adviser is asking us the question, “If I partner with another broker-dealer, what is their long-term strategic plan? Are they going to be sold in the next two to three years?”
What we’re seeing is that the boutique broker-dealers that have revenues between $5 million and $15 million, in that micromarket, a lot of those firms shouldn’t be broker-dealers. The regulatory environment, the services and the relationship they have with their advisers is a concern.
The cost of capital [to run] a broker-dealer is very high, so what we’re seeing is, these broker-dealers are reluctant to put a for-sale sign on the front lawn and say they’re interested in making the transition.
For larger broker-dealers who are actively going into the market and telling their story, it’s closing that divide. A lot of these firms are super[offices of supervisory jurisdiction], when you really look at the business.
Mr. Flynn: Whenever there is turmoil, we do have reps from other firms give us a call. Or people we know will ask if it’s OK for somebody to call us and ask us what we think about our current broker-dealer. That call would never happen had there not been some kind of sale of a back office or change of broker-dealer.
That creates some uncertainty and call levels pick up. Most recently, [following] the AXA/LPL clearing arrangement, a couple of AXA advisers [have started] to call us.
InvestmentNews: Did they want to know if they could join you or were they curious about LPL?
Mr. Flynn: They have successful top offices in their own right and probably could go anywhere they want. It’s the uncertainty. I don’t think the message of the deal is being explained probably as well as it should be. They’re asking me questions that they should know the answer to, so that’s probably something that should be communicated. Maybe it’s a legal thing.
Mr. Rooney: I think there’s a mind-set difference between the broker-dealers who are paying the bonuses to entice people to take a jump they wouldn’t normally take, and the broker-dealers who view transition incentives as a number to get them over the hump. These are people who decided they’re going to change their affiliation.
There are hard and soft costs associated with that change that have increased [such as automated customer account transfer] fees at broker-dealers, and the complexity of the business has increased. It’s taking advisers a bit to change, so we’ve ratcheted it up a bit, but it’s not an exponential increase. It’s an incremental increase.
InvestmentNews: Are advisers looking for that money, more so than ever before?
Mr. Rooney: They’re certainly aware of it now.
Mr. Gruber: The smart advisers get nervous when they hear the big numbers. If you’re getting somebody recruited away from the organization, and they’re receiving 30%, 40%, with 95% payout, they start to put paper and pen together. And they’re saying, “Tell me how that broker-dealer is going to be in business five years down the road.”
It’s hard to transition your business, no matter who says it’s seamless. You’re going to have some disruption to your practice and you don’t want to jump ship in 24 months because the money isn’t there. So the smart advisers ask those real tough questions, and they don’t tend to fly out the door like you think they would.
Mr. Grant: What’s worse is, are they going to be there in five years, or are they just fattening up the firm for some reason? The other thing, if you add up the [costs] over a five-year period and you realize that the firm is going to, even without expenses, lose money on you, you have to say, they’re not stupid, they’re making the money somewhere, you just don’t know where.
Mr. Van Law: Really, it’s about economics and long-term value. One of the reasons that the cost of recruiting hasn’t escalated in the independent world the way it has in the wirehouse world is, the trends here have been positive. Our recruiting has primarily over the years come from the largest firms.
Probably 75% to 80% has come from the big firms, and so it’s really about adding value. If you’re adding value over time, if you’re doing things to help the advisers increase their business, if you’re creating an environment and culture that they’re really looking for, then that makes a difference.
A number of advisers have said to me, “I don’t want to simply go UBS to Merrill.” They recognize if they take that check, they’re going to get some short-term gratification, but they’re going to find themselves in a position that’s very similar to what they had before. So I think the reason the trends have improved is, they’re looking for something different. They’re looking for a culture. It’s different than what they had experienced before.
Advisers want to choose their culture, so giving them an opportunity to be in a different environment is [considered] separately [from] the economics. When you look at these upfront checks by the wirehouses, really what they’re doing is just simply monetizing the increased net that a well-run practice is going to [generate] over time.
If you look at a well-run practice, let’s say they’re going to earn 60% or 70% on a net basis and you compare that to the 35% to 45% payout, plus maybe some additional benefits, they could earn another 20 points a year. Even with a 100% check, [over] five years and assuming no growth in the business, they’re in the same position. If, on the other hand, we could help them increase their business, then they’re going to be much better off.
