In Praise of Pruning

Mark Little, a San Antonio-based broker gave away 99 percent of his clients. And that, he says, is the best thing he has ever done to boost his income.

Mark Little, a San Antonio-based broker gave away 99 percent of his clients. And that, he says, is the best thing he has ever done to boost his income.

Giving up nearly all of your practice might sound like a less-than-ideal career move. But for Little, less has became much, much more, because the few clients he held onto were the basis of a true wealth management practice. And, as Registered Rep.'s annual compensation report shows, more than ever it is wealth managers who are scoring the big income gains. While generalist reps, with primarily transaction-based practices, saw their income rise 14 percent last year, advisors with fee-based, multidisciplinary practices and high-net-worth clients saw a whopping 44 percent jump in income.

Before his drastic overhaul, Little had the kind of practice that didn't do well by the clients and was hell on the advisor. “I had 1,242 clients — way more than I could meet with consistently and truly take care of,” he recalls. That was 1999 and he was top producer for his broker/dealer, Main Street Management, based in Wallingford, Conn. (The firm has since closed.) His production of $388,000 provided a good living, but Little was fed up. He was working six-day weeks to manage hundreds of dinky accounts that generated few commissions. “I had a lot of clients with 15-year-old $50,000 IRAs and that was it,” he says.

Managing Aggressively

Little knew what he wanted — a wealth advisory practice. To get it, he called on advisor coach Bill Bachrach and his firm, Bachrach & Associates, who mapped out his transition from registered rep to registered investment advisor. They looked at what kind of recurring revenue it would take to maintain his lifestyle, run the business and fund his long-term goals. Then they created a profile of the ideal client to support that practice. From his roster of 1,242 accounts he identified 17 keepers — clients with a net worth of more than $1 million.

Then, he went to work converting those 17 accounts to fee-based. “I wrote a letter. It was an invitation to a seminar explaining briefly what I was doing with the business, but it essentially said, ‘If you'd like to keep working with our firm you'll have to attend,’ ” recalls Little. “That was very scary…but I needed to find out if they really wanted to be my clients.”

Five years later, Little's RIA practice, Wall Street Services, has 91 accounts. For an annual fee that ranges between .75 percent and 1.2 percent of assets under management, Little and his team manage investments, provide financial planning and lavish all sorts of attention on the firm's clientele. “I helped many of my clients refinance their mortgages as interest rates were dropping; I even helped them buy cars,” he says. And it really paid off: Little's gross production last year broke $1 million; nearly triple his level in 1999.

That puts Little in the top tier of financial advisors. “Everyone wants to be in this space,” says Russ Alan Prince, president of Prince & Associates, a financial services consulting firm in Shelton, Conn., which conducted the Registered Rep. compensation survey. “Wealth managers make the most money by far,” he says, and the gap is growing. He says advisors that shift their focus from investment generalist to wealth manager can expect an income increase of 35 percent in the first year.

Buzzword City

These days, the term wealth management is used with reckless abandon. Prince, however, defines a wealth manager as someone providing brokerage and fee-based investment management and financial planning in a consultative manner, and who provides at least two distinct services to at least half of his or her clients. Those services include offering a broad array of investment products, planning services (estate planning, retirement planning, asset-protection planning, etc.), trust services, insurance and credit.

According to the survey, the average production of wealth managers in 2004 was $980,000, a 44-percent increase over 2003. Part of this jump can be explained as the aftereffects of the success of 2003, a year during which the S&P 500 and the DJIA advanced 26.4 percent and 25.3 percent, respectively. That performance attracted more money to the market, especially from wealthy clients, in 2004, even though the market faltered in the second half. “The momentum of the 2003 market carried a lot of money into accounts in 2004, with a lot of investors thinking the bull market was back,” says Prince. “What this illustrates is an income lag tied to the market.” That lag, he notes, may work against brokers in 2005, because new money is no longer flooding in.

Specialists recorded the biggest percentage gain in compensation during 2004. Prince defines a specialist as someone focused exclusively on an investment-oriented product niche, like managed accounts, municipal bonds or closed-end funds. They saw average production soar by 59.4 percent, to $510,000. “If the product is hot, they're hot,” says Prince of specialists. Derivative specialists and IRA rollover specialists in particular fared very well in 2004. The average production for investment generalists was $490,000, a 14-percent increase — up from 3 percent in 2003, he says.

