The RIA/broker model: Way station or final destination?

InvestmentNews: Please describe your firm and what you do.

Mr. Bachrach: Well, I started in the trunk of my car in 1991. That was my office. And today we manage about $1.2 billion. We’ve got 15 members of our team that are employees. We’ve gravitated away from the commission or a percentage-of-revenue business to being structured more like a law firm. We built the firm through strategic partnerships, initially with corporations and universities where we would do financial-education seminars. Often they would pay us to do this. Then we also got into institutions, specifically credit unions. We have six credit unions now in Cincinnati. The most recent one that we formed a relationship with is General Electric [Co.’s] credit union, which has 65,000 families and is the second-largest credit union in the state of Ohio.

What really drove the business over the years was media. I started out in 1995 walking into a public radio station to be interviewed about what it’s like to sell investments in a credit union and wound up with my own radio show on NPR. About a year and a half ago, we moved to commercial radio, and I have a show from 6 to 7 every night on the talk station here in Cincinnati. I’m also a Fox News correspondent, and I’m on the evening news five nights a week doing a market recap and five other times during the week doing consumer segments during the day. We have a studio built here in our office. If anybody is thinking about media, I’d be happy to talk about compliance departments at broker-dealers and how they can actually be your friend. They can be a big obstacle or they can be your best buddy if you’re going to be doing anything in the public arena. I’m on a lot during the week, so I’ve got to get along well with the compliance department.

At this point, we have our own [registered investment adviser]. Last time I looked, a couple of weeks ago, 70% of our revenue would be strictly defined as fee-based, or running through the [Securities and Exchange Commission] side of our business, and 22% is commissions. In other words, GDC, gross dealer concession, and probably 85% or 90% of that is actually asset-based 12(b)-1s, a few C shares left over from the old days, maybe some troublesome variable annuities. The firm is probably 95% asset-based at this point, and during the course of the conversation, I’d be happy to talk about where I see us going in terms of our revenue and what that might mean for our relationship long-term with a broker-dealer.

InvestmentNews: John, what does your firm do?

Mr. Brant: I started in 1992 with a broker-dealer firm, American Express [Co.], and moved in 2001 to SunAmerica, still as a sole proprietor. I joined an ensemble practice for three or four years and decided to go back to my own last year. My broker-dealer is National Planning Corp. Within National Planning, I’m part of a smaller group called the Planner Network. They are my RIA, and the Planner Network is a great group to be part of. We’re shareholder owners. We have our own continuing education, and we also go to the broker-dealer conferences, so we have a very intimate group of advisers sharing ideas and best practices. It’s a great group to be part of.

My practice is mainly retired clients or clients getting ready to retire. I manage about $50 million currently. I have a model where most of my fees are pretty split up. I get about 40% retainer fees. I use third-party money managers and manage those managers. I have a unique process called Wealth Experience, and clients pay me to be part of that process. So about 40% of my revenue comes from retainer business. And then the last 20% is commissions and other fees. So it’s a well-balanced practice. I have just one full-time assistant and two part-time assistants. We have fun with our clients, and life’s been good.

InvestmentNews: Bill, let’s hear what goes on in Dallas.

Mr. Carter: Well, I started in 1973 and opened Carter Financial [Management] in 1976. And then in 1980, I formed Carter Advisory [Services Inc.], which is our RIA. I formed it to do financial plans and written annual reviews, because that particular product or service did not exist back then. Through the advisory firm, we write our financial plans and charge fees for those. Then we charge annual fees for our annual reviews.

The other side of the business is the broker-dealer side, where we’re with Raymond James [Financial Services Inc.]. We have somewhere around $685 million of assets under management. We’ve got about 28 people associated with the firm. Again, we’re a full-service, comprehensive financial planning firm. I guess we’re a hybrid hybrid. We don’t run any of the products or the fees except for plans and our annual reviews. But about 75% of our revenue from Raymond James comes through one of their fee-based platforms. It’s either wrap accounts or one of the three or four fee-based accounts that we utilize. About 10% probably is left over in C shares. We’ve been around so long that we’ve had those for a long time. And then the remainder is probably the revenue that comes through some type of commission product.

InvestmentNews: Let’s get to the question we posed as the title of this webcast. Is this hybrid or the dual registration model a way station to something else, or is it something you would like to stay this way? Do you feel that being both has inherent advantages or would you rather be just an RIA?

Mr. Brant: Well, I’m in a coaching program called the Strategic Coach, and I’ve been in that for 11 years. It’s a great program for life and business coaching. And when I first got into that a few years ago, it really looked like I was going to go just to a straight RIA model so I could charge for the value I bring to my clients, and not have to deal with all the complexities of a broker-dealer. As times have changed through the years — and I’m still with a broker-dealer — I’ve thought about leaving a couple times. But actually, I like the model of having the products that are available through the broker-dealer. Sometimes compliance can be difficult, but I think our broker-dealer is very fair and very easy to deal with. I don’t find that much of an issue at all. And I actually like having that oversight in the products that are available. I like annuities. I have used them a lot for clients’ retirement money, and because of that, my clients are very happy this year. With all the benefits and guarantees that are available, they’re sleeping very well at night.

If I left the broker-dealer, that would be more difficult, especially with the whole Madoff scandal this year. Up until this year, most of my clients probably didn’t know I had a broker-dealer or what that meant. We’ve had long talks about that with almost every client this year. We tell them what a broker-dealer can provide: compliance, due diligence, looking over the products and making sure everything is as it should be. It actually gives the client a measure of protection that they may not get with somebody else. That has actually made it even more important these days. And I like our broker-dealer; they treat us well, so I don’t have any plans on leaving.

Mr. Bachrach: First off, I don’t know that I’d ever want to be in the broker-dealer business. I got a number recently that LPL [Financial] had a 12% return. That seems like a lot of moving parts to make 12%. I think it’s a tough business, and I think it’s not going to get any easier, and I don’t think regulators are going to make it any easier. So I don’t know whether that means payouts change or the value proposition changes.

I certainly know from my life in broadcast, if I were RIA-only, I would be able to do an entirely different type of media experience by virtue of the fact that I have [the Financial Industry Regulatory Authority Inc.], which periodically has some comments about what I can and cannot say. So from my own perspective, that’s an issue. The other thing is, I think you have to have a certain size to be able to go it on your own. My guess would be if I were only registered with the SEC, I would be picking up $120,000 right off the bat in a lawyer who’s going to be down the hall making sure that we’re hitting all the things we need to do on compliance. So I think to go RIA only requires either confederation of other people or a business of a size that could actually manage it. Maybe the strategic question for broker-dealers long term is: When their largest shops could go out on their own, what will the value proposition be?

InvestmentNews: So you’re saying, even with your $1.2 billion in assets under management, you feel you’re too small to go it alone as an RIA?

Mr. Bachrach: I don’t think we’re too small. Right now for us, we still take in $500,000 to $700,000 of revenue through our broker-dealer that would be qualified as commissions. If you go RIA-only, you’ve either got to re-characterize that relationship so it’s a fee-based relationship, maybe with an offset, or you leave it at the door when you walk to the world of SEC only.

InvestmentNews: Bill, give us your view about whether you’re staying in this for the long run or as a way station to going RIA?

Mr. Carter: We’re probably going to stay this way, and I’ll explain that in a second. I think the trend had been to go the independent-RIA way. Attending the many meetings I’ve attended over the last three or four years, I think the trend was definitely in that direction. After what happened last year, though, you’re seeing a lot of people leave the big brokerage firms, and I’m not sure they’re quite ready to go the independent-RIA route. So the hybrid, like all of us are, seems to be something that will be more attractive to them.

The reason I like it is very simple: We do a lot of alternative investments. I’m a great believer in alternative investments. But the problem with alternative investments is, it’s very complex in the amount of due diligence that’s required to really select products that we hope will work. It far exceeds the capacity in my firm.

Raymond James, on the other hand, has an excellent due-diligence office, and one of things I really like from them is their due diligence in that area. The other thing is, they provide us the capacity to do things that we couldn’t do on our own. We could do investment banking. If we want to take a company public, we have the ability to do that with them. So they provide us services where we really can go head-to-head with anybody. There’s really not a service out there that I’m aware of that any of the larger firms provide that we can’t provide, because of our affiliation with Raymond James. So it’s been a very good move for us.