Transition expertise
Mr. Gruber: That’s right on target. Anybody could write the big check. Everybody has the pockets to do it. It takes somebody to take a step back and say, “How are you going to transition my business? What are you going to do for me? That has nothing to do with money: 25% of my time is spent on personal production; 75% is running my back office. I want to grow the 25%. I want to reduce the 75%. What are you doing from the compliance standpoint to help me with that, from a technology standpoint to help me with that.
Those are business owners that act like business owners, and they’re very focused on the longevity of their practice. A lot of times you’ll hear the term “succession planning.” The reality is, you never find an adviser that wants to retire. What they’re looking for is continuity planning. I want to make sure that my family, my clients are all taken care of. They need to be affiliated with a firm and they’re asking those questions. They will look right past 40% upfront cash to take something substantially less, or nothing at all, if you could paint the picture that as a business owner I could bring some value to the table for you.
Mr. Lally: There are too many reps or advisers in the marketplace. To the large broker-dealers, looking from the outside in, it’s hard to differentiate. The phone calls we are getting are that the upfront money is important. They’ll look at the check.
The business owner wants to know, “What else can you do for me if I join your firm?” And part of that is, to advisers, the back-office work, finding an audience, finding clients and gathering assets. So the question we’re getting is, “Can you help my advisers go into the market and do acquisitions?” “Will you help me grow my practice by finding other firms inside your network or outside to acquire?”
The reason a lot of deals haven’t gotten done, historically, was a lack of capital to do transactions. We’re seeing some of the large broker-dealers with acquisition financing, so in addition to the upfront payout, they want to know that there’s capital available to help grow the practice.
On the block
InvestmentNews: I think that’s a good transition into mergers and acquisitions. Paul, what trends in M&A are you seeing?
Mr. Lally: Our world is the middle market, which is, from the broker-dealer side, roughly $10 million to $100 million in revenue. For the larger transactions, I’m like everybody else, I pick up InvestmentNews and I read it. I hear rumors about it, until eventually it’s true. For a lot of transactions that happen in the marketplace, no one in this room is going to know about it except the acquirer and [the firm that is being acquired].
Most of these broker-dealers at a boutique level are privately owned, and it’s going to be a transition where they’re not going to publicly announce that they’re for sale. They’re going to find a couple of acquirers, talk to a couple of them and do a transaction. You’re going to see the pace increase. I don’t think you’re going to see the buzz increase, but there are going to be a lot of transactions in the space.
InvestmentNews: And what are the valuations? With what LPL got in October 2005, so much of the talk was, “Geez, I’m not going to sell my firm, I’m going to hang onto this thing and get as much as LPL got.”
Mr. Lally: Most entrepreneurs make the mistake of believing that if they hold onto their business, it will be worth more. If the industry matures and it continues to consolidate, it will actually decrease because their appetites will become full.
I’ve had many broker-dealers say to me, “LPL, that’s what I’m looking for.” They’re 10 times larger than you. So I don’t think you’re going to see that multiple in the marketplace. We’re seeing a different mind-set though.
Buyers are getting smarter. They have bought broker-dealers on multiple levels, historically 25% to 40% of revenue. Buyers are looking at the cash flows of those businesses, to make sure they generate enough cash flow that they could service the debt, pay off the shareholders and get a nice internal rate of return on their investment over a long period of time.
Everybody has asked me in the market, what do you see as multiples in the industry? The multiples are all over the place. What a willing buyer is willing to pay, what a willing seller is willing to sell at in the market. What I found, and this holds true if you look at the public multiples in the market, the private companies trade within 30% of the public multiples. Whether that’s a three to six times adjusted earnings, or [earnings before interest, taxes, depreciation and amortization], it’s over and across the board.
Mr. Grant: It’s nice to think that your company is viewed as a business rather than as a conduit for distributing your products, which is the way it was looked at 10 years ago. I don’t think the acquirer looks at the acquisition of a broker-dealer as the opportunity to run and break even, but distribute your own products, and so they evaluate them as businesses. That’s a good thing, but that doesn’t affect us.
InvestmentNews: That is due to the regulatory changes over the past 10 years?
Mr. Grant: I think it’s due to that. I don’t have any knowledge of this, but it might be due to difficulties that some of the acquirers discovered in this market segment. A lot of people in our segment sought independence for a reason, and they don’t want to be told what to do, when to do it, how to do it.
