The Future of Registered Reps

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Dec 29, 2010 12:18 pm

Since I got in this business back in 1992, the "future" has been managed accounts.

Well, I'm "taking it back".

The future is commissions, transactions, smaller margins, larger asset pools, experience vs youth, old vs new, customer service over consulting, small over big, general securities vs packaged product. 

I know this is "revolutionary" thinking, but just like being a contrarian investor, you can't run with the crowd.

The New Era, is about Old School.

Dec 29, 2010 12:40 pm

Dang it.  I was just getting into managed accounts and fee based assets.  Now you're telling me the future is the way it used to be? 

I think it's funny how the industry changes based on the things FAs are trying to sell against.  Mutual funds came about because brokers were trying to sell against individual holdings.  Then ETFs came out because brokers were trying to sell against mutual funds.  Each time there was an explanation like better diversification, lower costs, better management, less management, blah blah blah.  Somewhere along the way someone said commissions are bad but fees are good.  Now clients have had a decade, a flat one at that, of fees and they're wondering what's wrong with a commission based system. 

Personally, I like the diversity.  You can grab something out of each new iteration of our industry and build on it.  For active stock traders fee based is a great platform.  For buy and hold folks, ETFs in a commission based account are a great option.  But then so are A shares with a good company.   You can combine the ETFs with mutual funds, put them both in a fee based account and be in great shape.  Or you can say screw it all and throw the money in a 6.5% BAB for the next 30 years and be happy as a clam.  You just have to be able to sell your "new" philosophy to your clients. 

Dec 29, 2010 12:55 pm

"consulting" is like leasing a car, the cost that keeps on costing. Customers understand that or at least feel that way.

I see all sorts of brokers either not succeed, fail, or never get the really big money from a client, because the client has decided that broker is "x", and not necessarilly the place for "all of their money".

This job, is sooo much easier, when you get ALL of their money.

So, never, ever, give a cleint a reason to not give you all of their money. That equation is part service, part costs, part knowledge, part trust, and the personal connection you have with them.

I'm not saying that all fee based business is bad, but it is over sold, used excessively these days. Many clients, maybe most, would rather do it the old school way. I've especially found the fee element be very difficult to approach because of the lost decade, and very low interest rates.

Dec 29, 2010 2:02 pm

The future is commissions, transactions, smaller margins, larger asset pools, experience vs youth, old vs new, customer service over consulting, small over big, general securities vs packaged product.

A profound and timely comment, on many levels. I have been doing a ton of CE to renew all of my licenses by year end, and it reminds me of why I wanted to become a professional in this industry.

I was viewing a YouTube clip of Dave Ramsey reaming a professional for questioning Ramsey about recommending only term insurance being appropriate ever for anybody. Ramsey was running the guy down as being a schlock who is only pitching permanent insurance to make a commission and ignoring (Ramsey) reality.

I think Lao Tzu said something like, " those who don't know speak, those who speak don't know".

Meaning comes from engagement, engagement with clients and prospects is what makes me happy.

I always tell new clients that most people don't want to move all of their money over right away, but that most clients have eventually moved all of their money and it is about them being comfortable and in control.

I would rather aim at 170 rounds of golf in 2011 and have people come to me and be their humble servant, than try to define myself by chasing down shadows, making more money, justifying myself, paying more taxes, increasing my ego. Keeping the number 170 in my mind is the best idea I ever got from this board. Playing 3060 holes reminds me in 2011 reminds me that there is just about one golf hole to pair up with every significant critical business activity for 2011 ( one phone call to review a portfolio, one meeting to review retirement planning, one long term care insurance proposal, one follow up call to introduce my services to a warm cold prospect, one hour of continuing education credit ...).

Here is my business plan for 2011: 3060 x series 7, insurance, CFP CE, new CLU x more fun (rafting, fly fishing, guitar, beach time).