Now, you may be aware that Raymond James, about four or five years ago, started a fee-only side, so they actually have both. Some of our friends have decided to go over to their fee-only side, and I think that’s another trend you may see. And I think a couple of the large broker-dealers have done the same thing. So you may see people go to the fee-only RIA model but still be affiliated with the large broker-dealer. I think that’s another trend you’re going to see a lot of in the future.

InvestmentNews: Regarding your relationship with your broker-dealer, do they give you special attention, perhaps because they’re worried about losing you to the RIA-only model? Also, does this make it any more difficult for the regulators to classify you if you do run into a Finra exam or an SEC exam?

Mr. Carter: We’re a little more of a complex firm in that we run our RIA fee-based business through Raymond James’ RIA. We do that because that relieves us of a lot of compliance and a lot of things that would cost me a lot of money to do, and we were able to alleviate that. I think Raymond James’ attitude is, you can go either way you want to go, and that’s the reason they set it up. What I think they didn’t want to do is, they didn’t want to lose a firm like ours if we decided to go that route. So I’ve not had any pressure. I’ve not had anyone ever even talk to me about that particular division of Raymond James. I know the guy who runs it very well, and I will ask him when I see him at an RJ conference, “How are you doing? How is the growth coming? How’s your business?” I’ll talk to him about things like that. But he’s never said anything to me like, “Well, Bill, you need to come over and talk to us, and I think you’d be happier with us than where you are.” I’ve never had that kind of comment from them.

Mr. Bachrach: I’ve got a great relationship with my broker-dealer [Royal Alliance Associates Inc.]. I’ve been with these guys for 19 years, and — other than the fact that my parent company, [American International Group Inc.], has helped to get some attention for itself over the years — fortunately, my clients have a relationship with us, and very rarely does AIG come up. It never came up in my discussions with GE Credit Union. It was not a concern for them at all. I think that in our case, we — by virtue of who we were with — probably had everybody in the world call us and talk to us about what was going on with our businesses and run through different economic models. And I think the one thing that we have come to learn out of this process is that you find out what it costs to have a broker-dealer in your life. Then you can determine really for yourself if it’s worth it, given the time and effort and trouble you’re going to have if you’re not with a broker-dealer, whether or not you should stay with one and whether or not there is a cost benefit for you.

We’re part of an organization called Royal Court, which consists of probably the top 50 offices and top 50 producers at the company, so the service that we get is fabulous. But I believe that at the end of the day, our broker-dealers are going to have to start benchmarking what they provide for the fee-based side of all of our businesses. They need to provide service that is truly state-of-the-art and can compete with the custodians out there, the pure custodians, custodians who are offering some pretty interesting alternatives to a broker-dealer if you should decide to be independent.

I was talking to an executive of a very large broker-dealer, who said, “I don’t want to be in the transaction business.” Well, as firms get larger, you start to examine your cost per transaction and what it takes for you to conduct your business. And someday the dollars and cents could be very stressful when you take a look at how you might be able to do it on your own, versus in a broker-dealer relationship. I think that’s where the tension’s going to be. Who do they want to retain? Who do they want to service? Who do they want to develop their platform for? Will it be for the folks that will never get large enough to go on their own, or find that there’s just no reason for it? Or will there be a cost benefit analysis that ultimately says over time, some of the larger offices will be going on their own because they can effect some substantial cost savings by transacting their business on another platform?

InvestmentNews: Something that has come up both in our reporting and questions from the attendees of this webcast is the issue of fiduciary standards. Looking at it from the point of view of your clients, do they know when you’re acting as a broker and when you’re acting as an RIA? And are they aware of, or do you tell them about, the difference in the standards? How do you treat the customers when you’re wearing two hats?

Mr. Carter: Well, remember, I’m a [certified financial planner], so I’m held to that fiduciary standard, regardless. And I don’t think most consumers really understand that. I mean, we sit down and explain it to them, and I have had a couple people say, “Oh, that’s interesting.” That’s about the only comment that I get, so I don’t think they really know. But obviously, we act as if we’re a fiduciary in all of our dealings with clients, and have for many years.

InvestmentNews: So all the commissions and arrangements are disclosed?

Mr. Carter: Absolutely.

Mr. Brant: Exactly the same thing. I do financial planning with everyone, so I’m fulfilling a fiduciary responsibility. I’m a chartered financial consultant, so I’m held to the same standard.

Mr. Bachrach: Same over here — nothing different. The one thing I agree on in the proposed legislation from the Obama administration is that ultimately, I can’t wait until the day when everybody is working on a fiduciary standard, versus half the world is fiduciary, and half the world is working under suitability.

InvestmentNews: Again, when the commission issue comes up, or how you’re getting paid, that’s all disclosed?

Mr. Bachrach: All fully disclosed. I say on the radio every night, “If you can’t figure out what you’re paying your adviser with a calculator and know exactly what it is, don’t do it.”

InvestmentNews: Have you ever been examined as an RIA and then examined again as a broker? And how do they compare?

Mr. Bachrach: I’ve had both. I would say I’m much happier being registered with the SEC than I am with the state, because the SEC guys come in, and they very quickly figure out that everything is custodied with a big, solid firm, and they’ve got a great paper trail on it. The last time the SEC came in to see me, I wanted to talk to them about reverse churning and what they were looking for when they look for the kinds of activities that need to take place on the fee-based accounts. The guy finally looked at me and said, “Kid, I’d love to talk to you more, but I’ve got tickets for the 12:30 Businessman’s Special to the Reds. I know you’d like to learn more, but you’re just going to have to hire somebody to tell you, because I’m out of here.” So they’re older, they’re more experienced, and they really come to understand we’re not taking custody of assets and that life is pretty good.

I have had a Finra exam, because they tend to come in and ask to talk to some of the larger offices in a firm, figuring if we’re not doing it right, they’ll drill down. They’re more time-consuming. They’re certainly looking for stuff. The letters are always a little bit bigger than they might be from the SEC side. But we’ve got a lot of staff that take a lot of pride in doing everything right. So it’s just the rules.

I think I’d rather have only one group with the threat of coming in at any point in time, but in the meantime, the exams themselves are not an issue. The compliance that is related to what I can write in a letter, what I can say on the radio, what I can do in a seminar, is substantially more involved. So our own compliance issues may be what separates some broker-dealers from others, and certainly can make life much more difficult when you talk about marketing.

InvestmentNews: What about the state exams?

Mr. Bachrach: I don’t think the Ohio Department of Securities has anything to do with me, because of my Finra registrations. We’re SEC-registered, not state-registered, on the fee-based side.

Mr. Brant: We had an SEC audit last year at the prior firm I was at, and it was not a big issue. They were there for a while, and of course we have good controls and a well-trained staff, so it was not a big issue.

InvestmentNews: What about Finra regulation?

Mr. Brant: They come in and audit us every year. Everything’s gone electronic with NPC, so they’re tracking everything on a daily basis now. That actually makes life a lot simpler as long as the computers are talking to each other and working well. So I don’t have any problems in that area at all.

InvestmentNews: Nathan, how do you address compliance around your appearances on television and radio?

Mr. Bachrach: Well, the way around it is that you get hired by the station. When you become an employee and it’s an outside business activity, the rules don’t disappear, but you get a lot more flexibility and latitude because you’re actually acting as a journalist, not as an investment adviser. And I think that’s the key element. Most of the radio shows that you hear, if you give your service away for free or if you buy a show, are covered under advertising rules and regs. When I used to just do a show on NPR, every time I mentioned the word “mutual fund,” we’d have to do a transcript of that section of the show, and if it was less than 10 pages, it cost me $50 to send it up to NASD or Finra. So it could cost me $5,200 a year just to say “mutual fund.” And it’s hard to get through a one-hour radio show without mentioning “mutual fund” at some point, you know?

So that ultimately was the solution for us. Prior to that, it was incredibly difficult. We had a guy locally who happened to be with Raymond James. One day he just threw up his hands and said, “Look, there’s just too much regulation. There’s so little I can say on a show anymore that I’m just not going to do it.”

InvestmentNews: For those who want to pursue that or are doing it already, being an RIA exclusively would probably be an advantage in that case, right?

Mr. Bachrach: When you have to meet two sets of standards, you will always have to meet the more restrictive standard. I just did a piece of stationery — the credit union wanted to have GE Credit Union’s name on it plus Financial Network Group’s logo, “Simply Money,” which is the radio show, on the other side of the logo. There is no way in the world that our compliance department would ever allow that in a month of Sundays, so it doesn’t happen.