Mr. Gruber: The reality on our side of the business, when a production has feet, it’s a $250 million to $300 million production. You have to go out there and try to create relationships with advisers. They’re going to go make phone calls and say, “This isn’t what I was looking for.” Now you find the ones that are $5 million to $10 million to $15 million.
Half a dozen advisers make up that business, you sit in the room with them, they close the deal, they have a relationship, and they’re all different in what they’re looking for. Those things are much easier conversations. Those happen all day long below the radar screen. Things that don’t make the glamorous press, but it’s great business for us.
InvestmentNews: How successful will the A.G. Edwards/ Wachovia deal be?
Mr. Flynn: It’s the uncertainty again. I don’t know how well they delivered the message beforehand. A lot of the messages, you get by reading InvestmentNews, by getting the e-mail. I don’t know that that’s the best way to handle it. I think most people are going to hang out and see how things go, but the level of anxiety is way high, so that’s an opportunity for firms to pick off people [caught] in that uncertainty. For me, I like to get the call, as I do from time to time, that some things are going to happen. It’s just showing the respect. It’s recognizing that they’re a business, and that alleviates a lot of concerns.
Mr. Van Law: Advisers have feet and the reality is, they can move. The important thing to recognize is that the advisers at these firms chose those firms. In particular, when you talk about A.G. Edwards, most of those advisers are homegrown advisers that stayed at A.G. Edwards. They stayed there, even given the fact that upfront money in the wirehouse has been so high, because they enjoy the culture.
Suddenly they wake up, and they find themselves in this mega firm with 15,000 advisers. I don’t think that’s what they signed up for, and so some of them may decide that’s unacceptable. Many others over a period of time are going to wake up and say, “This isn’t what I bargained for.”
I had a call from an adviser after one of the past acquisitions. Six months or so later the phone rang, and it was this adviser on the phone and he said, “Bill, I finally recognize the difference.” I said, “Difference of what?” “The difference between a regional and wirehouse,” and ultimately he made a change. So I think there are going to be a lot of advisers over the course of the next year, two years, or three years, who are going to wake up and say, “This isn’t what I [expected].”
Mr. Grant: Can I ask you a question? What are the chances of the de-acquisition of a broker-dealer by a bank or an insurance company? What would be the chance for a firm like mine to buy them?
InvestmentNews: I think it’s pretty high. If you look at AXA/LPL, that’s almost a de-acquisition. AXA Advisers still exists, of course, but they are giving the responsibility of the broker-dealer over to LPL, so I think you’re going to see more such activity.
Mr. Lally: Also with the acquisition of A.G. Edwards by Wachovia, we talk about it from the buyer side. These advisers are leaving, how is it hurting Wachovia? When we’re looking at transactions from the seller side, it’s great to talk about the valuations in this industry, but there’s also the structure of the deals, and we are very concerned.
I tell sellers you better know your advisers and you want the buyer to know the top 20% of your advisers too, because I want to be confident the day I sign to sell my firm those advisers are going to stick around and transition. If not, the buyer gets hurt, but the seller is going to get hurt as well. They’re getting some money down but on the ultimate structure they’re losing money over time.
Mr. Van Law: We talk about this acquisition from the A.G. Edwards perspective, but we haven’t talked about it from the Wachovia adviser’s perspective.
You have some number of people from Richmond, Va., who moved to St. Louis, but that service team is certainly not going to be the size of those two separate firms. Obviously they’re going to take a lot of costs out of the structure.
When you have this smaller number of people servicing 15,000 advisers, there’s going to be some service gaps. So there are going to be some Wachovia advisers that are also questioning where they are at this point.
Cutting edge
InvestmentNews: Switching gears, what is an emerging must-have technology or application?
Mr. Flynn: As an adviser you think, sure, I have 100% of my client’s assets. I must because I’m good at what I do, and lo and behold, they have some other accounts that you don’t know they have.
People apparently do like to have everything consolidated from the standpoint of what their net worth is. So it gives you an opportunity to help them with those other things that they didn’t tell you about, like a couple pieces of Florida real estate that they knew you would have told them not to do a year ago, but they did anyway.
InvestmentNews: You think the technology can help you communicate with your clients then?
Mr. Flynn: And then help them on those assets and ideally, bring them over to your firm. If you’re doing financial planning, then ideally you should know everything about their financial life. So that’s just a convenient way to collect it all and not have to bother them every six, seven months for a copy of every single statement, including a 401(k) that isn’t with you and all that stuff. People are busy and they want you to be able to help them, so I think that’s all good.