Big Firms, Big Checks

Another clear pattern in the data: the bigger the firm, the bigger the paycheck. Advisors at the five big wirehouses (Merrill, Morgan Stanley, Salomon Smith Barney, UBS and Wachovia) experienced the largest increases in both assets and production: Average assets for reps at these firms increased from $62 million in 2003 to $74 million last year, while production jumped 28 percent from $530,000 in 2003 to $680,000.

Average assets for regional reps, meanwhile, increased from $53 million to $59 million, and production increased 16 percent from $440,000 in 2003 to $510,000 in 2004. Lastly, despite the smallest gains in assets — from $34 million to $36 million — the growing independent channel saw production increase 24 percent, from $290,000 in 2003 to $360,000 in 2004.

Prince & Associates also surveyed financial advisors about their attitudes toward the business and found that fee-based advisors are less nervous about the markets and their business than those who rely more on transactions. Of the survey respondents, 86 percent of generalists and 70 percent of specialists said market direction was a concern, but only 10 percent of wealth managers said it was. Wealth managers, according to the survey group, have 70 percent of assets under management in fee-based arrangements. Generalists said they had about 50 percent; specialists said 40 percent.

According to Boston-based researcher Cerulli Associates, the proportion of advisors deriving more than half of their revenue from fees increased from 30 percent in 2002 to 43 percent in 2004.

“All the wirehouses are pushing [wealth management], trying to get advisors to be a bigger part of the client's whole financial story,” says Nick Ferber, a recruiter with Sanford Barrows in Fort Lauderdale, Fla. Smaller brokers and independents are in on the hunt as well. Bill Dwyer, head of branch development for LPL, says the firm has recently launched a nationwide training program to address issues of intergenerational wealth management. Additionally, the firm has its own trust, insurance and mortgage companies under its umbrella to round out its wealth management offerings for advisors. Says Dwyer: “If a client has to go somewhere else for something they might not come back.”

Important But Small

For all the buzz about wealth management, however, it is still a small slice of the business. According to Prince, “very, very few of those that say they do wealth management actually do.” According to the survey, of the respondents, only 8 percent qualify for the label. Most (79 percent) were generalists, and 12 percent were specialists.

But there is still plenty of opportunity. There are more than 670,000 families in the U.S. with a net worth of more than $10 million who want a relationship with an advisor, not just someone to steward an account, according to Prince.

So why aren't there more wealth managers? For starters, it's a more challenging role. To cultivate a wealthy clientele, you have to have greater expertise. You must be able to help clients on a range of issues that go beyond investing and planning. Take Gary Rathbun for example, owner of Private Wealth Consultants, a Toledo, Ohio-based wealth manager. He calls himself the personal CFO for his 65 clients. “I back-office almost everything — from portfolio management and insurance to estate planning — but I also oversee it all. I'm the client's advocate on everything,” he says. That means when his best client calls him at 9:30 on a Thursday night saying she isn't happy with her security detail and wants it changed, but also needs a new one by that night, he makes it happen. “I essentially have one answer for everything client related — ‘I'll take care of it.’”

And for that high-touch involvement he collects a premium — for new clients, his minimum net worth is $15 million. Rathbun charges clients an annual asset-management fee of between 30 basis points and 100 basis points, which doesn't include monthly fees for other services, such as hiring and firing personal staff (drivers, bodyguards, attorneys, trust officers), purchasing artwork and buying and selling real estate. For his wealthiest clients he'll have more than 75 meetings a year, but every client is guaranteed at least 17.

As Little discovered, the secret to building a wealth management practice is to be selective and attentive. According to the survey, the average number of clients for a wealth manager is 80, as opposed to 210 for specialists and 330 for generalists. These clients expect attention, which means the advisor needs support from his staff and/or firm when he's out tending to his flock. And getting the clients is only the beginning. With big money comes big egos and big expectations. “It's a lot more demanding. You're not just putting the client's money in an ETF,” says Commonwealth Financial CEO Joe Deitch.

Head Games

Indeed, says Bachrach, whose San Diego-based firm helped Mark Little, the biggest hurdle to becoming a wealth manager is psychological. Advisors, he says, have trouble getting their minds around the idea of jettisoning unprofitable clients. “They refuse to accept how easy it is for the clients to find another advisor,” he says. “But if it's handled properly, most departing clients say, ‘OK, great, good luck.’” Similarly, Bachrach says, advisors hold themselves back when they don't have the confidence to demand high minimums for their new wealth management practices.

There are, to be sure, legitimate reasons to fear the leap to a fee-based wealth management practice. Chief among them: How will I make a living during the transition? Perhaps advisors can learn from Little — he didn't lose a dime of production during his transition. Before trimming a single client he ranked them by how much revenue they brought in each year. For every new ideal client he added, he calculated how many he could lose from the bottom of the list.