InvestmentNews: Let’s switch gears a little bit and talk about insurance, because so many advisers who leave the full-service-brokerage world and go out on their own choose the dual model because of the insurance business that they already have and the difficulty of finding fee-based insurance at the moment. Tell us a little about your own experiences with that. How much of the business that you do is insurance-related, and is that a reason to stay in the dual model?

Mr. Carter: Well, our percentage of revenue in insurance to our total revenue is very small. But yes, that has had an influence in our staying positioned the way we are. We’ve done a lot of studies. We’ve tried to find what we felt were acceptable fee products, and we found some in life insurance, but when you look in the areas of long-term care and disability, we haven’t been able to find what we would call quality products. I’m not saying they’re not out there; I’m just saying I haven’t seen them. My experience has been that if my people get paid for doing insurance, they tend to make sure they pay attention to it. Sometimes people, if they’re not getting compensated in some way, kind of gloss over it. And there’s a tremendous fear, I think, in our profession of being considered an insurance agent. Well, we consider those risk management products to be extremely important in the overall scope of a person’s financial affairs. As we say to our clients all the time, “It’s one thing to make the millions; it’s another thing to keep it.” A lot of those types of things, if they’re not properly addressed, can cost people a lot of money.

So yes, it’s had an influence on us staying. Is it a strong enough influence that if we decided to move over to a pure RIA platform, it would keep us there? No, it wouldn’t; it wouldn’t be strong enough to keep us there. We would simply form a relationship with — and there are several firms here in Dallas that do that — one of those firms, and we would just have to be very conscientious when we referred our clients to them to make sure that they implemented what we know those clients needed. But would that one thing keep me from leaving and becoming an independent RIA? No.

InvestmentNews: John, what’s your take on the insurance issue?

Mr. Brant: I think it’s vitally important. I have always believed in insurance. After I’d been in the business the first year, one of my very young clients, 30 years old, died and fortunately had implemented insurance, and it made the difference for his wife to continue to have a lifestyle and raise the kids. They’re in college now. That was the wake-up call; this wasn’t theoretical. So I’ve always strongly believed in insurance, long-term care and using life insurance for estate-planning needs or estate preservation. I still look at that all the time with clients. I’m getting ready to do insurance audits on every single client in the next client meeting going forward. I also like to be able to use the annuity products. I think there are some great products out there, and I don’t want to give those up until I see an alternative that works as well in the tumultuous markets we’re having these days. So I like insurance. I’m not at all feeling bad to say I do insurance, and I use that risk management tool when necessary. I had three clients this year collecting on their long-term-care policies, and without that, their spouses would pretty much be destitute when they die.

InvestmentNews: And that would be more difficult to do if you were a pure RIA, right?

Mr. Brant: Absolutely. Because then I would have to send it to somebody and make sure it’s implemented, and hope those people do a good job. At least if I’m controlling the relationship, I have a pretty good chance of getting it implemented, or if not, that discussion’s been done, and people know the risk they’re taking. So yes, I like having the relationship for that reason.

Mr. Bachrach: I would just simply say it would have no bearing on the RIA-only versus the hybrid. First off, I don’t believe in taking risks. In an insurance policy, I’ve always stayed away from variable-universal-life insurance on the variable-annuity side. There are lots of no-load options if I’m fee-only, and it’s going to be improving, I think. Every day, the consumer is going to drive that one, as you look at the costs of a lot of the alternatives that are being offered to the public at this point. It just doesn’t rise to the level of being significant enough to drive the revenue. When we make our decisions, it doesn’t hit the radar screen in terms of being detrimental to our revenue.

InvestmentNews: In transitioning from a commission-based form of business to a fee-based form, how do you decide which clients should be moved to fee-based? What happens to the commission-based clients who do not fit with the fee-based model?

Mr. Brant: Well, I made the decision about eight years ago to take most of my business to fee-based. I don’t sell any commission mutual funds. I also decided that I would rather manage professional money managers than do it myself, because I can’t be everything to my clients. I’d rather be the point person, the financial planner, the one looking over all of their lives. Of course, it costs money in the short term over a commissionable product.

The result is, I’m in business today, and it’s allowed me to weather a very difficult year. Had I not done that, transitioning my business this year in the worst market we’ve had in years — moving all my clients, and retaining all of them as clients and having a business model that includes retainer fees, as well as assets-under-management fees — would have been difficult.

I still enjoy being in the business and wanting to grow the business and be here for a lot of years in the future. We tell our clients that they need to save money for the future, and I think in going to a fee-based practice, that’s what you’re doing. You’re creating your practice for the future. Then at some point in time, if you want to sell it to someone, it’s going to be worth more money if you have that constant income stream. It may go up and down with the market, but it’s going to be coming in.

InvestmentNews: Nathan, how would you handle the transition?

Mr. Bachrach: Well, we started the transition in 1995 to 1996. At this point, 78% of our revenue, as I mentioned earlier, is coming from fee-based accounts. We are a mass-affluent practice, and we don’t discriminate. We take anybody who walks through the door. We have $50 million clients, and we have people who are putting money into a mutual fund for the first time. The only rule there is to make sure you have the right-priced rep with the right-priced client. We try and do everybody at this point on a fee basis. If it’s under $100,000, we’ll use turnkey programs such as Russell [Investments’], where we can just turn it over to a custodian to do. They set the allocation, or we pick an allocation and go from there. Anything $100,000 or over, we create our own models, and we operate that platform on our broker-dealer alliance. We pretty much have gotten to the point where we get all the things we need, global trading and everything, to manage the accounts going forward. I might add that this year right now, our revenue is only off 7% from last year, which was the best year we ever had, so we’re growing and replacing clients at a pretty good clip.

Mr. Carter: Sometime in the early to mid-’80s, we made our first step in that we started using funds that paid 12(b)-1 fees, so we got that 25-basis-point trail, because I was trying to build up some type of recurring income within the firm. Then in about 1986, Invesco [Ltd.] came out with a mutual fund with a $100,000 minimum with no upfront charges and just paid 25 basis points or 1% a year. And we said, “This is a great product. This is something we can really use.” And that was the precursor, by the way, to C shares. We started using a lot of the product. Our clients loved it, and we loved it. Then the C shares came in, and we started using C shares. So by the late “80s, we had pretty much gotten away from any front-end-loaded type of mutual fund.

And then in 1993 when I was changing broker-dealers, I was at the meeting where Raymond James said that they were going to aggregate fees on their wrap accounts. Before, if you had $1 million and you wanted to use five different managers, each manager started out at 3%. I just always felt that was too expensive and would not use them, even though we had them at my previous broker-dealer. At the meeting, they said that they were going to aggregate fees, so if I had a client that had $1 million or $2 million, or $5 million, then we could aggregate all of that and give them a fee that was very competitive and, I thought, fair to the consumer.

So we moved to that. Then, about two or three years after that, Raymond James came out with a lot of fee platforms where you could buy stocks, bonds, mutual funds, [real estate investment trusts] and some other types of products on a fee basis, and we started using those platforms. So today, they’ve got three or four of those, and we use most of those. We’re pretty much an affluent firm; most of our clients are relatively affluent. But we get clients’ brothers, sisters, moms, dads, etc., who may have $500,000 or less, and we will use some of those prepackaged products. Raymond James now has its own type of product that’s similar to Russell, and we’ll use that. So it took us a lot of years to transition over, but I would say by 1994, we were working with every new client who came in to us with only a fee-type product.

InvestmentNews: Did you make it mandatory that customers could not do commissions?

Mr. Carter: No, we didn’t. We did not make it mandatory, but when we showed them both, most people liked the idea that my income would go up if they were doing well. If they weren’t doing well, my income would go down. They liked that idea. And so we really didn’t have any trouble at all, from that point on, utilizing nearly 100% fee-based product.

Now with that said, there is one thing. There have been some products that have come out through the years. We had a private-placement product that came out this year that — obviously through Raymond James — that was buying dislocated debt, and I thought the product was excellent. Well, they didn’t have time to put it on a fee platform or anything like that, so I think it paid a 2% commission. So every once in a while, some product will come out like that that can’t get put on a fee platform, and we will utilize a commission. But that’s one of the advantages of a broker-dealer. Every once in a while, you have the opportunity to participate in things that you [otherwise] might not be able to get.

InvestmentNews: Here’s a question that came from the audience, a little on the nasty side: Did your clients really like those expensive C share products, and did they understand how you were getting paid on those?

