Not Your Father's Regional

In the securities business, the word connotes a smallish brokerage, dispensing simple, up-the-gut advice to their aw-shucks clientele, the kind of folks who live in small cities and rural communities in, say, the Midwest. And we all know the stereotype of the regional registered rep: Nice guy, bright, but doesn't compare in drive or sophistication to his big city-dwelling wirehouse or RIA counterpart,

In the securities business, the word “regional” connotes a smallish brokerage, dispensing simple, up-the-gut advice to their aw-shucks clientele, the kind of folks who live in small cities and rural communities in, say, the Midwest. And we all know the stereotype of the regional registered rep: Nice guy, bright, but doesn't compare in drive or sophistication to his big city-dwelling wirehouse or RIA counterpart, who tend to cater to comparatively sophisticated (richer) clientele.

So how to stereotype Robert W. Baird these days? In his six years as CEO of Baird, Paul Purcell has whipped the 87-year-old regional brokerage into a more balanced and productive business. On paper (average broker assets under management, for example), Baird hardly looks like the hayseed broker that some would assume of the Milwaukee-based firm. The turning point came in 2001, three years before Purcell orchestrated the buyout from insurance behemoth Northwestern Mutual, which had owned it for two decades. (Purcell's beef: “They didn't invest a dime in Baird.”) But perhaps the most significant and difficult changes Purcell has made within Baird have been to the firm's crown jewel, the private wealth-management group. Instead of adding bodies like other regional firms, Purcell instead slashed the number of producers, ratcheted up production expectations and reoriented the firm towards fee-based wealth management and, of course, the pursuit of wealthier clients. (Sound familiar?) In short, Purcell is using all the “mean” tactics that the wirehouse bosses use to stay competitive. Indeed, Purcell's strategy resembles those of the Gormans of the world rather than, say, the Weddles of the world: Raise your game or be gone (Until June 2005, Purcell's brother Philip ran Morgan Stanley.)

Before Purcell

What a marked cultural change from his predecessor, Fred Kasten, who ran the firm for 23 years. In that time, Kasten quadrupled the size of Baird's brokerage unit to 824 reps in 79 offices. Brokers and former executives remember Kasten as an immensely likable and caring leader — the stereotypical regional brokerage boss. Reps say he not only knew the reps' names, he knew their wives names, too. One Baird broker compares Kasten to longtime Edward Jones CEO, Ted Jones, “But with a lot of Jimmy Stewart and It's a Wonderful Life thrown in.” Under Kasten, Baird was an easy-going, “I'm OK, you're OK”-type of place, say reps, where a broker was left to run his business his way, even if it that meant just showing up. “There's been a perception in the past that at Baird, ‘We cut your food for you’,” says a former executive, referring to the cozy complacency that many brokers had come to expect at Baird. “And, to Paul's credit, they've been changing that, bringing in much more self-sufficient, entrepreneurial-type brokers,” he says. Purcell says he didn't have a choice. Baird brokers are competing for the same investor dollars everyone else is. Baird can't afford to be a place for advisors to hang out and coast, says Purcell. As a result, he's cut nearly 300 reps loose and raised expectations: Baird reps now must produce $245,000 or more in annual revenue or leave, and new recruits are typically $400,000-plus producers. Purcell wants hungry people with ambition. And he also wants reps to pursue wealthier clients and fee-based account arrangements. John Mack, CEO of Morgan Stanley, has made similar changes, cutting roughly 1,000 brokers and raising minimum annual production to $250,000 per broker.

So far, Purcell's numbers would suggest his changes have been good for the business: In 2006 the firm estimates net revenues will reach $650 million, up from $632 million in 2005, Baird's first full year of independence, and $604 million in 2004. In the private wealth-management group — “the biggest and most important business,” says Purcell — revenues are expected to reach just under $300 million in 2006, up from $282 million in 2005. And that's with a lot fewer reps: Baird today has 589 reps in 60 offices. The average Baird producer now generates $433,000 in annual revenue and has $90 million in assets, a substantial improvement from 2000 when the average rep produced only $388,000 in revenue. By comparison, a rep at regional powerhouse Raymond James produces $344,000 in annual revenue and has $35 million in assets. And it's getting better still: According to Mike Schroeder, head of the firm's private wealth-management group, the firm added 30 new advisors averaging $600,000 in production in 2006, the firm's best recruiting year yet. “Quality over quantity,” says Purcell.

And that refers to the delivery of the services, as well. “We've tried to change Baird from a typical regional stockbroking business to an advisory and consulting business, focusing on top-shelf asset allocation and financial planning,” says Schroeder. To that end, fee-based revenues — a number Purcell says he “sleeps with” — are being dialed up and now account for half of the unit's total revenue. And reps increasingly work in teams — nearly 50 percent of reps now work together in groups that, Schroeder says, more and more involve a CFP, a CPA or some other specialist. More than 200 Baird advisors are now “senior investment consultants,” too, a designation the firm helped design with the University of Chicago.