But what if you’re fee-based? If a client has a small account like an education savings account somewhere else, and I can’t put it on my fee-based platform because it doesn’t meet a minimum, I now have to get into a discussion with the person with millions of dollars. Every asset they have is on the fee-based platform except for this couple-thousand-dollar 529 or education savings plan. I have to tell them I don’t want to handle that, which I find it hard to do. So I might have 99.9% of the person’s assets, which is the way I choose to do my business, yet, I can’t run it 100%.
We often bring it up as a household thing. The client has a million dollars, why does an individual account have to have a minimum? Those kinds of things are important to me because that’s the way that I’ve chosen to run my business and now I have to go back to the quote-unquote, old way. So for me, technology to be able to do that would be fantastic.
InvestmentNews: From a regulatory standpoint, would the regulators want something as well?
Mr. Rooney: That’s a lot of the problem. They don’t look at 529s as managed accounts. They don’t look at it as appropriate from an advisory platform because it’s long-term money, and it’s supposed to be fairly static.
Mr. Flynn: I have a lot of colleagues who just don’t advise 529s. They don’t even bother. How can that be the right answer for clients, if 529s are appropriate for them? So those are the issues on our level.
Mr. Van Law: You’re talking specifically about technology, but more broadly defined, it’s really all platform. With our recruiting being 75% to 80%, historically, from the traditional firms, your platform has to be broad. It has to basically be the same as what they’re going to find at UBS or Morgan Stanley or any of the other big five firms and that requires investment. So it’s an ongoing investment that we have to make in order to stay competitive.
Our technology budget last year was $105 million, a big number. We’ve been focusing on [broadening] our customer relations management platform, to allow the adviser to have one point of entry integrated with a back office. One of the frustrations that many advisers have, if they use ACT! or some other system [for tracking clients], is that they collect all this data, put it in the system and open an account.
But what happens if the address changes? Not only do you have to change the address on the broker-dealer system, you’ve got to go back and change it on my personal system, as well. So having something that’s fully integrated so things [need to be changed only once].
Also, a broad and deep financial planning package, because financial planning and providing advice and guidance to clients is really the primary focus of our advisers, and so giving them tools right there at the desktop to facilitate that is important.
Courting service personnel
InvestmentNews: Do you talk to the assistants and the other people in the office to get them to know what you offer, because they may be the ones who do most of the work?
Mr. Van Law: That’s a terrific point. We just completed a senior-executive round table that we’ve [held] for 21 years. This year, it was focused on service. We each went out and visited three offices and asked a lot of questions. The overlying theme was: “What can we do to make it easier for you to do business with Raymond James?”
We didn’t just meet with the financial advisers, because the reality is, you’re talking about service issues. The staff in the office knows a lot more about dealing with the back office and the broker-dealer than the advisers do. So each of us spent a day in three different offices, and we met with each adviser, and then we spent a week going through hundreds of ideas and suggestions to try and make sure we continue to add additional tools and resources, [as well as] fix any issues that are coming up with the staff, not just with the advisers.
InvestmentNews: When you recruit, do the assistants enter the equation at all?
Mr. Grant: Absolutely. They come with the adviser, and it’s evident that a key staff member who is unhappy can convince an adviser to change firms. That works in two directions.
Mr. Rooney: Especially if it’s a spouse.
Mr. Grant: At many of our meetings, we’ll run side sessions or even primary sessions that are designed for the adviser’s assistant and office staff, not for the adviser per se. In years gone by, the staff often was the spouse, but now, as the business is maturing, you see many more cases where the staff is professional. They could have [Master of Business Administration degrees]. They contribute a great deal to the building of a business rather than the building of a sales business.
So training and supporting the office staff is critically important. The other thing I would say is, training your staff to recognize and respect the staff of the adviser. There was a time when they didn’t get the respect — not in our firm. It wasn’t just the support and training, but the respect.
Mr. Rooney: We’ve had a lot of success with simply putting a feedback page on our web page. We get roughly 20 to 25 queries or suggestions each day from the staff in the representatives’ offices. It’s very easy for us to go through them and say, “OK, that was kind of intuitive. Why didn’t we ever think of it?” It takes 15 minutes to fix, and it benefits 1,100 advisers. So it’s a very effective way we found to keep our ear to the ground and do little fixes and [address] big trends all at the same time. It goes out to about 120 people in the home office, and we all watch it and keep a close eye on it, so it can be easy to do.
