Financial Dustbowl

Even as the three-year bear market recedes in memory, the experience of one rep illustrates how those lean years are not yet through with the brokerage employment market. The rep, a Milwaukee-based independent who asked to be identified as David K., recalls that he began having a tough time in 2000, as normally eager clients stopped returning his phone calls and his business tailed off. As the bad

Even as the three-year bear market recedes in memory, the experience of one rep illustrates how those lean years are not yet through with the brokerage employment market.

The rep, a Milwaukee-based independent who asked to be identified as David K., recalls that he began having a tough time in 2000, as normally eager clients stopped returning his phone calls and his business tailed off. As the bad times persisted, his firm, AXA Advisors, and the fund managers he bought from all continued to sing from the same hymnal: “They told us to wait it out, that everything would turn around in the third quarter,” David says.

Such optimism was sustainable for a time, but soon David hit a real skid — two consecutive months with no income at all — and he decided to leave the business before his home life and health suffered any further.

Unfortunately, David's tale of unrewarded patience is too common. In the past two years, the industry has shed about 20,000 registered reps. According to the NASD, the number of reps as of December was 653,887, down from 673,822 in 2001, and the number of member firms was 5,272, down from 5,499 in 2001. (Note: the demand for big producers remains strong. See page 16 for more on this trend.)

In a year that was widely expected to be the third consecutive for job declines nationwide, a triple-year feat not seen since the midst of the Great Depression, it comes as little surprise that the financial services sector would be especially hard hit.

True, many firms, including Merrill Lynch, are starting to add to their brokerage workforces again, but they are being very selective, because the downturn has taught them some painful lessons about the cost of training and supporting reps. CBM Group, a New York-based management consulting firm, places the average cost of carrying a broker through his first four years at a $250,000. As a result, the number of reps in the industry overall continues to drop. Between August and December of last year alone, the industry lost 9,317 reps, according to NASD figures, and few expect this to change any time soon.

What a Drag It Is

One reason the industry will continue to lose brokers is that the bear market aged the industry's workforce. The last three years have functioned as a sort of natural selection process, with the least experienced brokers getting weeded out in disproportionately large numbers.

“Some advisors were so new to the business that they couldn't sustain in this extended downturn,” says Jim Almond, a certified financial planner with Financial Network ING.

This was good for the industry in some ways. For instance, it had a overall positive effect on the level of talent in the brokerage pool. However, an older workforce has its downside as well.

“If you go to any Financial Planners Association meeting, you'll see a lot of gray hairs,” says Almond. “There is an acceleration of people leaving the business, and their kids are not moving in to take over the family practice.”

The number of reps leaving the industry is only one half of the brokerage industry's human resources saga. In an attempt to cope with lagging income during the down markets, many brokers looked for greener pastures in the independent field, and that shifted some of the industry's balance of power.

“Brokers moved from wirehouses to indies to grab a quick payout in the hopes it would salvage their business and allow them to fix things,” says Rick Peterson, head of Rick Peterson & Assoc., a Houston-based broker recruitment firm. But often it was too late, he adds.

As the markets are improving, brokers seem less enthralled with the notion of independence. Independent advisors make up about 40 percent of the total advisory market, but the stampede to join them is slowing down, according to Dennis Gallant, director of intermediary research with Cerulli Associates, a Boston research and consulting firm. That's partly thanks to increased competition, and partly due to the fact that “a lot of the people who wanted to go independent have already done so.” Cerulli projects the number of reps affiliated with broker/dealers will grow from 94,816 in 2001 to 96,484 in 2004, eventually settling to 95,761 in 2006. (Meanwhile, the number of registered investment advisors has been dropping, from 30,024 in 2001 to an estimated 27,139 in 2006.)

Had I Only Known

A study done last summer by CEG Worldwide, a financial services research and consulting firm, suggests disillusionment is as large a part of an independent financial advisors' world as the stock tables.

In a survey of 1,117 investment advisors, registered investment advisors and brokers, 17.5 percent (mostly the IAs and RIAs) were considering switching broker/dealers in the next year. The top reasons? “Unhappy with current management” (90.3 percent of all respondents) and “Desire to find a more responsive organization” (75.5 percent).

John Bowen, founder and chief executive officer of CEG Worldwide, says the study shows a deep disenchantment among investment professionals.

“What's happening in this industry is a perception of a lack of leadership,” he explains. “Investment advisors feel they are rudderless and in need of a road map that's not being provided by current management.”

With that attitude dominant, it's no wonder one in five indie advisors or registered reps are looking elsewhere. Perhaps unsurprisingly, the smaller firms — those least able to provide institutional stability and shelter in down times — are accounting for the the largest share of industry attrition.

What is the overall effect of this on the brokerage market? For starters, the strong are getting stronger. Wirehouses are retaining their best talent and are now in the catbird seat in terms of recruiting. On the indie side, many of the smallest players are selling upwards into large firms, like Jessica Bibliowicz's National Financial Partners. NFP paid an average of $3 million per acquisition, making 132 purchases of independent firms while assembling a network of 1,300 brokers and financial planners.

Almond, who has purchased three independent practices himself in the past three years, declines to characterize this as a buyers' market. “Some advisors still want too much for their practices,” he says. According to Almond, a reasonable purchase price falls between 1 and 1.5 times recurring revenue.

Still, he says, in this market it's still better to buy than to build. “With acquisitions, it's easier and quicker to bring on clients with some velocity,” Almond explains, adding he continues to look at buying opportunities.

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