Business hasn't been this difficult since, well, ever, says a Texas-based wirehouse advisor. His client assets have shrunk substantially, his firm gets negative press on a regular basis, his largest clients are calling him a lot these days (“Not to pat me on the back,” he says) and the deferred compensation he thought he would use to fund his eventual retirement is “scrawny” at best. Some might say it's a good time for him to consider going independent. He's a million dollar producer managing about $500 million in client assets, and he already feels like he runs his own business. But he's not considering the move. “A couple of guys here left and went independent. It's not for me. I'll probably always be a large firm advisor,” he says.
It's not for a lack of places to land. There are plenty of independent b/ds trolling for advisors like him these days. Independent b/ds have been looking to increase scale and improve advisor quality for years now, and some of them have enjoyed great success recruiting away from the wirehouses in the recent downturn. And yet, the indie b/d channel still lags so far behind: Median production stands at about $131,000, according to preliminary research by the Financial Services Industry, the independent b/d lobbying group. That's an improvement from average revenue of around $109,000 per advisor in 2005, but still a far cry from averages of around $600,000 at Wall Street firms. With its 95,000 or so advisors, the independent channel is the largest in the industry, but most of its advisors manage less than $100 million in assets, according to Cerulli Associates.
That's because independent b/ds are still evolving from the days when they were filled with part-time advisors, certified public accountants and insurance agents. The problem is, hiring and providing back-end support services to small producers just isn't a lucrative business anymore. “There is a growing recognition among independent b/ds that it costs to maintain and keep those low producers. There's a fixed cost associated with every advisor. From on-boarding, to equipping them with the technology and paying for compliance — there may even be a higher compliance cost associated with a lower producer. I think independent b/ds are becoming increasingly aware that the economics just don't make sense to keep advisors at that level,” says Dan Inveen, founder of FA Insight, a Tacoma, WA-based advisory consulting firm.
But change takes time. “In 2007, a lot of smaller independent firms were actually still hiring producers who generate under $50,000,” says Inveen. The smaller advisors in the channel haven't gone away because there has always been another independent b/d that is willing to hire them. “That doesn't happen at the big employee firms. If Merrill Lynch doesn't want a broker because he's not producing enough to stay competitive, then chances are neither does UBS or Smith Barney,” says one recruiter who works with wirehouse reps. He adds, “When one firm trims the fat at the bottom of its advisory force, the other wirehouses are usually doing the same. That's when you see an uptick in that breakaway broker movement.”
But these breakaway brokers are too few to make a big impact on the channel's overall economics, and only go to a handful of firms. “Most advisors in the independent channel fall into the lower categories of client assets under management and production levels. When you look at the independent channel as a whole, there doesn't appear to be much focus on sophisticated financial planning or advice. It's happening, but it's just not happening across the board,” says Bing Waldert, associate director at Cerulli Associates. “Smaller advisors with smaller books of business and low production levels just plain outnumber bigger advisors in the independent channel.”
Indeed, over half of the top 25 independent b/ds on our list have average advisor production levels of under $200,000. Intersecurities, a Florida-based independent b/d affiliated with Aegon USA, reported average production per advisor of about $90,000 in 2008. ProEquities, an Alabama-based b/d affiliated with Protective Life, reported average productive levels of about $69,000 last year. “Many insurance owned b/ds are more willing to keep these reps,” Inveen says. Independent b/ds affiliated with insurance companies, simply have an easier time making the economics work because the reps associated with the firms are more likely to sell their insurance products — so long as they are suitable investments for clients.
It's mostly the bigger independent b/ds that are making strides in raising the profitability of their advisors. “The firms that have invested in their platforms and technology are able to attract a higher-class advisor. They're breeding a better group of advisors and helping the independent channel improve its image,” says Waldert.
Waldert says one firm that's helped with that image is Raymond James Financial Services. Raymond James management decided in 2003 that it couldn't afford to keep advisors who weren't working full-time. “If you're trying to do this job on a part-time basis, you're probably not doing your clients justice. We decided to hold people accountable and asked those people to find another home,” says Bill Van Law, senior vice president and director of business development at Raymond James Financial Services.
Van Law says the firm has begun hiring bigger and better quality advisors. Average revenue per producing rep at the firm increased 21 percent to $330,438 in 2008 from $273,150 in 2006. Meanwhile, if you look only at the top 20 percent of its advisors, average production is up to $876,081 in 2008 from $716,638 in 2006. “If we look at the last three or four years at Raymond James, we didn't hire many large producers,” Van Law says. “But that is a major focus now.” Between July 1 and August 31, the firm will have hired at least 7 one million dollar producers, he says. “That's a huge improvement just compared to the previous year or two.” The number of million dollar producers that joined the firm increased nearly 400 percent from 2003 to 2008. And at an RJFS Las Vegas conference held in March for current advisors and prospective recruits, the average production of of the prospective recruits was over $512,000.
Meanwhile, at Commonwealth Financial Network, a Waltham, Mass. independent b/d with about 1,250 reps, production levels were up 73 percent in 2007 versus 2003. That year the average production per advisor stood at about $184,000. In 2007, it hit $318,000. “We have really become more selective about who we want to bring on. We made a decision we want the average production per advisor to grow. That means we can't just hire everyone who calls us,” says John Rooney, managing principal at Commonwealth.
Rooney says increased interest from wirehouse advisors is no doubt related to cuts at many big firms. About 75 percent more wirehouse reps have contacted Commonwealth so far this year, but the firm says it has passed on more than half of these advisors. “We got plenty of calls earlier this year, but we didn't take a lot of those guys. They will show you trailing 12 month production of $220,000. But that's $220,000 with everything being handed to them by the firm and the branch manager. That number is going to drop significantly if they go independent. They won't be getting that same level of support anymore, so the production will certainly suffer,” Rooney says.
“You have to remember, there are plenty of towns and cities not on the coasts where a guy with $20 million in assets is the big dog. Those towns and cities are also where a lot of these smaller independent b/ds are hiring small producers. People in those areas need financial advice too,” Rooney continues. Besides, he says, most of the independents have a hard time competing for the really high end advisors. “There are only a handful of independent firms in the channel that really appeal to big wirehouse advisors. When you're a $500,000 producer or more, there are only a few firms who can work with you,” he says.
“The primary issue is that a few independent b/ds have really come a long way from what the channel looked like in its early years,” Bing says. “Those firms can compete with the big wirehouses because they invested in technology. They can give big advisors things like research, inventories of municipal bonds, access to high end trading desks and investment banks, liquid alternatives like hedge funds. Those services being available at an independent b/d was not impossible not too long ago.”
At the same time, he says, the independent channel is made up of many different firms catering to different levels of advisors. “The majority of them are very small firms. So, there's always a place for small advisors. They're not going away,” Bing says.