InvestmentNews: How much does the technology come into play with mergers and acquisitions?
Mr. Lally: It drives the selling firm. Technology, for a lot of small firms, has been very expensive, and there are deficiencies in their technology. When they’re looking at a suitor and doing their due diligence, technology is a very big question. It comes down to a simple question: Can you support my reps better than I could support my reps with technology? There’s also your dedication to technology. Are you constantly improving your platform? Are you constantly improving the services to your reps?
From an investment banking standpoint, when you’re looking at putting a deal together, the good infrastructure will increase value, and an uneducated or unsophisticated support structure will actually [suffer] a decrease in value. It either gets you more money or less money as part of the deal. What I ask, as an investment banker, “If something happens to the chief executive, does your staff know how to run your business, not long term, but for a period of time to maintain it?”
Oftentimes, I get a yes, but I also get a no because a financial adviser is trying to be the chief technology officer, the CEO, the head financial adviser of the firm. You can’t be everything, so support staff, from my standpoint, is crucial when we do our due diligence.
InvestmentNews: This question is for Joby. Your organization keeps doing consolidations among broker-dealers. How much of that is driven by technology?
Search for efficiencies
Mr. Gruber: It’s absolutely part of it. What you look for with an organization our size is some economy of scale. You’ve got a number of different front offices, and it’s no different than General Motors [Corp. of Detroit] — three different platforms, three different brands, are going to be put out there. Behind the scenes, you want to have some economy of scale.
We also try to bring to the table other ways to reduce cost. So an easy example is compliance. It’s not going anywhere. We know we have to deal with it. You have some technology solutions. Other times, you have manual labor. One of the things that we implemented this year across all of AIG’s adviser groups is that we perform the satellite branch office exams for all of our OSJs.
If you’re a stand-in OSJ, it’s a non-event. If you’re an OSJ that’s got X number of offices spread out, and you’ve got to hire a person to travel there, we’ve said, “We’ll do that for you.” It’s not really a technology solution; it’s us putting our money on the table and saying, “We’re going to take that burden off so you can focus on something that’s much more productive.”
InvestmentNews: That leads into our next question, about an adviser’s overhead as a percentage of gross revenue. Is the overhead rising? Is it stable? Are advisers able to keep up with the cost of doing business?
Mr. Rooney: Anytime you’re a non-revenue-generating firm that’s costing money, what can you leverage out of the home offices to
increase the efficiencies at the branch-office level? What can we do to take that burden off their shoulders so they can meet with clients, gather new clients and improve the quality of life, which makes them a better producer in the long run?
When you look at technology support, we try and run that 14 hours a day and on Saturdays. They can use the systems without worrying about maintaining and improving them. That increases the net to us, and they’ll just be more productive.
The question is, do you see this as a return-on-investment equation where you spend the money and get it back in spades? Or are you just trying to cut your expenses and put more work down on the branch- office level?
Mr. Van Law: If you’re providing tools and resources and educational opportunity to help the adviser increase productivity, the real question is getting back to the net. These folks own and run their own business, so it’s not just about what’s happening to the cost but what’s happening to the revenue and productivity.
Certainly, in our personal lives, as well as our business lives, costs unfortunately have gone up over the last couple of years, and that clearly has affected our advisers.
However, what we found, particularly for our best advisers, is, the revenues are rising much more rapidly than the expenses, so net is actually increasing. One of the reasons the trends are so positive is leverage. There’s real leverage for advisers.
I’ll use the example of a modest-size producer that was earning 40% at the traditional firm, and they create a structure where they’re netting 60%. Well, it’s 60% on the total business, but it’s not 60% on the margin, so as they increase their business by $100,000, a significant portion of that goes to the bottom line. I’m sure you’ve seen that.
Mr. Flynn: Absolutely.
Mr. Van Law: That has been a positive trend because of productivity increases for advisers.
Mr. Flynn: Investment in technology has allowed us to run an efficient office with less staff per hundred thousand in revenue. I think about how many people I would have needed five or 10 years ago to run at the same income levels we have now, and it would clearly be more people.
So even though the cost may have flat-lined as a percentage, I think it’s definitely gone down. Maybe that’s just because you’re pouring more at the top, and the fixed structure is already in place, but you can run a very efficient practice with less staff. I can spin out reports in seconds to help me on the phone with a client, versus when I had to call them back. Now we could handle that instantly.