Mr. Carter: Well, we don’t use C shares anymore. It’s probably someone who’s younger who is asking that question. If you go back to the late “80s and the early “90s, there were no fee platforms out there for us to utilize, at least not on the broker-dealer side. So the best-cost product that we had was C shares. So that was really the only alternative we had to a fee. And remember, we started in about “94 or “95 when Raymond James came out with these platforms.

We pretty well moved away from the C shares and went to the fee-based platforms. There was a little bit of controversy for a while about one thing: You may remember for a while a lot of the fee-based platforms, at least at Raymond James, said they were going to charge a client, say, 1%, and then there was a 12(b)-1 fee. Well, you’d get the 1%. In addition, you’d get the 25-basis-points 12(b)-1 fee. I always thought that was terrible. Clients didn’t know you were getting it. Even if you disclosed it, they never saw that you really got paid that. And that always bothered me — always. I was really against that. But there were funds that I wanted to use that paid it — managers who I’d worked with for years and I had a lot of faith in. So finally, it wasn’t very many years after that, Raymond James began instead of paying that fee out, rebating it back to clients.

So it’s been a long transition. We are where we are because we evolved that way. It’s a little bit different than somebody that started a business five or 10 years ago. A lot of the things that are available today were not available. Remember, I’m starting my 37th year here in about a month or two, so there are a lot of things that were just not available during the vast majority of my career.

InvestmentNews: There are a couple of questions that came in about Employee Retirement Income Security Act plans. What’s the method you use for charging fees?

Mr. Bachrach: All I can tell you is that we have about $100 million in 401(k) plans, and it’s almost all coming from 12(b)-1 fees. The guys who run our 401(k) division, for reasons that I cannot quite explain, don’t want to go back and re-characterize and basically do what was mentioned a moment ago — charge one-quarter of 1% a year, rebate the 12(b)-1s back into the accounts and deduct your fee, not as a commission but as a fee. That’s how I would do it, because that’s pretty much been the expectation of the plan sponsor. They know that there are these fees coming out; they see them on their 5500. But to date, we have not gone in and really re-established or re-characterized that revenue coming off of plans, which is really what I think we would be doing. My guess is that that’s one of the things that either has to happen or at some point, we’ll just have to evaluate where the 401(k) plans sit in the grand scheme of things.

InvestmentNews: Is there any way to share commissions between the RIA and the broker-dealer? I’ve heard that a broker-dealer can get a referral from the RIA, but not vice versa?

Mr. Bachrach: What I’ve heard recently is that if you’re RIA-only and you have a relationship with what is termed a friendly broker-dealer, and I believe it’s called a “client-servicing agreement,” you can be paid — not 12(b)-1s or any kind of commission — but you can enter into an agreement to provide certain services to the client. So that would be a way, if you wanted to go RIA-only, to take those clients, place them with a friendly broker-dealer and then receive some revenue, but it would not be asset-based, obviously. It wouldn’t necessarily be the same as what your 12(b)-1s might be. So that’s the one option that I’m aware of.

InvestmentNews: One thing that we write about a lot is recruitment. How do recruitment packages work in terms of your commission business and your fee business? Also, how does having RIA and commission businesses of your sizes affect your thinking about changing firms?

Mr. Bachrach: I find it amusing when people leave one broker-dealer and go to another, because given what I understand about mortality within the client base and the stress that it puts an organization under for anywhere from three to six to nine months, for me personally, there’s no reason why I need to move from one broker-dealer to another broker-dealer or from one hybrid platform to another. I don’t know what anybody could necessarily tell me. The conclusion that I’ve come to is that I would not want to go through that stress to do it. Somebody saying they could do something a little better, it always sounds too good to be true. And right now, it ain’t broke, so I don’t need to fix it. We’re growing at a pretty good clip, so it would be nothing but a distraction, to be quite honest. My sense is, most of the people who have moved from one broker-dealer to another have found that there was a way, just like the wirehouses’ recapitalizing their business and loans, to get some forgivable loans in order to get from point A to point B and recover what happened in 2008.

InvestmentNews: John, will you address the issue of moving firms?

Mr. Brant: Well, I see e-mails, occasionally, proposing moving. I have no desire to move to another firm probably ever again in my career; I’m happy where I am. Pretty much all the firms are offering great things today. I’ve been with three firms now. Because compliance is always an issue, the firm I’m with now is the easiest to deal with on compliance of any I’ve been with. They actually act like we’re a client of theirs. They treat us that way so there would not be any reason to even look at another firm.

InvestmentNews: Bill, what about you? Are you a delighted RJ user?

Mr. Carter: Well, yes, I am. When we switched in “93, we had about 18 months of just heavy due diligence. And I knew most of the principals of the large broker-dealers; I’d been around and served on boards with them, done something with most of them. So we narrowed it down to about five and then down to three before we made a decision. We spent a lot of time. We visited the offices a couple times, had a checklist as long as my conference table. And this took a long time in making the decision.

When we made the decision, we told Raymond James, “We hope you like us, because we ain’t going anywhere; we’re here to stay,” once we made that decision. Because it is disruptive, and it takes a lot of time. It’s confusing, I think, to clients. I think the only thing that would ever [prompt] me to leave is if the quality of products that went through their due diligence deteriorated and we weren’t able to provide the kind of quality products that we feel that we want to provide for our clients. Now, I don’t see that happening at RJ; that’s just not their culture. But that’s about the only thing that I think would drive me away, and I just don’t see that in the cards.

InvestmentNews: Let’s take some other questions from the attendees. Do you credit the commission against the fee?

Mr. Carter: No, I don’t. On our fee products, there is no commission. The mutual funds and other such things are bought at [net asset value]. It sounds like a question we used to hear a lot — if somebody bought a commissionable product and you’re charging a financial planning fee, do you credit it against that? I’ve heard that a lot through my years, and no, we don’t. They’re two separate operations. I’ve got two separate companies, and each has to stand on its own.

Mr. Brant: The answer is no. The only fees I’m charging are the fees that are with the third-party money manager. There are other investments that if I got paid upfront, then that was it. So it’s more coverage and overall retainer planning fees that I do, but I do not charge for a commission and then also charge a fee on top of that; they’re completely separate.

InvestmentNews: The other question is, what is your average fee percentage? I guess if you take everything in and then even it out, what would you say the percentage is?

Mr. Carter: Well, it varies. We’ve got a wide variety. I know what we would charge on those things, but there is a lot of difference between a $1 million account and a $15 million to $20 million account. For a $1 million account, it’s going to be right around 1%. That’s our part of it. If you’re talking about a wrap account, we’re using $100,000 managers. I’m not sure what those manager fees and all those other expenses would be. But let’s say it’s on their mutual fund platform. Between what RJ gets and what we get, the total out of that client’s pocket is going to be 1%. And then it’s probably going to be less than that because probably somewhere in there, one or two or three or more of those funds that we utilize will have 12(b)-1 fees that will be credited back against their 90 basis points or 1%, whatever we charge them.

Mr. Brant: For us, it would be a similar amount on a $1 million account.

InvestmentNews: How about to run money, though — to manage a portfolio actively? What could be expected there?

Mr. Carter: All I can tell you is what I’ve seen of clients who have moved over to our firm. And this doesn’t include the expenses, I don’t think, but the management. I’ve seen it as low as 20 basis points and as high as 150, 160 basis points. You don’t see much over 150 basis points, but that’s what I’ve seen with people who have moved from other firms to us.

InvestmentNews: When you take in clients from other firms, are they coming from a mix of broker-RIA combinations or is it all broker?

Mr. Carter: All of the above. We just had a $13 million account come to us this week. It’s been primarily a commission-based account, and we can’t do it all at once, because you’ve got a little thing called income taxes you have to pay. So we will slowly be migrating that account to a fee basis. Now, I had another client come in, around $3 million or $4 million, and they’re going to be moving about $1 million into a fee-based account, and they, not me, want to trade the other money. They told me that they’re retired, and they get up at 6 or 6:30 in the morning, get The Wall Street Journal and turn on the news. She said, “Bill, if we stop doing that, it would disrupt our whole retirement way of life, our whole lifestyle.”

InvestmentNews: You wouldn’t want to change their lives.

Mr. Carter: That’s right. Exactly. I said, “I don’t want to do that. You just get up and trade.” But I explained to them that we would not be responsible for telling them when to buy or sell, and she said, “That’s not a problem. We take that responsibility.”