Dec 29, 2010 2:07 pm

Good post 7. Clients truly enjoy getting to know their advisor, their firm, the staff. Our 3 person office gives the customer something to be connected to. One day I'll post some pictures on the internet what our office looks like. We're really big on atmosphere. Furniture, pictures, family photos, books, trains, little knicknacks, the whole thing just tells a big story about what/who we are. Our pictures include mountaineering (biz partners hobby), trains (near the tracks and part of our biz logo), old historical pictures of the town we're in, a few old pictures and paintings of Wall Street, and a variety of Founding Fathers/Declaration of Independence stuff. I think we have about 60 large framed items in our 1100 square feet. Cost us about 6-7 grand, even with significant discounts, but it sure looks nice in here.

Our typical client comes in about 4-6 times per year. Not all of that is revenue producing, some of it is service or just chit chat. Then we call them and mail them stuff. We really have done a good job of personalized cards and notes too. As a transaction based rep, I MUST be on top of it, otherwise I die each month. That keeps me sharp. If I got paid regardless, like others, my contact ratio would decline.

Dec 29, 2010 9:16 pm

BFP, do you mind telling us a little about how your transactional charges lead to your total production and how this would compare to a fee-based account? Say, for exmple, a fee based advisor brings in a 250k account and charges 1%. The income is obvious. In order to do the same in a transactional environment (excluding packaged products, I assume?) you'd need to charge $100 for 25 commissions, more for a smaller number or less for a higher number, etc. Let's just assume ticket charges are the same at your BD for fee based or transactional and the activity is the same, for the sake of argument. I'm just curious how you're making it work monetarily? I have some transactional clients as well, but the only ones that aren't howling about full-service commission rates are the ones who are old enough to remember that as the norm. They're not going to live forever... I especially disaprove of fee-based advisors selling someone out automatically to fit a model that's predetermined, often leading to liquidation of appreciated positions that might be heavily concentrated at a disadvantageous tax situation. I suppose in short I'm asking how you're making the money work in a transactional environment in 2010?

Dec 31, 2010 11:20 am

80% of production, comes from transactions. The other 20% from trails. Compared to the 90s, I NEVER get into big arguments about costs/fees. Certainly, my clients over the years can fully see the value in working with us. We are very service oriented, and spend probably 70% of our client inter action regarding service/account structure/other issues. Amazing, but if you really care about a client, there is just so much more to this than what stock or bond to buy, whether the xyz fund is good, or whether the stock market is cheap or expensive. We are very cash flow oriented. Somehow, or someways, we seem to always do about 80 beeps of production on a 12 months go forward basis, granted, some years it might be 70 beeps. But, where I'm at, in a managed account you lose 20 bps for Admin, so if I charged 100 bps, I'd make......80 bps. So, wth is the upside?

And boy, if I sat with a newbie household/prospect, and said I'm going to charge you 1%... that is going to lose half the people sitting in front of me, right off the bat. Folks need to see the value first.  

Jan 2, 2011 9:03 pm

[quote=BigFirepower]

Since I got in this business back in 1992, the "future" has been managed accounts.

Well, I'm "taking it back".

The future is commissions, transactions, smaller margins, larger asset pools, experience vs youth, old vs new, customer service over consulting, small over big, general securities vs packaged product. 

I know this is "revolutionary" thinking, but just like being a contrarian investor, you can't run with the crowd.

The New Era, is about Old School.

[/quote]

wrong.

show me ONE acct you beat S and P over a 10 plus year period with old school call the damn client commis based acct

discretionary fee based is THE only way to go  (duh)

leverage time

clear vision making people money  (hard enough without having to call a stupid client for his/her opinion) 

commis conflict of interest

on same side of table as client

discretionary fee based that YOU run is the ultimate way to run ur biz  (pspm.gpm.pim.pmp etc)

old school is BS school for stubborn MF like you

Jan 3, 2011 11:05 am

Just curious, why would you refer to me as MF? Bo, this isn't the yahoo sports commentary pages...