Mr. Grant: At the same time, when you build a business, you should be willing to spend the money that’s necessary to really build the business. That means that you probably want to have a good lawyer who’s a securities lawyer.
There are live and tangible expenses that you have to be prepared for, whether it’s training, whether it’s your business quadruples, and your staff triples. That sounds like good leverage, but now you have three people who could be home sick on any given day rather than one.
Running a business is not the same as simply you and your spouse, or your son or daughter, in a small business. You have to be prepared for a level of expense that wasn’t there before. That’s just reality.
Mr. Gruber: There’s that comment: Are you going from commissions to fees? The answer is, nobody goes from commissions to fees. They go from commissions to commissions and fees, and then over time, they may decide what they want to do with the commission portion of the business.
The interesting phone calls that we’re getting are: “I need somebody to now run my business for me.” They want to be face to face with a client. They want to hire somebody. Maybe it’s a second-career individual who doesn’t have anything to do with our business but understands what it’s like to run an organization. That’s a big expense. You’re not paying your spouse minimum wage anymore to sit here and cover your absences like you did 30 years ago. Now you’re talking equity in your business, taking it to the next level. That’s a totally different environment.
Those are the ones where you’re not looking to cut costs. They’re literally trying to build an infrastructure and make sure they could leverage that and make it grow. All of us in running our businesses have over time said we’re willing to take less in order to build the infrastructure to get to be something down the road. Advisers have done the same thing, especially the ones that are more fee inclined.
Mr. Grant: Sometimes they get to plateaus and fail to make the decision about what’s necessary to get over that plateau. They think that somehow there’s going to be some efficiency or technology that means that they don’t have to hire another person or something, and it’s not necessarily possible. You’ve got to do a superior job at all times.
Mr. Lally: I’m seeing two mind-sets in the industry. One of the great aspects about the industry is, financial advisers can make great income just doing financial advising. A lot of big broker-dealers have provided the technology and support to allow them to have one support person and make a very nice living, and maybe they don’t want to be any bigger.
Then there’s the other mind-set. With all entrepreneurs, you get into a business because you like doing something — you like being a salesperson, you like being the president or you like being a financial adviser.
All of a sudden, you’re now the head of human resources, you’re the chief compliance officer, and it’s not what you like doing anymore. So what’s driving these transactions is: “What can you take off my plate?”
The myth of succession planning is that it’s for the older adviser, the 55-year-old-demographic adviser. That’s not necessarily true. It can be the 40-year-old who realizes he’s a great adviser, but he’s not a good business owner-chief executive.
Mr. Grant: We face the same set of decisions in terms of whether to use technology to achieve efficiency. We recognize the value of having people at the other end of the phone, so there’s a point where we’re not going to try and push people to the Internet.
The relationship is so important to maintaining the bond that creates the strength of the company. The Internet is there, and it’s great, but give us a call. It gives us a chance to say hello and ask about the kids.
InvestmentNews: In recruiting, chemistry is an important thing. How do you explain the culture of your firm? That’s a big part of why they come to you.
Mr. Van Law: I’ll answer that in two ways. The first is, you can articulate to somebody what that’s all about. What I try and explain is the combination of the platform and the fact that the platform is broad and deep.
The other half of the equation is culture. Really, any of us could talk about that all day long, and it doesn’t mean anything until the adviser comes down and gets a feeling firsthand of what we’ve got.
Mr. Rooney: I can’t believe $500,000 producers don’t take time to visit prospective broker-dealers before they make a choice. They’ll walk into the offices, and within 15 minutes, they’re going to recognize there’s a difference, there’s a value and a culture proposition.
It astounds me when we land somebody over the phone. It’s great when it happens. I save a couple bucks with the hotel and flight, but I wouldn’t make a move without looking people in the eye and trying to figure out what they stand for.
Mr. Van Law: What I try and do when somebody comes down for one of these visits is help them really understand who we are, what are the tools we offer, what are the resources, what’s the culture, so that they can make the right decision. We are confident that the right advisers are going to make the decision to join.
It’s not about the number of people that we affiliate with in a particular year — not that we don’t have reasonable high goals in that regard — but it’s really about building a quality firm over time and having the right fit.
One of the things that we pride ourselves on is extraordinarily low attrition. Part of the story there is helping people understand who you are in the front end so that the right advisers join and then working on delivering that over a period of time, and then they stay.
InvestmentNews: Doug, when you made the decision, did you go to visit the firms?
