IN THE WEEK FOLLOWING the implosion of Brookstreet Securities, a disaster caused by massive margins calls on highly leveraged CMO derivative investments held for the firm's clients, the firm's brokers were inundated with calls from independent broker/dealer recruiters. (For more on Brookstreet, see our cover story on p. 26). No joke. These reps, from a tarnished firm that had allegedly just lost some of its clients their life savings, were aggressively pursued by other b/ds. “I was working with reps I placed that got 20 to 30 recruiters calling them in a five-day period of time. In the past I would never have heard that,” says Jodie Papike, vice president of Cross-Search, a recruiting firm for independent reps and executives in Jamul, Calif. Some of the best — those with at least $500,00 in production and clean records — were offered nice recruiting packages: Securities America paid 15 percent upfront for several Brookstreet reps, says Papike.
Indeed, times couldn't be better for top independent reps. They're very much in demand, and firms are going to great lengths to lure them in and keep them happy. In fact, recruiting wars for the industry's biggest fish are so intense that in the past year, independent b/ds have begun offering recruiting bonuses for the first time ever. Some firms are also extending a very different carrot: intensive help with practice management.
One thing working in top independent reps' favor is that the pool of top talent actually switching firms is relatively small — even smaller than the firms may think. According to a study from Moss Adams and commissioned by Pershing, titled The Race for Top Talent, the number of top advisors (with production of $500,000 or more) who will switch firms in 2007 is in the hundreds, not thousands. In fact, according to the study, while nearly 80 percent of advisors on the independent side of the business generate less than $250,000 in production annually, 80 percent of firms' recruiting efforts focus on the top 10 and 20 percent of advisors.
Supply just hasn't kept up with demand, explains Philip Palaveev, a consultant with Moss Adams. Everyone wants sophisticated financial advice these days, from baby boomers heading into retirement to younger professionals who want to save for the future, but the number of experienced and successful financial advisors able to offer that kind of advice hasn't kept pace, he says.
While sign-on bonuses are standard practice at the wirehouses (where they have gotten as high as 300 percent of trailing 12-month production in extreme cases), it's a new trick for independent firms. Although the bonuses offered on the independent side are just a fraction of those offered by the wirehouses, Palaveev says that they are creeping up. The large insurance-backed independent firms tend to give reps the most: between 15 and 20 percent, says Papike. Usually, that money is offered in the form of a loan, which is forgivable over five or seven years as long as certain production goals are met, she says.
Royal Alliance, a New York-based independent b/d and subsidiary of AIG, for example, offers between 10 and 30 percent. However, Gary Bender, senior vice president and director of national recruiting for the firm, says that 30 percent is the absolute maximum, and would typically go to a small b/d recruit, not an individual advisor. The bonuses are far smaller at non-insurance b/ds like LPL or Raymond James, which give the best reps more like three to 10 percent.
“It used to be that if you wanted to go independent, you knew you wouldn't get transition money, but the tradeoff was that you would get to sell your business later,” she says. “But lately, there were some guys who just couldn't leave behind all that non-vested deferred comp [at their former firms]. And then there are the startup costs. As the deals got bigger in the traditional wirehouse sector, more of the independent b/ds began to respond with packages of their own.”
Of course, the firms try not to advertise such bonuses. “They don't like to talk about it,” says Mindy Diamond, a columnist for this magazine and president of Diamond Consultants, a Chester, N.J., recruiting firm. “They say it's on a case by case basis; they don't call it recruiting bonuses.” Indeed, the firms often call it “transition financing,” because reps use it to help pay the costs of getting started as an independent, from account termination fees to office space, furniture and supplies.
In the long run, bonuses like these may not last. They just don't make great business for the firms, who already operate on extremely slim margins of around two to five percent. Large independent firms typically have annual recruiting budgets of between $800,000 and $1 million, which includes print and media advertising, mailing and the cost of paying recruiters. According to the Moss Adams/Pershing study, each advisor recruited to a firm costs around $12,000 — and that's before any sign-on bonuses are added to the mix. Offering even a 10 percent sign-on bonus for, say, a $500,000 producer, would bump up that recruiting cost per advisor more than fivefold. What's more, hefty sign-on bonuses can attract the wrong kind of rep. “They can sometimes appeal to ‘serial switchers,’” says Palaveev, or reps that switch firms every five years or so.