And trust me, the reason why I took serious coin after going indy 30 days after the 3/9 lows, had something to do with keeping the client happy, providing decent returns while managing risk.   

Jan 3, 2011 11:16 am

Owe - so, you're saying that because BFP likes to run a commission based account and you like to run a fee based discretionary account, you'll outperform him?  Really? 

That may be one of the dumbest things I've ever seen written on this forum. 

What kind of logic do you have to back that up?  Sounds like you're calling him out based on your personal preference, not based on any actual evidence.  Time to put up or shut up. 

Jan 4, 2011 11:52 am

[quote=series7taxguy]

BFP, do you mind telling us a little about how your transactional charges lead to your total production and how this would compare to a fee-based account? Say, for exmple, a fee based advisor brings in a 250k account and charges 1%. The income is obvious. In order to do the same in a transactional environment (excluding packaged products, I assume?) you'd need to charge $100 for 25 commissions, more for a smaller number or less for a higher number, etc. Let's just assume ticket charges are the same at your BD for fee based or transactional and the activity is the same, for the sake of argument. I'm just curious how you're making it work monetarily? I have some transactional clients as well, but the only ones that aren't howling about full-service commission rates are the ones who are old enough to remember that as the norm. They're not going to live forever... I especially disaprove of fee-based advisors selling someone out automatically to fit a model that's predetermined, often leading to liquidation of appreciated positions that might be heavily concentrated at a disadvantageous tax situation. I suppose in short I'm asking how you're making the money work in a transactional environment in 2010?

[/quote]

For us fixed income guys the ROA isn't 1%. It's usually much less. Not, that it can't be higher. There is no way to trade ones self into an even dollar amount position relative to fee guys. That's a benefit to the client and part of the competive advantage offered by transactional advisors. it's part of the value proposition made to prospects and clients. After-all, as a client would you rather pay 1% or .5%? The answer is obvious.

 Still, one has to make a living. How to do that? The key is more assets. The combo of less trades and more assets will get the job done. It's just simple math. To achieve a certain income at a certain ROA requires X assets. That,  X is a higher number for fixed income guys is just another business challenge to meet. More prospects with more money is the answer. Looking for prospects that can invest seven figures is the key. They open for six figures and have plenty of dough to take advantage of opportunities as they present themselves. ie, they become good bond buying clients.

 Considering my AUM, I make less than every fee guy at the same level, and most  fee guys with half as much. My choice. And, but one of the many ways to get it done in this business.

Jan 4, 2011 11:59 am

Well said BG. You sell vanilla at a low margin, but in high volume. AUM is the answer to all problems. I don't think any other measure is a greater indicator of your current and future success. I can just imagine you in an appointment where a big portfolio is in front of you, managed account, the typical lack of service and contact...

Jan 12, 2011 1:23 pm

[quote=Spaceman Spiff]

Owe - so, you're saying that because BFP likes to run a commission based account and you like to run a fee based discretionary account, you'll outperform him?  Really? 

That may be one of the dumbest things I've ever seen written on this forum. 

What kind of logic do you have to back that up?  Sounds like you're calling him out based on your personal preference, not based on any actual evidence.  Time to put up or shut up. 

[/quote]

well.   

i remember the exact moment i figured out I need to find a new way to do biz or quit.

i was looking at my holding pages  (old school circa 1989ish)   we posted trades to a book.

I saw that i was letting my losers run and selling my winners.

why?  well   duh.  human nature.

having to call a client and "convince" them to buy a name. (adding their greed,fear and stupidity to the equation).

they pay a comis.

something negative happenes with the name.   scared to call client

just paid a commis.

not clear vision.

hold broken crap names

get a winner.   sell it too early

easy to call client

feels good

you make money

i NEVER made people money  EVER

had 15 small winners and 3 dog with fleas BS names down 60%

so i moved to fee based.

then yers later went to fee based that I run.

no clients to call

no commis

clear vision

pull trigger

do the righjt thing

same side of table of cleint

now i make people money 

its hard as hell to beat the s and p over the long with clear vision

its impossible if you have to call clients and have conflict of interest commis on each trade

DUH

Jan 12, 2011 2:54 pm

Bar, you provide a real and legit reason to switch. Unfortunately regulators think that keeping winners, doing the right thing, is reverse churning... Duh...