Mr. Flynn: Absolutely. Around 1995, I teamed up with my business partner. We went to LPL, we went to [Investment Management and Research Inc. of Atlanta], national conferences, and visited the home offices — which is a great thing to do, because being part of American Express [Financial Advisors Inc. of Minneapolis] at the time, you just figured everybody was doing it the way you were doing it. You see and say, “Oh, my God, many other people are doing this in a great way, but in a different way.” Every person that I met was running a slightly different business, but a great business, and so it opened that up. In all honesty, every two or three years, I poke my head around. One of the commitments that we made to the business was to make sure that this was still the best place for us. It’s a short list on the independent side at this level of who you’re comfortable with. I haven’t gone and visited in a long time, but at that time, we absolutely did, and as you mentioned, I can’t imagine moving your business to somewhere where you hadn’t visited and met the people and felt comfortable.
Under the hood
Mr. Van Law: Going to the industry conferences is an interesting distinction to our industry relative to the wirehouse world. The wirehouse world, of course they’ll give references, but those references are screened, and of course they’re going to say good things.
In inviting advisers to the national conference, in essence, what you’re doing is, you’re opening up the hood of the car. Come on in and check it out, come talk to any adviser that’s here and ask them what they think.
It really allows you to get a true feel of the culture of the firm, but it also puts the burden on us running the organizations to make sure we’re really addressing issues and concerns of the advisers, so we’re creating an environment that they want to be in.
Mr. Lally: Part of our investment banking process is analytical, but a major part of it is the practical and emotional side of the business, whether we’re representing the buyer or seller in transactions.
Most advisers don’t wake up at
7 a.m. and switch at 4 p.m. There are a few key points to that transition. I say there’s truth in repetition. The advisers want to hear the same story over and over again.
There is a bit of skepticism when they walk through the door if they hear one thing from one person. Part of our due diligence process is, you need to talk to other advisers, talk to peers, because they will [tell] you the straight [truth]. I found the adviser can be more open to another adviser and ask some difficult questions and get a very truthful answer. That’s an important part of that process.
Mr. Gruber: There’s also that old line: Advisers don’t look for a new firm; they leave their old one. They’ll only go out and look at places because they’re dissatisfied. The minute they walk into your office, the potential client is going to know: “I want to be here,” or, “This doesn’t feel right.” It’s always better to cut it loose if it’s not right.
It’s hard to transition the business. We won’t see any lateral moves. Unless there’s a step up in value, they don’t even consider making the move anymore. It’s just too painful. It takes that critical mass.
InvestmentNews: “Practice management” is one of these phrases you hear executives talk about all the time. What is it really? What are the advisers getting out of practice management? How important is stressing practice management to your advisers?
Mr. Flynn: Well, to me, it’s huge. We got a call six months ago from LPL to analyze our business and help us look at it from the outside. I said, “Sure, why not? Come on in,” not expecting anything. But they came in with some pretty interesting reports and analyses of where we were doing a good job on a relative basis and where we could be charging more.
On smaller accounts, we were charging less than what most advisers were charging. So then they had a couple solutions. One was to raise fees, the other one was to consider different products like ones that other advisers were using. Having a solution in a specific example of where we could possibly increase our revenue was something I’ve never had in my life, and I didn’t even know it existed.
Pseudo-consultants
It’s almost like we’ve hired business consultants to come in. To me, that was quite insightful. I could have left it alone and just been going about my merry way and not realizing that there was an opportunity for me. We already had classified our clients A, B, C, D and E, and carved out the Es and handed them to a junior adviser. That’s just one small example of practice-management specifics that I felt were huge. That’s brand-new.
Mr. Rooney: With the demographics in the industry, the practices are getting larger. They’re not producers in the securities business; they’re business owners working on their businesses, and they want help with infrastructure and scalability.
Most of my advisers are at a point where they’re not marketing challenged anymore. It’s more, “How can I contend with the growing demands and the complexities of the business without spending an inordinate amount of money staffing up?” They’re looking to get guidance in those areas to make their practices run more efficiently.
InvestmentNews: What’s something that’s proven to be very successful?
Mr. Rooney: A lot of it is just making sure that they’re taking advantage of the infrastructure and the technology. It’s dealing with one data source that migrates across the applications that they need, whether it’s [customer relationship management] or financial planning or account maintenance and trading or sales presentations. You don’t want to have the data re-keyed; you want to have it migrate from application to application.
