-AFTER THE FALL Independents, RIAs and regionals are still standing — and they're betting they will benefit from the crisis.
The world of finance looks a little different than it did just four months ago. The landscape of Wall Street and beyond has been fundamentally altered by the sub-prime mess and credit crisis, the implosion of a number of firms on Wall Street, and the stock market's biggest and most erratic declines in years. But what does that mean specifically for brokerages, independent broker/dealers and RIAs? We spoke with executives from three well-placed industry players — WealthTrust, Raymond James and Stifel Nicolaus — to find out. For the most part, independent and regional firms are optimistic that they will benefit from the fallout by snatching up waves of breakaway brokers from the Wall Street wirehouses.
Rusty Benton
CEO, WealthTrust LLC. Nashville
Since 2004, the number of holding companies buying up RIA advisory firms in the U.S. has surged. These firms typically acquire a portion of an existing RIA in exchange for cash, stock and promises of an eventual IPO. (See related story on page 22.) These days though, many of these holding companies are searching for new blood among wirehouse advisors. We spoke with Rusty Benton, CEO of Nashville, Tenn.-based WealthTrust — which has 12 partner firms — about this trend.
Registered Rep.: Why are RIA holding companies courting wirehouse advisors today?
Rusty Benton: There are a lot of people in the industry who say there's going to be a huge increase of wirehouse guys leaving and becoming independent because of what their firms are going through. I think there will be an increase in the next year or two, but it will be a lot less than some people have predicted. The broker/dealers are going to do a pretty good job of hanging on to those brokers. At the same time, we're having a lot more conversations with wirehouse advisors interested in joining us than we were three months ago. And our platform is capable of taking on an advisor with some commission business. A wirehouse advisor who has 80 percent of revenue coming from fees and 20 percent from commission is attractive. Wirehouse advisors also have a very loyal client base. They bring at least 90 percent of their book over with them.
RR: What percent of WealthTrust acquisitions do you expect will come from the wirehouses next year?
RB: I'm not sure exactly how many total deals we'll do. But I'd say, from what I'm seeing, 75 percent of all the deals will be wirehouse advisors joining us.
RR: How are the transactions you do with existing RIAs different from those you do with wirehouse advisors?
RB: Wirehouse advisors are looking for more support. An existing RIA that's already been around has everything in place for the most part. They know where they're getting the research from, what open architecture platform they're going to use and they have their health care in order. The conversation with someone coming out of Merrill Lynch tends to be much more about day-to-day business operations. An RIA's first question is, ‘What's the value of my business?’ A broker certainly wants that value conversation, too, but he's a heck of a lot more interested in the support platform. — Halah Touryalai
Ron Kruszewski
CEO, Stifel Financial Corp. St. Louis
Stifel Financial, the regional brokerage/middle market investment bank, is thriving in an awful market. Revenues are up, income is up, and the firm has added 21 new offices and 120 advisors so far this year. Responding to rumors that the firm would sell earlier this year, CEO Ron Kruscewski boasted that Merrill would be sold before Stifel would. He wasn't trying to predict a Merrill sale, quite the contrary. The Street likes what it sees: Stifel stock was snapped up at a September 24 public offering at $45 per share, or two times book value (that day, Goldman Sachs shares were selling for 1.1 times book value). Registered Rep. talked briefly with CEO Ron Kruszewski about the firm's success and what lies ahead.
Registered Rep.: Stifel Financial has had one heck of year.
Ron Kruszewski: We're doing pretty well considering the environment. We had record nine-month revenues of $639 million, up 17 percent over last year. Net income is only up 11 percent year-over-year. Profit margins are 13 percent for the nine months, down from 14 a year ago — so that's not bad, either. [In fact, Stifel stock is up 21 percent year-to-date and has returned a cumulative 783 percent over the last 10 years.]
RR: With the financial services landscape completely changed, how do you like your position in the market?
RK: Let me first say, no one wanted to see the demise of those larger Wall Street firms. But a lot of revenue-producing people have been let go recently and we're benefiting from that. That many firms shifting to the holding company model without the leverage has also certainly leveled the playing field for firms like ours.
RR: What do you think the appeal of your firm is, and how has that been affected in the last 18 months?
RK: We've always believed that our business is a service business — that we provide advice through people and we do not sell our balance sheet, primarily because we weren't in a position to do so. You could say the appeal of our firm today is that we do business the way it used to be done. As far as advisors, everyone's saying firms are getting rid of the $300,000 producers, right? We love them. We make money with those guys and we don't tell them what to do. Every $300,000 producer should call me tomorrow.
RR: One more time: Is Stifel for sale?
RK: Firms similar to ours have sold to be part of the universal bank model. If you look at what price they sold at, and what they're worth now, I think you'll find the answer to that question. The real simple answer — as we say in Missouri — is that we're in tall cotton. We are perfectly positioned to grow shareholder value in this market so why would I sell to someone that I'm gaining market share from? — John Churchill
William Van Law III
Senior Vice President, National Director of Business Development Raymond James Financial Services St. Petersburg
Perhaps the biggest change in the independent b/d space we'll see in 2009 is an influx of breakaway brokers from the wirehouses. Raymond James Financial Services, the independent arm of parent company Raymond James Financial, has been recruiting at a fever pitch. With 3,148 advisors (as of September 2008), RJFS has set an aggressive recruiting goal of $100 million in new advisor production for fiscal 2009.
Registered Rep.: When did you start seeing increased interest in going independent from advisors in the wirehouse space?
William Van Law: It really started a couple of years ago. But it accelerated as we moved through 2008, and since the fall [when Merrill Lynch sold itself to Bank of America], it has absolutely exploded. Over the last two years, we've seen the strongest interest from wirehouse advisors. In our fiscal year 2008, which ended September, we recruited 398 new advisors — most came from wirehouses and larger regionals. However, most of these moves are not actually going to happen until the first and second quarter of 2009.
RR: What is a common hurdle these breakaway brokers face during the move? Can RJFS help them navigate?
WVL: Owning a business is different than being an employee. It provides different challenges, such as securing space and setting up a business structure. Over the years, we've helped thousands of advisors go independent (both financially and with guidance through the process). Most of those advisors have come from the wirehouses and other firms like Edward Jones or A.G. Edwards. We were the first in the industry to create a transition management group. We have an experienced 40-member team all devoted exclusively to helping advisors start an independent business and move over to Raymond James.
RR: How much growth do you expect for 2009? What will that growth look like?
WVL: Our main driver is really the revenue, not a number of people. It is about quality not about quantity. But, we're also a growth company — the goal as an organization is to grow at 20 percent a year. We try to attract new advisors to the firm at a level of about 10 percent of historical revenues. Secondly, we try to help existing advisors grow their business to the tune of about 10 percent. The trends are very positive: We finished our fiscal year 2008 up 45.4 percent in recruited revenue versus 2007. In October and November, recruiting was up north of 40 percent versus the same period last year. — Christina Mucciolo