I assume you must meet certain contact criteria, etc?

Jan 12, 2011 3:10 pm

You didn't read the part where he said - "no clients to call"

I'm not saying that the way he runs his book is wrong.  I think a purely discretionary trading platform with zero interaction with clients would be a nice change of pace. But then I don't want to run a mutual fund.  Which is in essence how Mr. Owebama runs his business. 

But he said "old school is BS school for stubborn MF like you", no so subtly implying that your way of running your biz IS wrong.  Since I run my biz the same way you do, by extension, the way I run mine is wrong too.  That's the part that I thought was dumb.  Just because he doesn't like talking with his clients and making decisions with them, not for them, doesn't mean the old school way is wrong.  And I completely disagree that you can't beat the S&P without a fully discretionary setup.  That's just stupid.   

I personally think that there a lot of people out there that have been in fee based accounts for the last 5-10 years who have seen zero growth on their accounts, but yet see the management fee coming out every year.  Seems their FA has made better money than they have.  Makes an investor kind of bitter.  And makes easy pickings for us old fashioned commission based guys. 

Jan 12, 2011 3:32 pm

I think he makes a good point. Of course you call them, but if you just set the asset allocations right and protect them from themselves, they are better off.

Fee based is more about paying the rep more (kind of necessary) and maybe less waste in 12b1s and such, versus charging the client more.

For example, probably most of us wrap total financial planning into the wrap service.

Well, I'm "taking it back".

The future is commissions, transactions, smaller margins, larger asset pools, experience vs youth, old vs new, customer service over consulting, small over big, general securities vs packaged product. 

 

I just had to bring this back and relish it.

Remember when women took back the night in the 70s?

In the 80's, the military took back the country.

In the 90's, Technology took over.

In the 10's, government prevailed.

In the twenty  teens, maybe it will be old age and treachery.

Maybe this business doesn't suck. Oh, I forgot, it's too cold and wet to golf.

Jan 12, 2011 3:58 pm

I'm hoping the next 10 yrs are about hot babes, doom metal riffs, rising stock prices, and everyone packing heat. Break out the sticks, Big Fire's going break 60 this year! Hey, I shot a 67, how hard could 59 be...

I try to extend Bar some courtesy, even though...

By definition, I must find VALUE, not transactions constantly. Gather more assets, find avenues of opportunity, learn, read, think, defense, offense.... All the stuff this industry has largely overlooked for years. I have positions on my book that are many many years old, I'll generally keep a stock until it's a big winner, or hits zero. I'd say my average holding time for stocks is about 4-5 yrs.

Jan 12, 2011 4:32 pm

Might want to wait until your birthday before you try to shoot your age.

At least I know for sure I'm shooting blanks.

We should, like, rebrand ourselves man. Bigger branding  bang for all those b/d charges:

HIRE A REGISTERED REP STOCKBROKER TODAY : Old Guys packing heat, wiley MOFS with smoking sticks

They will take you out into orbit on a wild ride, enjoy compounded growth while Earthlings  suck up a limited supply of high quality blue chips, exploding mid caps, and exciting small cap ideas.

Jan 12, 2011 4:37 pm

You should have been with Pink Floyd, you missed your calling.

Jan 12, 2011 5:22 pm

Lets all just be honest here. The reason that firms have pushed fee based accounts is because a predictive cash flow is better for the firms than depending on commission based transactions over the long term. It really has nothing to do with the clients.  On the flip side, each person needs to decide how they want to be paid, either a recurring fee or  per trade. I would bet over time, the  average commission based client would end up paying less. But to each his own. Either way, whether you call it a fee or not, in the end it is still a commission.