It really is often reaching out to their staff, because a lot of times, the producers don’t want to get their hands dirty with the infrastructure. When you do talk to the reps, you have to say, “This is how it’s going to make you money,” or, “This is how it’s going to save you money,” or they kind of gloss over when you talk about CRM.
So it’s really just finding a way to translate it to their staff and to the benefits of the business. Hopefully, they will carve the time out to become more proficient.
Mr. Gruber: You have to have a different conversation with that adviser, and it’s not, “Hi, I’m an employee of the broker-dealer”; it’s, “I’m going to come in as a consultant for your practice.” You have to have that conversation up front, because they can get potentially very offended when you start to go underneath the engine a little bit.
You take a step back and start to look at their practice: “Do you have the right staffing? Do you have tools to hire the right staff? Do you have a health-care plan for not just the adviser but for [underlings]? We’ll bring that to the table for you.”
Art was talking earlier about trying to make it a business and hire the MBA. That MBA is going to work for the adviser if they could have the same thing that they had in a corporate environment, so I need to know that we have health care, we’ve got a deferred-comp plan. As an adviser, I need to know that you’re taking care of those pieces of my business.
Several years ago, they wanted to network, but you can’t do it at a top-producer meeting or at an educational conference, because you have got a limited amount of time, so you go to the Internet. It’s an e-mail thread that goes back and forth.
If an OSJ posts a question, and you’re an OSJ, you have automatic access to it. Twenty-five people in the next two days come back and say, “Do this,” and it’s an automatic case study. All the way down to, “What do you guys do for the holiday gift for your best 25 clients?” It’s not just practice management; it’s the ownership of the management and all those things that come with it.
Mr. Gruber: Everybody is wired a little bit differently in terms of what they’re looking for. We have some type of toolbox sitting in a shelf in our offices, and based on what you’re looking for, we could bring those services to the table. We all could do a better job of marketing our existing services to our existing advisers.
It’s interesting. The recruits always get to see everything brand-new. The guy that has been with you for 25 years who is focused on his practice, you need to go back into his or her office and say, “You know, we do actually have some other things.” You’ve got to make sure you’re focused on that.
Constructive criticism
Mr. Lally: It’s going from a more reactive resource in the back office to more proactive. You go to the seminars, you read the trade journals. You know these options are out there, but you don’t know how it applies to you. You sit in your office and do nothing until someone comes and challenges you on what you could be doing better.
You have a fiduciary responsibility to have a succession plan in place, because now you’ve built the infrastructure, you’re responsible for your staff, responsible to your clients and also to your family.
In actuality, it’s a process. It’s a series of events to get to a goal. How do I get this business to the next level? What they’re doing is challenging your thinking, because the CEO of AIG has a strategic-planning group that sits with him and provides options to him.
Entrepreneurs don’t get that. It is broker-dealers’ taking a proactive approach to the market. I see practice management more as proactive initiatives in the market from broker-dealers than it has been in the past.
Mr. Flynn: At the same time, if you don’t want it, you could politely decline it. It’s not like you have to do it. In my previous firm, I had meetings to schedule meetings to go over this stuff. But now we don’t have situations where 50 reps are all getting together.
I hardly know the reps that are affiliated in a 10-mile radius to me. Before, you were meeting all the time, you knew everybody, and you could pick each others’ brains. Now you’re in your own silo, so these are good opportunities.
Mr. Van Law: One of the misconceptions I think that many advisers that are still in the wirehouse world have is that if you go independent, you lose the advice and guidance and resources to help you build your practice, and it’s really quite the opposite.
I would say the biggest difference is, you actually have a choice whether you go to these meetings or not, but the opportunities are absolutely there at regional conferences or national conferences with truly some of the top educators and trainers in the industry.
We’ve had our regional directors go through the certification process to be corporate coaches, so they then come in and help the adviser evaluate the practice: What are the strengths? What are the areas of opportunity? Then they help them develop a plan to build on and solve any issues that were uncovered through that process. The net result has been quite significant.
In fact, looking back over the last four years, the number of million-dollar producers is more than four-fold over that period of time. Certainly, we’ve recruited some of those folks, but the vast majority is the people that are $400,000, $500,000, $600,000 producers, even smaller than that, and had some help and support in their businesses.
I would say separately, put an adviser in an environment that they really enjoy. They tend to prosper, because they like the environment, and combine that with providing tools and resources and coaching, and we’ve seen significant increases in productivity.