I’ve had very few clients that do that, by the way. In fact, that will be my first. I’ve had people who want to manage their own accounts, and we’ll set them up in a separate account with RJ, and they’ll go manage it for a year or two, and typically they come back and say, “You know, I think we’ll just move the rest of this money back with you.” Making money on money is not easy to do.

InvestmentNews: John, what about you? How do you deal with clients who come in from other kinds of accounts?

Mr. Brant: Well, they usually do have a mix of investments that they’ve accumulated over a lot of years, and it’s the same thing: Look at the tax consequences of making changes and do some in-depth financial planning. Find out where they are now, what their needs are and redesign the portfolios to see what fits and what needs to be changed. And then over time, make the transition. It may take a year or a year and a half to make the transition to something that fits better.

The audio webcast and slide presentation are archived at InvestmentNews.com/webcasts.

At this point, we have our own [registered investment adviser]. Last time I looked, a couple of weeks ago, 70% of our revenue would be strictly defined as fee-based, or running through the [Securities and Exchange Commission] side of our business, and 22% is commissions. In other words, GDC, gross dealer concession, and probably 85% or 90% of that is actually asset-based 12(b)-1s, a few C shares left over from the old days, maybe some troublesome variable annuities. The firm is probably 95% asset-based at this point, and during the course of the conversation, I’d be happy to talk about where I see us going in terms of our revenue and what that might mean for our relationship long-term with a broker-dealer.

InvestmentNews: John, what does your firm do?

Mr. Brant: I started in 1992 with a broker-dealer firm, American Express [Co.], and moved in 2001 to SunAmerica, still as a sole proprietor. I joined an ensemble practice for three or four years and decided to go back to my own last year. My broker-dealer is National Planning Corp. Within National Planning, I’m part of a smaller group called the Planner Network. They are my RIA, and the Planner Network is a great group to be part of. We’re shareholder owners. We have our own continuing education, and we also go to the broker-dealer conferences, so we have a very intimate group of advisers sharing ideas and best practices. It’s a great group to be part of.

My practice is mainly retired clients or clients getting ready to retire. I manage about $50 million currently. I have a model where most of my fees are pretty split up. I get about 40% retainer fees. I use third-party money managers and manage those managers. I have a unique process called Wealth Experience, and clients pay me to be part of that process. So about 40% of my revenue comes from retainer business. And then the last 20% is commissions and other fees. So it’s a well-balanced practice. I have just one full-time assistant and two part-time assistants. We have fun with our clients, and life’s been good.

InvestmentNews: Bill, let’s hear what goes on in Dallas.

Mr. Carter: Well, I started in 1973 and opened Carter Financial [Management] in 1976. And then in 1980, I formed Carter Advisory [Services Inc.], which is our RIA. I formed it to do financial plans and written annual reviews, because that particular product or service did not exist back then. Through the advisory firm, we write our financial plans and charge fees for those. Then we charge annual fees for our annual reviews.

The other side of the business is the broker-dealer side, where we’re with Raymond James [Financial Services Inc.]. We have somewhere around $685 million of assets under management. We’ve got about 28 people associated with the firm. Again, we’re a full-service, comprehensive financial planning firm. I guess we’re a hybrid hybrid. We don’t run any of the products or the fees except for plans and our annual reviews. But about 75% of our revenue from Raymond James comes through one of their fee-based platforms. It’s either wrap accounts or one of the three or four fee-based accounts that we utilize. About 10% probably is left over in C shares. We’ve been around so long that we’ve had those for a long time. And then the remainder is probably the revenue that comes through some type of commission product.

InvestmentNews: Let’s get to the question we posed as the title of this webcast. Is this hybrid or the dual registration model a way station to something else, or is it something you would like to stay this way? Do you feel that being both has inherent advantages or would you rather be just an RIA?

Mr. Brant: Well, I’m in a coaching program called the Strategic Coach, and I’ve been in that for 11 years. It’s a great program for life and business coaching. And when I first got into that a few years ago, it really looked like I was going to go just to a straight RIA model so I could charge for the value I bring to my clients, and not have to deal with all the complexities of a broker-dealer. As times have changed through the years — and I’m still with a broker-dealer — I’ve thought about leaving a couple times. But actually, I like the model of having the products that are available through the broker-dealer. Sometimes compliance can be difficult, but I think our broker-dealer is very fair and very easy to deal with. I don’t find that much of an issue at all. And I actually like having that oversight in the products that are available. I like annuities. I have used them a lot for clients’ retirement money, and because of that, my clients are very happy this year. With all the benefits and guarantees that are available, they’re sleeping very well at night.

If I left the broker-dealer, that would be more difficult, especially with the whole Madoff scandal this year. Up until this year, most of my clients probably didn’t know I had a broker-dealer or what that meant. We’ve had long talks about that with almost every client this year. We tell them what a broker-dealer can provide: compliance, due diligence, looking over the products and making sure everything is as it should be. It actually gives the client a measure of protection that they may not get with somebody else. That has actually made it even more important these days. And I like our broker-dealer; they treat us well, so I don’t have any plans on leaving.

Mr. Bachrach: First off, I don’t know that I’d ever want to be in the broker-dealer business. I got a number recently that LPL [Financial] had a 12% return. That seems like a lot of moving parts to make 12%. I think it’s a tough business, and I think it’s not going to get any easier, and I don’t think regulators are going to make it any easier. So I don’t know whether that means payouts change or the value proposition changes.

I certainly know from my life in broadcast, if I were RIA-only, I would be able to do an entirely different type of media experience by virtue of the fact that I have [the Financial Industry Regulatory Authority Inc.], which periodically has some comments about what I can and cannot say. So from my own perspective, that’s an issue. The other thing is, I think you have to have a certain size to be able to go it on your own. My guess would be if I were only registered with the SEC, I would be picking up $120,000 right off the bat in a lawyer who’s going to be down the hall making sure that we’re hitting all the things we need to do on compliance. So I think to go RIA only requires either confederation of other people or a business of a size that could actually manage it. Maybe the strategic question for broker-dealers long term is: When their largest shops could go out on their own, what will the value proposition be?

InvestmentNews: So you’re saying, even with your $1.2 billion in assets under management, you feel you’re too small to go it alone as an RIA?

Mr. Bachrach: I don’t think we’re too small. Right now for us, we still take in $500,000 to $700,000 of revenue through our broker-dealer that would be qualified as commissions. If you go RIA-only, you’ve either got to re-characterize that relationship so it’s a fee-based relationship, maybe with an offset, or you leave it at the door when you walk to the world of SEC only.

InvestmentNews: Bill, give us your view about whether you’re staying in this for the long run or as a way station to going RIA?

Mr. Carter: We’re probably going to stay this way, and I’ll explain that in a second. I think the trend had been to go the independent-RIA way. Attending the many meetings I’ve attended over the last three or four years, I think the trend was definitely in that direction. After what happened last year, though, you’re seeing a lot of people leave the big brokerage firms, and I’m not sure they’re quite ready to go the independent-RIA route. So the hybrid, like all of us are, seems to be something that will be more attractive to them.

The reason I like it is very simple: We do a lot of alternative investments. I’m a great believer in alternative investments. But the problem with alternative investments is, it’s very complex in the amount of due diligence that’s required to really select products that we hope will work. It far exceeds the capacity in my firm.

Raymond James, on the other hand, has an excellent due-diligence office, and one of things I really like from them is their due diligence in that area. The other thing is, they provide us the capacity to do things that we couldn’t do on our own. We could do investment banking. If we want to take a company public, we have the ability to do that with them. So they provide us services where we really can go head-to-head with anybody. There’s really not a service out there that I’m aware of that any of the larger firms provide that we can’t provide, because of our affiliation with Raymond James. So it’s been a very good move for us.

Now, you may be aware that Raymond James, about four or five years ago, started a fee-only side, so they actually have both. Some of our friends have decided to go over to their fee-only side, and I think that’s another trend you may see. And I think a couple of the large broker-dealers have done the same thing. So you may see people go to the fee-only RIA model but still be affiliated with the large broker-dealer. I think that’s another trend you’re going to see a lot of in the future.

InvestmentNews: Regarding your relationship with your broker-dealer, do they give you special attention, perhaps because they’re worried about losing you to the RIA-only model? Also, does this make it any more difficult for the regulators to classify you if you do run into a Finra exam or an SEC exam?