The aim is better service for bigger clients, particularly those with a net worth in the $500,000 to $10 million range. “Baird has hedge funds, private equity and other alternatives, but serving the wealthy is more about learning the process, it's more hands-on than most reps are used to,” says Bill Nicholson, managing director of the firm's elite private asset-management group — now part of private wealth management — which has 30 advisors with $10 million-plus accounts. He helped design the University of Chicago program after coming to Baird from Donaldson Lufkin & Jenrette, where he founded that firm's ultra-high-net-worth consulting business.

To complement the new approach, Schroeder says private wealth management will be getting some key technology upgrades in the new year. He says the firm will be rolling out a unified managed-account platform for reps as well as new financial-planning and client-relationship software for their desktops. “It's hard for smaller budget firms to compete on technology,” says Philip Palaveev, a consultant with Moss Adams. He also says regional firms are usually slower to implement improvements. Purcell says it just has to be done correctly. “With $85 million to $90 million in operating profit, for us to spend $10 million to $20 million investing in our business isn't a big deal,” he says. “We just have to do it smart and not reinvent the wheel every time we do it.”

Despite the increased expectations for reps and Purcell's dogged pursuit of a better bottom line, he's adamant about one thing: “Baird is dramatically different in many respects than the Baird of just a few years ago, with one very important exception — our culture,” he said in a recent press release announcing a rebranding campaign designed to call attention to the post-Northwestern Mutual Baird, which Purcell admits is “a story that's not particularly well-known.” When asked about Baird's unique ‘culture,’ Purcell finds it difficult to pin it down in words — especially for a “metrics guy,” as he puts it. “The reason we've been on the Fortune 100 list for the ‘best places to work’ for the past four years is because we pay people well, we incent people through ownership to work for the betterment of the team and we treat people fairly,” he says. Exceptionally low turnover rates suggest as much: The average Baird rep has been with the firm for 10 years, 12 years for those with more than six years in the industry.

Surprisingly, Purcell mentions the massive layoffs of reps as an illustrative example of the firm's fairness. They were given 18 months to reach $245,000 in production as well as advice on how to do it — nobody was kicked out the door. Those that didn't make it were helped with outplacement options; those that did were paid as if they'd been $245,000 producers for the previous 12 months. As for ownership, new shares are issued to employees ever year and opportunities to buy are based on an associate's tenure and his unit's productivity. There's a bonus, too, which is never less than 9 percent of an associate's base salary, and increases with company profitability. None of this can be independently verified, since the company is private and seeks little publicity. And indeed no brokerage industry analysts said they know enough about Baird to comment on its strategy, or in general.

Purcell says rank-and-file associates are free to call him with problems and concerns as well; he says he will return calls in 24 hours or less. According to most reps, Baird's culture is really about its small-town feel: “I can call Betty in the IRA department if I need help with an account,” says one rep. “And she'll know who I am, where I'm calling from and we'll end up talking about her grandkids,” he says. He also mentions how nice it is that the firm tends to stay out of trouble and, thus, out of the newspapers, at least for negative stories. (This trend was interrupted earlier this year, see sidebar.)

But let's face it: Purcell is no Fred Kasten. And he's the first to admit it. “Fred is probably the kindest human being I know,” says Purcell. “I'm a good human being, but he brought me in to make changes. Fred would never have made the decision to take out the bottom tier of advisors,” he says. “But it needed to be done.”

Purcell hopes the improvements he's overseeing at Baird will become an advantage. He hopes by turning Baird into a boutique but without sacrificing its regional charm, he can turn old threats into opportunities. “We love consolidation,” says Purcell, and when he says it he also squashes rumors that he's prettying up Baird for a sale, “We love being private and we're not for sale.” Although he does like it when other firms acquire each other: He sees reps fleeing Piper Jaffray, Legg Mason, Advest and McDonald Investments as potential Baird brokers.

One thing's for sure. With those firms now being leveraged under new wirehouse ownership on Baird's 15-state Midwest footprint, Purcell is doing what any CEO would be doing in his situation, says Dennis Gallant of Gallant Consulting. “It's hard to be the complacent, ‘nice place to work’ in this type of hyper-competitive environment,” he says.

UNWANTED ATTENTION [story sidebar]

For a firm that is trying to increase its global profile, Baird has had a lot of the wrong kind of attention in the last several months.

In June, Baird sued two of its own prominent large-cap asset managers, Joel Vrabel and David Bowman, for allegedly taking Baird client info with them when they left the firm last spring. Bowman and Vrabel say they only took personal affects when they left to form their own asset-management firm, Red Granite Capital. Ten other employees left with them. More importantly, their exit directly or indirectly caused assets in the unit to drop to just over $1 billion, from more than $5 billion — virtually none of which has turned up at Red Granite.

Vrabel and Bowman contend that they left because Baird low-balled them when it came time to renew their compensation packages last January. They say the lawsuit is Purcell's personal vendetta. “It's embarrassing for us,” says one broker of the local media's persistent coverage of the suit.

So far, Vrabel and the others are winning. In November, a Milwaukee County Circuit Court judge threw out Baird's request to have Granite return documents, saying there was insufficient evidence they took them.
John Churchill

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