With so much buzz about the RIA world's rapid growth in assets and number of advisors, news about the other independent channel seems to be slipping through the cracks. Just a few years ago, it was the independent broker/dealer firms that were getting all the attention with their strong appeal to wirehouse advisors who were looking to work for themselves. The channel was attracting scores of wirehouse reps each year, and was easily the biggest in terms of number of reps. At present, only one of those two trends still stands: It still has the greatest number of reps of any channel, but growth has slowed. The number of wirehouse reps jumping to independent b/ds is less than 1,000 per year today. But just as many, or more, are leaving the channel each year for a small loss in overall headcount. The good news, though, is that today's independent b/d-affiliated advisor has better production numbers, more assets and an all-around larger practice.
According to Cerulli Associate's Quantitative Update 2007, there are 88,000 independent b/d reps today, down 5 percent from 2005, when there were almost 94,000 advisors. But most of that drop happened in the past year: Between 2005 and 2006 there was almost zero change — with a net loss of just 44 reps. (Cerulli notes that the number of dually registered reps, who are part of both the independent b/d and RIA channels, has increased.) That's big news for this sector of the industry. The immediate impact is not major, but Philip Palaveev, senior manager for Moss Adams, a Seattle-based accounting firm specializing in the financial-services industry, says in the long term this probably means that independent b/ds are not training people well, and that, he says, could turn into a crisis very quickly.
RECRUITING THE BEST HAS ITS HAZARDS
As you have already read in the pages of this magazine, the increased competition to get the biggest and best advisors is not limited to the wirehouse channel; the recruiting effort in the independent space is just as fierce. For the first time, these firms are offering upfront bonuses for valuable advisors. Though independent b/ds call their bonuses “transition assistance,” they're essentially offering the same thing: upfront money, if on a much less-generous scale. While a new Morgan Stanley rep can get upwards of 200 percent of trailing 12-month production, independent b/d reps can see a maximum 40-percent upfront bonus, with the biggest packages going to those at insurance-owned b/ds.
The push behind these bonuses in the independent world is tied directly to the race for top reps. An increasingly complex marketplace combined with an increasingly educated investing public is forcing firms to look for more experienced advisors. Hiring top advisors is the best route to increasing assets, winning bigger clients, generating better production and of course, reporting a nicer-looking bottom line. But the focus on experienced advisors means firms aren't developing new talent.“The problem is, what about the next generation of advisors?” asks Dennis Gallant, founder of Gallant Distribution Consulting (GDC), a boutique research and consulting firm to U.S. and international financial-service companies in Sherborn, Mass. “What happens to them? It's a challenge to balance [recruiting reps and developing new advisors].”
Indeed, it's the smallest, least productive reps, who are accounting for most of the decline in advisor headcount in the independent space, Palaveev says. According to a recent Moss Adams report, the typical independent b/d recruited 193 reps in 2006, and lost 211 for a net loss of 18 advisors. A further look reveals that of the 211 reps lost, the vast majority of them had production levels below $100,000. These individuals were probably not meeting production requirements, Palaveev says. Meanwhile, the robust training programs of the 1990s have long been in decline, increasing the gap between the numbers of older, more experienced advisors in the talent pool, compared with the numbers of younger newer advisors who might replace them when they retire. Gallant and other industry consultants say finding the next generation of advisors will be among the biggest challenges for independent firms.
In any case, figures showing thousands of new reps affiliating with independent b/ds each year is probably something of the past. Palaveev says the rapid growth in headcount the industry witnessed in recent years was primarily attributable to insurance b/d-affiliated advisors who were getting their Series 7 licenses, anyway. But the wirehouses — which used to be a major source of new recruits for the independent b/ds — are also doing a better job of retaining their employees with packages that include deferred compensation and upfront bonuses, says Gallant. “That's keeping some reps who would maybe have gone independent from leaving,” Gallant says. “If recruiting was easy, [independent b/ds] wouldn't have to be spending so much more to get reps to join,” he adds.
DOWN BUT NOT OUT
The number of reps in the channel may be down and slowing, but that doesn't mean independent b/d businesses are suffering. Actually, far from it. While they are losing lower-producing advisors, the firms are focusing their attention on better quality reps, and that's helped overall growth.
The average revenue per independent b/d grew to $110 million in 2006 from around $92 million in 2005, according to Moss Adams. Overall revenue for the entire independent channel reached $3.5 billion in 2006. Palaveev says that number has grown about 19 percent per year for several years. Meanwhile, average annualized production per rep, while nowhere near wirehouse levels, was up over 20 percent to $126,527 in 2006. Exclude insurance-owned b/d reps from the equation, and that average production number jumps to $157,000. Meanwhile, average assets under management per firm in the independent channel rose by about 40 percent to $1.7 billion in 2006 versus to $1.2 billion the year before. And from 2004 through 2006, average assets under management per independent rep increased by 70 percent to $104 million, according to Moss Adams. Advisors also took on more clients — averaging 340 in 2006, versus about 296 the prior year. These are encouraging numbers. “Independent b/ds are not the fastest growing channel, but I think they are experiencing healthy growth,” Palaveev says.
That's because many independent firms are thinking more in terms of quality rather than quantity. Take Woodbury Financial Services, an independent b/d in Woodbury, Minn., with about 1,700 reps. The firm's president, Walter White, says he is focused much less on increasing the rep count than increasing existing reps' production levels. “We don't want 5,000 advisors, we want better production,” he says. And so far he's getting just that. The average production of a Woodbury rep has increased threefold to about $145,000, and the firm expects it to quadruple in the next year.
How? White doesn't hesitate to point out that a rising market has done a lot of the work for advisors. But reps have also gotten better at winning new clients and getting a greater share of their wallets. Woodbury helps by offering programs to assist reps in developing marketing plans. The firm has 30 sales managers, and these employees have shifted their focus from full-time recruiting to running practice-management programs meant to help reps expand their businesses. Just this last summer, the firm also launched a top-producers group, where advisors with at least $500,000 in production meet to share best practices.
It's been a boon so far: White says 2007 was a great year because while the number of advisors at the firm declined versus 2006, total production revenue remained the same.
It's the same story at almost all of the large independent b/ds. Palaveev says the biggest firms — like LPL, Raymond James Financial Services, Commonwealth and Royal Alliance — continue to be very competitive and record profit margins in the double digits. The common thread between these and other large firms are their extensive practice-management programs for reps.
For example, LPL's business-development unit was launched in 2006 to help its branches improve and manage growth. The unit works with advisors to help them better understand the tools and services offered by the firm. The group also analyzes team revenues and expenses, and then benchmarks these against other similar practices.
Raymond James' program, Create Client Advocates, trains reps to get referrals from current clients. The program is run by six coaches who help advisors through a four-step program. The firm says production numbers for the reps in the program are almost triple those for reps who haven't participated.
Consultants say independent b/ds are looking to focus more of their energy inward by helping existing advisors build their businesses and increase production. The challenge will be to extend this training to newer, less experienced advisors. “What is alarming is not so much the number of people [leaving the independent b/d channel], but that independent broker/dealers have yet to establish a track record of being able to recruit and develop producers,” Palaveev says.