Mr. Carter: We’re a little more of a complex firm in that we run our RIA fee-based business through Raymond James’ RIA. We do that because that relieves us of a lot of compliance and a lot of things that would cost me a lot of money to do, and we were able to alleviate that. I think Raymond James’ attitude is, you can go either way you want to go, and that’s the reason they set it up. What I think they didn’t want to do is, they didn’t want to lose a firm like ours if we decided to go that route. So I’ve not had any pressure. I’ve not had anyone ever even talk to me about that particular division of Raymond James. I know the guy who runs it very well, and I will ask him when I see him at an RJ conference, “How are you doing? How is the growth coming? How’s your business?” I’ll talk to him about things like that. But he’s never said anything to me like, “Well, Bill, you need to come over and talk to us, and I think you’d be happier with us than where you are.” I’ve never had that kind of comment from them.

Mr. Bachrach: I’ve got a great relationship with my broker-dealer [Royal Alliance Associates Inc.]. I’ve been with these guys for 19 years, and — other than the fact that my parent company, [American International Group Inc.], has helped to get some attention for itself over the years — fortunately, my clients have a relationship with us, and very rarely does AIG come up. It never came up in my discussions with GE Credit Union. It was not a concern for them at all. I think that in our case, we — by virtue of who we were with — probably had everybody in the world call us and talk to us about what was going on with our businesses and run through different economic models. And I think the one thing that we have come to learn out of this process is that you find out what it costs to have a broker-dealer in your life. Then you can determine really for yourself if it’s worth it, given the time and effort and trouble you’re going to have if you’re not with a broker-dealer, whether or not you should stay with one and whether or not there is a cost benefit for you.

We’re part of an organization called Royal Court, which consists of probably the top 50 offices and top 50 producers at the company, so the service that we get is fabulous. But I believe that at the end of the day, our broker-dealers are going to have to start benchmarking what they provide for the fee-based side of all of our businesses. They need to provide service that is truly state-of-the-art and can compete with the custodians out there, the pure custodians, custodians who are offering some pretty interesting alternatives to a broker-dealer if you should decide to be independent.

I was talking to an executive of a very large broker-dealer, who said, “I don’t want to be in the transaction business.” Well, as firms get larger, you start to examine your cost per transaction and what it takes for you to conduct your business. And someday the dollars and cents could be very stressful when you take a look at how you might be able to do it on your own, versus in a broker-dealer relationship. I think that’s where the tension’s going to be. Who do they want to retain? Who do they want to service? Who do they want to develop their platform for? Will it be for the folks that will never get large enough to go on their own, or find that there’s just no reason for it? Or will there be a cost benefit analysis that ultimately says over time, some of the larger offices will be going on their own because they can effect some substantial cost savings by transacting their business on another platform?

InvestmentNews: Something that has come up both in our reporting and questions from the attendees of this webcast is the issue of fiduciary standards. Looking at it from the point of view of your clients, do they know when you’re acting as a broker and when you’re acting as an RIA? And are they aware of, or do you tell them about, the difference in the standards? How do you treat the customers when you’re wearing two hats?

Mr. Carter: Well, remember, I’m a [certified financial planner], so I’m held to that fiduciary standard, regardless. And I don’t think most consumers really understand that. I mean, we sit down and explain it to them, and I have had a couple people say, “Oh, that’s interesting.” That’s about the only comment that I get, so I don’t think they really know. But obviously, we act as if we’re a fiduciary in all of our dealings with clients, and have for many years.

InvestmentNews: So all the commissions and arrangements are disclosed?

Mr. Carter: Absolutely.

Mr. Brant: Exactly the same thing. I do financial planning with everyone, so I’m fulfilling a fiduciary responsibility. I’m a chartered financial consultant, so I’m held to the same standard.

Mr. Bachrach: Same over here — nothing different. The one thing I agree on in the proposed legislation from the Obama administration is that ultimately, I can’t wait until the day when everybody is working on a fiduciary standard, versus half the world is fiduciary, and half the world is working under suitability.

InvestmentNews: Again, when the commission issue comes up, or how you’re getting paid, that’s all disclosed?

Mr. Bachrach: All fully disclosed. I say on the radio every night, “If you can’t figure out what you’re paying your adviser with a calculator and know exactly what it is, don’t do it.”

InvestmentNews: Have you ever been examined as an RIA and then examined again as a broker? And how do they compare?

Mr. Bachrach: I’ve had both. I would say I’m much happier being registered with the SEC than I am with the state, because the SEC guys come in, and they very quickly figure out that everything is custodied with a big, solid firm, and they’ve got a great paper trail on it. The last time the SEC came in to see me, I wanted to talk to them about reverse churning and what they were looking for when they look for the kinds of activities that need to take place on the fee-based accounts. The guy finally looked at me and said, “Kid, I’d love to talk to you more, but I’ve got tickets for the 12:30 Businessman’s Special to the Reds. I know you’d like to learn more, but you’re just going to have to hire somebody to tell you, because I’m out of here.” So they’re older, they’re more experienced, and they really come to understand we’re not taking custody of assets and that life is pretty good.

I have had a Finra exam, because they tend to come in and ask to talk to some of the larger offices in a firm, figuring if we’re not doing it right, they’ll drill down. They’re more time-consuming. They’re certainly looking for stuff. The letters are always a little bit bigger than they might be from the SEC side. But we’ve got a lot of staff that take a lot of pride in doing everything right. So it’s just the rules.

I think I’d rather have only one group with the threat of coming in at any point in time, but in the meantime, the exams themselves are not an issue. The compliance that is related to what I can write in a letter, what I can say on the radio, what I can do in a seminar, is substantially more involved. So our own compliance issues may be what separates some broker-dealers from others, and certainly can make life much more difficult when you talk about marketing.

InvestmentNews: What about the state exams?

Mr. Bachrach: I don’t think the Ohio Department of Securities has anything to do with me, because of my Finra registrations. We’re SEC-registered, not state-registered, on the fee-based side.

Mr. Brant: We had an SEC audit last year at the prior firm I was at, and it was not a big issue. They were there for a while, and of course we have good controls and a well-trained staff, so it was not a big issue.

InvestmentNews: What about Finra regulation?

Mr. Brant: They come in and audit us every year. Everything’s gone electronic with NPC, so they’re tracking everything on a daily basis now. That actually makes life a lot simpler as long as the computers are talking to each other and working well. So I don’t have any problems in that area at all.

InvestmentNews: Nathan, how do you address compliance around your appearances on television and radio?

Mr. Bachrach: Well, the way around it is that you get hired by the station. When you become an employee and it’s an outside business activity, the rules don’t disappear, but you get a lot more flexibility and latitude because you’re actually acting as a journalist, not as an investment adviser. And I think that’s the key element. Most of the radio shows that you hear, if you give your service away for free or if you buy a show, are covered under advertising rules and regs. When I used to just do a show on NPR, every time I mentioned the word “mutual fund,” we’d have to do a transcript of that section of the show, and if it was less than 10 pages, it cost me $50 to send it up to NASD or Finra. So it could cost me $5,200 a year just to say “mutual fund.” And it’s hard to get through a one-hour radio show without mentioning “mutual fund” at some point, you know?

So that ultimately was the solution for us. Prior to that, it was incredibly difficult. We had a guy locally who happened to be with Raymond James. One day he just threw up his hands and said, “Look, there’s just too much regulation. There’s so little I can say on a show anymore that I’m just not going to do it.”

InvestmentNews: For those who want to pursue that or are doing it already, being an RIA exclusively would probably be an advantage in that case, right?

Mr. Bachrach: When you have to meet two sets of standards, you will always have to meet the more restrictive standard. I just did a piece of stationery — the credit union wanted to have GE Credit Union’s name on it plus Financial Network Group’s logo, “Simply Money,” which is the radio show, on the other side of the logo. There is no way in the world that our compliance department would ever allow that in a month of Sundays, so it doesn’t happen.

InvestmentNews: Let’s switch gears a little bit and talk about insurance, because so many advisers who leave the full-service-brokerage world and go out on their own choose the dual model because of the insurance business that they already have and the difficulty of finding fee-based insurance at the moment. Tell us a little about your own experiences with that. How much of the business that you do is insurance-related, and is that a reason to stay in the dual model?