Consultants from Moss Adams say the better strategy for firms is to help the reps already in-house expand their businesses through training and continuing education services, converting their legions of smaller advisors into tomorrow's top producers. B/ds that master this practice are the ones that will experience sustained growth and success, says Moss Adams.
In fact, independent b/ds have long said they offer some kind of practice management service to their reps, “but they didn't,” says Papike. “Now they really are providing programs and platforms to help reps enhance their practices. There's simply more competition, so you have to do more to keep reps happy.”
Not surprisingly, it's the larger independents like Commonwealth, Raymond James, LPL, Securities America, National Financial Partners and Royal Alliance that have taken the lead at developing in-house practice management programs, say recruiters and consultants. At most of these larger firms, it's a push that began about five years ago but has since gained momentum.
Commonwealth is the exception, having gotten started back in 1989 with an entire department dedicated to practice management and business development for advisors, including staffing, budgeting, marketing and prospecting for clients. The firm also offers extensive technology support help. More recently, Commonwealth launched its online benchmarking tool, which allows advisors to compare their own performance to that of the best advisors at the firm.
Other large firms, including LPL, Raymond James and Securities America, offer advisors an on-site practice management consultant to help them streamline operations, either for free or for a small fee. LPL also has a 19-person business development unit, dedicated to improving the efficiency and productivity of its advisors' practices, as well as a free online marketing program with customizable newsletters and a job posting service called Career Match for advisors who want to bring on new hires. Then there's Raymond James, which hired 12 people to work exclusively on practice management initiatives in different geographic regions. The firm also has a program called Create Client Advocates, which helps reps learn how to get referrals from current clients, and it sponsors a series of “rainmaker” workshops for top producers.
While the larger b/ds got started first, some of the smaller firms are starting to play catch-up, and take practice management very seriously. Take Advanced Equities, a Chicago-based firm with two independent b/d subsidiaries, First Allied and FFP Securities. Advanced Equities has spent millions over the past 18 months building a new business development program for reps. In June, the firm launched the new program, dubbed NextGen, offering reps access to late-stage venture capital and hedge funds for client investments, assisting reps in generating leads, setting up seminars for individual advisors and providing wealth management resources, including ERISA experts and estate attorneys. The firm held its first regional “NextGen University” event for about 150 reps this summer. The free three-day conference was aimed at training and educating advisors on NextGen's offerings.
NextGen cost Advanced Equities $5 million in its first year. But the firm thinks that investment will more than pay for itself: it expects the program to almost double average rep production to $300,000 from $179,000 today, says the firm's president, Adam Antoniades. In fact, the firm is so confident in the program that it's making some bold promises: it's telling reps that they'll be able to grow their business by 40 percent over two years. “We have the tools and education to help them realize that 40 percent growth from the time they join. If they don't, we'll pay them the difference between what they earned and the 40 percent mark,” he says.
The program is having the intended effect. Mike Robertson, an advisor with Advanced Equities subsidiary First Allied who manages about $1 billion in assets, attended the firm's NextGen conference in June and said prior to the event, “I wasn't a big cheerleader for the firm.” More specifically, he was getting frustrated with the firm's slow response to his request for additional money management vendors on the platform. First Allied eventually gave him what he asked for, but Robertson says it was the NextGen conference that helped reinforce his connection with the firm. “As an advisor you want to stay with a firm that wants to commit to you. Now I feel like the company has stepped up and made a commitment to advisors,” he says.
Of course, investments in practice management don't come cheap. Palaveev says business development programs typically cost a firm at least $500,000 a year. When you consider that an independent b/d with $100 million in revenue typically has about $12 million in annual expenses, “that's a pretty big chunk of revenue for one department,” Palaveev says. But consultants state that the independent model has come to a point where it's more productive to train and develop reps than recruit them — especially for the smaller shops. “Four years ago it seemed to make sense to throw all your money at recruiting, now it's better spent on developing your own reps,” Palaveev says.