Mr. Carter: Well, our percentage of revenue in insurance to our total revenue is very small. But yes, that has had an influence in our staying positioned the way we are. We’ve done a lot of studies. We’ve tried to find what we felt were acceptable fee products, and we found some in life insurance, but when you look in the areas of long-term care and disability, we haven’t been able to find what we would call quality products. I’m not saying they’re not out there; I’m just saying I haven’t seen them. My experience has been that if my people get paid for doing insurance, they tend to make sure they pay attention to it. Sometimes people, if they’re not getting compensated in some way, kind of gloss over it. And there’s a tremendous fear, I think, in our profession of being considered an insurance agent. Well, we consider those risk management products to be extremely important in the overall scope of a person’s financial affairs. As we say to our clients all the time, “It’s one thing to make the millions; it’s another thing to keep it.” A lot of those types of things, if they’re not properly addressed, can cost people a lot of money.

So yes, it’s had an influence on us staying. Is it a strong enough influence that if we decided to move over to a pure RIA platform, it would keep us there? No, it wouldn’t; it wouldn’t be strong enough to keep us there. We would simply form a relationship with — and there are several firms here in Dallas that do that — one of those firms, and we would just have to be very conscientious when we referred our clients to them to make sure that they implemented what we know those clients needed. But would that one thing keep me from leaving and becoming an independent RIA? No.

InvestmentNews: John, what’s your take on the insurance issue?

Mr. Brant: I think it’s vitally important. I have always believed in insurance. After I’d been in the business the first year, one of my very young clients, 30 years old, died and fortunately had implemented insurance, and it made the difference for his wife to continue to have a lifestyle and raise the kids. They’re in college now. That was the wake-up call; this wasn’t theoretical. So I’ve always strongly believed in insurance, long-term care and using life insurance for estate-planning needs or estate preservation. I still look at that all the time with clients. I’m getting ready to do insurance audits on every single client in the next client meeting going forward. I also like to be able to use the annuity products. I think there are some great products out there, and I don’t want to give those up until I see an alternative that works as well in the tumultuous markets we’re having these days. So I like insurance. I’m not at all feeling bad to say I do insurance, and I use that risk management tool when necessary. I had three clients this year collecting on their long-term-care policies, and without that, their spouses would pretty much be destitute when they die.

InvestmentNews: And that would be more difficult to do if you were a pure RIA, right?

Mr. Brant: Absolutely. Because then I would have to send it to somebody and make sure it’s implemented, and hope those people do a good job. At least if I’m controlling the relationship, I have a pretty good chance of getting it implemented, or if not, that discussion’s been done, and people know the risk they’re taking. So yes, I like having the relationship for that reason.

Mr. Bachrach: I would just simply say it would have no bearing on the RIA-only versus the hybrid. First off, I don’t believe in taking risks. In an insurance policy, I’ve always stayed away from variable-universal-life insurance on the variable-annuity side. There are lots of no-load options if I’m fee-only, and it’s going to be improving, I think. Every day, the consumer is going to drive that one, as you look at the costs of a lot of the alternatives that are being offered to the public at this point. It just doesn’t rise to the level of being significant enough to drive the revenue. When we make our decisions, it doesn’t hit the radar screen in terms of being detrimental to our revenue.

InvestmentNews: In transitioning from a commission-based form of business to a fee-based form, how do you decide which clients should be moved to fee-based? What happens to the commission-based clients who do not fit with the fee-based model?

Mr. Brant: Well, I made the decision about eight years ago to take most of my business to fee-based. I don’t sell any commission mutual funds. I also decided that I would rather manage professional money managers than do it myself, because I can’t be everything to my clients. I’d rather be the point person, the financial planner, the one looking over all of their lives. Of course, it costs money in the short term over a commissionable product.

The result is, I’m in business today, and it’s allowed me to weather a very difficult year. Had I not done that, transitioning my business this year in the worst market we’ve had in years — moving all my clients, and retaining all of them as clients and having a business model that includes retainer fees, as well as assets-under-management fees — would have been difficult.

I still enjoy being in the business and wanting to grow the business and be here for a lot of years in the future. We tell our clients that they need to save money for the future, and I think in going to a fee-based practice, that’s what you’re doing. You’re creating your practice for the future. Then at some point in time, if you want to sell it to someone, it’s going to be worth more money if you have that constant income stream. It may go up and down with the market, but it’s going to be coming in.

InvestmentNews: Nathan, how would you handle the transition?

Mr. Bachrach: Well, we started the transition in 1995 to 1996. At this point, 78% of our revenue, as I mentioned earlier, is coming from fee-based accounts. We are a mass-affluent practice, and we don’t discriminate. We take anybody who walks through the door. We have $50 million clients, and we have people who are putting money into a mutual fund for the first time. The only rule there is to make sure you have the right-priced rep with the right-priced client. We try and do everybody at this point on a fee basis. If it’s under $100,000, we’ll use turnkey programs such as Russell [Investments’], where we can just turn it over to a custodian to do. They set the allocation, or we pick an allocation and go from there. Anything $100,000 or over, we create our own models, and we operate that platform on our broker-dealer alliance. We pretty much have gotten to the point where we get all the things we need, global trading and everything, to manage the accounts going forward. I might add that this year right now, our revenue is only off 7% from last year, which was the best year we ever had, so we’re growing and replacing clients at a pretty good clip.

Mr. Carter: Sometime in the early to mid-’80s, we made our first step in that we started using funds that paid 12(b)-1 fees, so we got that 25-basis-point trail, because I was trying to build up some type of recurring income within the firm. Then in about 1986, Invesco [Ltd.] came out with a mutual fund with a $100,000 minimum with no upfront charges and just paid 25 basis points or 1% a year. And we said, “This is a great product. This is something we can really use.” And that was the precursor, by the way, to C shares. We started using a lot of the product. Our clients loved it, and we loved it. Then the C shares came in, and we started using C shares. So by the late “80s, we had pretty much gotten away from any front-end-loaded type of mutual fund.

And then in 1993 when I was changing broker-dealers, I was at the meeting where Raymond James said that they were going to aggregate fees on their wrap accounts. Before, if you had $1 million and you wanted to use five different managers, each manager started out at 3%. I just always felt that was too expensive and would not use them, even though we had them at my previous broker-dealer. At the meeting, they said that they were going to aggregate fees, so if I had a client that had $1 million or $2 million, or $5 million, then we could aggregate all of that and give them a fee that was very competitive and, I thought, fair to the consumer.

So we moved to that. Then, about two or three years after that, Raymond James came out with a lot of fee platforms where you could buy stocks, bonds, mutual funds, [real estate investment trusts] and some other types of products on a fee basis, and we started using those platforms. So today, they’ve got three or four of those, and we use most of those. We’re pretty much an affluent firm; most of our clients are relatively affluent. But we get clients’ brothers, sisters, moms, dads, etc., who may have $500,000 or less, and we will use some of those prepackaged products. Raymond James now has its own type of product that’s similar to Russell, and we’ll use that. So it took us a lot of years to transition over, but I would say by 1994, we were working with every new client who came in to us with only a fee-type product.

InvestmentNews: Did you make it mandatory that customers could not do commissions?

Mr. Carter: No, we didn’t. We did not make it mandatory, but when we showed them both, most people liked the idea that my income would go up if they were doing well. If they weren’t doing well, my income would go down. They liked that idea. And so we really didn’t have any trouble at all, from that point on, utilizing nearly 100% fee-based product.

Now with that said, there is one thing. There have been some products that have come out through the years. We had a private-placement product that came out this year that — obviously through Raymond James — that was buying dislocated debt, and I thought the product was excellent. Well, they didn’t have time to put it on a fee platform or anything like that, so I think it paid a 2% commission. So every once in a while, some product will come out like that that can’t get put on a fee platform, and we will utilize a commission. But that’s one of the advantages of a broker-dealer. Every once in a while, you have the opportunity to participate in things that you [otherwise] might not be able to get.

InvestmentNews: Here’s a question that came from the audience, a little on the nasty side: Did your clients really like those expensive C share products, and did they understand how you were getting paid on those?

Mr. Carter: Well, we don’t use C shares anymore. It’s probably someone who’s younger who is asking that question. If you go back to the late “80s and the early “90s, there were no fee platforms out there for us to utilize, at least not on the broker-dealer side. So the best-cost product that we had was C shares. So that was really the only alternative we had to a fee. And remember, we started in about “94 or “95 when Raymond James came out with these platforms.

We pretty well moved away from the C shares and went to the fee-based platforms. There was a little bit of controversy for a while about one thing: You may remember for a while a lot of the fee-based platforms, at least at Raymond James, said they were going to charge a client, say, 1%, and then there was a 12(b)-1 fee. Well, you’d get the 1%. In addition, you’d get the 25-basis-points 12(b)-1 fee. I always thought that was terrible. Clients didn’t know you were getting it. Even if you disclosed it, they never saw that you really got paid that. And that always bothered me — always. I was really against that. But there were funds that I wanted to use that paid it — managers who I’d worked with for years and I had a lot of faith in. So finally, it wasn’t very many years after that, Raymond James began instead of paying that fee out, rebating it back to clients.

So it’s been a long transition. We are where we are because we evolved that way. It’s a little bit different than somebody that started a business five or 10 years ago. A lot of the things that are available today were not available. Remember, I’m starting my 37th year here in about a month or two, so there are a lot of things that were just not available during the vast majority of my career.

InvestmentNews: There are a couple of questions that came in about Employee Retirement Income Security Act plans. What’s the method you use for charging fees?

Mr. Bachrach: All I can tell you is that we have about $100 million in 401(k) plans, and it’s almost all coming from 12(b)-1 fees. The guys who run our 401(k) division, for reasons that I cannot quite explain, don’t want to go back and re-characterize and basically do what was mentioned a moment ago — charge one-quarter of 1% a year, rebate the 12(b)-1s back into the accounts and deduct your fee, not as a commission but as a fee. That’s how I would do it, because that’s pretty much been the expectation of the plan sponsor. They know that there are these fees coming out; they see them on their 5500. But to date, we have not gone in and really re-established or re-characterized that revenue coming off of plans, which is really what I think we would be doing. My guess is that that’s one of the things that either has to happen or at some point, we’ll just have to evaluate where the 401(k) plans sit in the grand scheme of things.

InvestmentNews: Is there any way to share commissions between the RIA and the broker-dealer? I’ve heard that a broker-dealer can get a referral from the RIA, but not vice versa?

Mr. Bachrach: What I’ve heard recently is that if you’re RIA-only and you have a relationship with what is termed a friendly broker-dealer, and I believe it’s called a “client-servicing agreement,” you can be paid — not 12(b)-1s or any kind of commission — but you can enter into an agreement to provide certain services to the client. So that would be a way, if you wanted to go RIA-only, to take those clients, place them with a friendly broker-dealer and then receive some revenue, but it would not be asset-based, obviously. It wouldn’t necessarily be the same as what your 12(b)-1s might be. So that’s the one option that I’m aware of.

InvestmentNews: One thing that we write about a lot is recruitment. How do recruitment packages work in terms of your commission business and your fee business? Also, how does having RIA and commission businesses of your sizes affect your thinking about changing firms?

Mr. Bachrach: I find it amusing when people leave one broker-dealer and go to another, because given what I understand about mortality within the client base and the stress that it puts an organization under for anywhere from three to six to nine months, for me personally, there’s no reason why I need to move from one broker-dealer to another broker-dealer or from one hybrid platform to another. I don’t know what anybody could necessarily tell me. The conclusion that I’ve come to is that I would not want to go through that stress to do it. Somebody saying they could do something a little better, it always sounds too good to be true. And right now, it ain’t broke, so I don’t need to fix it. We’re growing at a pretty good clip, so it would be nothing but a distraction, to be quite honest. My sense is, most of the people who have moved from one broker-dealer to another have found that there was a way, just like the wirehouses’ recapitalizing their business and loans, to get some forgivable loans in order to get from point A to point B and recover what happened in 2008.

InvestmentNews: John, will you address the issue of moving firms?

Mr. Brant: Well, I see e-mails, occasionally, proposing moving. I have no desire to move to another firm probably ever again in my career; I’m happy where I am. Pretty much all the firms are offering great things today. I’ve been with three firms now. Because compliance is always an issue, the firm I’m with now is the easiest to deal with on compliance of any I’ve been with. They actually act like we’re a client of theirs. They treat us that way so there would not be any reason to even look at another firm.

InvestmentNews: Bill, what about you? Are you a delighted RJ user?

Mr. Carter: Well, yes, I am. When we switched in “93, we had about 18 months of just heavy due diligence. And I knew most of the principals of the large broker-dealers; I’d been around and served on boards with them, done something with most of them. So we narrowed it down to about five and then down to three before we made a decision. We spent a lot of time. We visited the offices a couple times, had a checklist as long as my conference table. And this took a long time in making the decision.

When we made the decision, we told Raymond James, “We hope you like us, because we ain’t going anywhere; we’re here to stay,” once we made that decision. Because it is disruptive, and it takes a lot of time. It’s confusing, I think, to clients. I think the only thing that would ever [prompt] me to leave is if the quality of products that went through their due diligence deteriorated and we weren’t able to provide the kind of quality products that we feel that we want to provide for our clients. Now, I don’t see that happening at RJ; that’s just not their culture. But that’s about the only thing that I think would drive me away, and I just don’t see that in the cards.

InvestmentNews: Let’s take some other questions from the attendees. Do you credit the commission against the fee?

Mr. Carter: No, I don’t. On our fee products, there is no commission. The mutual funds and other such things are bought at [net asset value]. It sounds like a question we used to hear a lot — if somebody bought a commissionable product and you’re charging a financial planning fee, do you credit it against that? I’ve heard that a lot through my years, and no, we don’t. They’re two separate operations. I’ve got two separate companies, and each has to stand on its own.

Mr. Brant: The answer is no. The only fees I’m charging are the fees that are with the third-party money manager. There are other investments that if I got paid upfront, then that was it. So it’s more coverage and overall retainer planning fees that I do, but I do not charge for a commission and then also charge a fee on top of that; they’re completely separate.

InvestmentNews: The other question is, what is your average fee percentage? I guess if you take everything in and then even it out, what would you say the percentage is?

Mr. Carter: Well, it varies. We’ve got a wide variety. I know what we would charge on those things, but there is a lot of difference between a $1 million account and a $15 million to $20 million account. For a $1 million account, it’s going to be right around 1%. That’s our part of it. If you’re talking about a wrap account, we’re using $100,000 managers. I’m not sure what those manager fees and all those other expenses would be. But let’s say it’s on their mutual fund platform. Between what RJ gets and what we get, the total out of that client’s pocket is going to be 1%. And then it’s probably going to be less than that because probably somewhere in there, one or two or three or more of those funds that we utilize will have 12(b)-1 fees that will be credited back against their 90 basis points or 1%, whatever we charge them.

Mr. Brant: For us, it would be a similar amount on a $1 million account.

InvestmentNews: How about to run money, though — to manage a portfolio actively? What could be expected there?

Mr. Carter: All I can tell you is what I’ve seen of clients who have moved over to our firm. And this doesn’t include the expenses, I don’t think, but the management. I’ve seen it as low as 20 basis points and as high as 150, 160 basis points. You don’t see much over 150 basis points, but that’s what I’ve seen with people who have moved from other firms to us.

InvestmentNews: When you take in clients from other firms, are they coming from a mix of broker-RIA combinations or is it all broker?

Mr. Carter: All of the above. We just had a $13 million account come to us this week. It’s been primarily a commission-based account, and we can’t do it all at once, because you’ve got a little thing called income taxes you have to pay. So we will slowly be migrating that account to a fee basis. Now, I had another client come in, around $3 million or $4 million, and they’re going to be moving about $1 million into a fee-based account, and they, not me, want to trade the other money. They told me that they’re retired, and they get up at 6 or 6:30 in the morning, get The Wall Street Journal and turn on the news. She said, “Bill, if we stop doing that, it would disrupt our whole retirement way of life, our whole lifestyle.”

InvestmentNews: You wouldn’t want to change their lives.

Mr. Carter: That’s right. Exactly. I said, “I don’t want to do that. You just get up and trade.” But I explained to them that we would not be responsible for telling them when to buy or sell, and she said, “That’s not a problem. We take that responsibility.”

I’ve had very few clients that do that, by the way. In fact, that will be my first. I’ve had people who want to manage their own accounts, and we’ll set them up in a separate account with RJ, and they’ll go manage it for a year or two, and typically they come back and say, “You know, I think we’ll just move the rest of this money back with you.” Making money on money is not easy to do.

InvestmentNews: John, what about you? How do you deal with clients who come in from other kinds of accounts?

Mr. Brant: Well, they usually do have a mix of investments that they’ve accumulated over a lot of years, and it’s the same thing: Look at the tax consequences of making changes and do some in-depth financial planning. Find out where they are now, what their needs are and redesign the portfolios to see what fits and what needs to be changed. And then over time, make the transition. It may take a year or a year and a half to make the transition to something that fits better.

The audio webcast and slide presentation are archived at InvestmentNews.com/webcasts.