Then there's the awkward moment when you tell a client that upfront you need him to pay an annual fee — in Little's case, the minimum was $9,000 (now it's $11,000). “I basically considered what I would have to do to answer a client who looked me in the eye and said, ‘OK, what will I get for that money?’” He knew that a vague promise of “holistic” financial services would not cut it. So, he developed what he calls his Ten Deliverables — essentially a run through of 10 major items/services he would bring to each client. According to the Prince survey, the most commonly cited concerns of wealth managers are about the ability to deliver the services they promise. In the survey, they cited “obtaining firm resources” (81 percent) and “delivering advisory services” (90 percent) as their top worries.

Friends in the Business

Wealth managers have good reason to worry about whether their firms will have the resources they need to support their practices. A successful wealth manager needs to have at least five strategic relationships — two private client attorneys, two CPAs and some kind of insurance expert and/or a liquidity specialist, says Jeffrey Roush, principal with CEG Worldwide. Roush says the development of these relationships is crucial to the growth of the business, because it improves your base of knowledge and while also becoming a source of referrals.

If you're on your own, you have to build those key relationships. Rathbun remembers politely hounding a well-respected veteran wealth manager for a meeting. When they met for coffee, he didn't waste any time getting to the point. “I said, ‘I want access to you, your ideas, your cases, and I expect to pay you through the nose for it.’” The arrangement ended up with Rathbun getting a 50/50 cut of whatever new business he generated. Looking back on the experience he gained, Rathbun says he would have gladly paid 80 percent.

One important lesson: Wealthy clients hear pitches for their business a lot, so cultivating customized approaches for every client is important. Using an idea given to him by a tax guru — who has since set up an exclusive relationship with him — he pitched an idea to a very wealthy prospect. “He had $175 million coming to him over the next five years, and I showed how we could spread that taxable income across 20 years, using a very old, little known tax loophole — Rathbun definitely hadn't seen that.” He provided a solution, says Prince, something of value in an increasingly commoditized business: “Nobody else is saying they can solve your problem.” he says. “That's what wealth managers do.”

Business Models

Wealth Manager: Providing brokerage, fee-based investment management and financial planning in a consultative manner.

Investment Generalist: Providing a wide range of investment options.

Product Specialist: Focused exclusively on an investment-oriented product niche such as managed accounts, concentrated stock options, municipal bonds or closed-end funds.

Key Figures for the Largest Full-Service Broker/Dealers

Number of Reps Client Assets (billions) 2003-2004 % Increase in Client Assets Asset per Rep (millions) Managed Account Marketshare*
Merrill Lynch 14,100 $1,342 6.3% $96.38 20.8%
Smith Barney 12,138 978 7.2 80.57 20.1
Morgan Stanley 10,962 602 6.5 55 10.2
Edward Jones 9,548 357 17 37.39 n/a
Wachovia Sec. 7,883 652 8.1 82.70 6.7
UBS Securities 7,519 592 15.85 78.73 8.3
A.G. Edwards 6,890 319 6.3 46.29 n/a
LPL 6,000 100 18 16.66 2.4
Raymond James 4,670 111 15.62 23.76 n/a
*Source: Cerulli Associates 4Q 2004
*The term “Managed Accounts” includes the following programs: separate accounts, mutual fund advisory, rep as portfolio manager, fee-based brokerage, and unified managed accounts.

Methodology: In March 2005, Prince & Associates interviewed 1,077 financial advisors selected from Registered Rep.'s subscriber rolls. Each respondent had five years or more experience and all had no plans of leaving the business. When measured against the number of “active” advisors (250,000), the survey has a 95-percent confidence interval, plus or minus 3 percent.

Different Strokes for Different Folks

Top Concerns for advisors by differing business models.

Generalists worry the most. Wealth managers worry the least and get hassled less…

What are you most concerned about?

Percentage of reps answering “yes.”

Wealth Manager Investment Generalist Product Specialist
Competition for Clients 52.7% 94.1 92.5
Obtaining Firm Resources 81.3 85.4 61.9
Market Direction 9.9 86.2 70.1
Increased Fee Pressure 17.6 77.2 39.6
Delivering Advisory Services 90.1 78.2 0.7
Losing Important Clients 8.8 63.1 49.3
Clients Suing Because of “Bad” Advice 2.2 44.7 23.1
Managing Growth of the Practice 61.5 62.2 13.4
Source: Prince & Assoc., March 2005, 1,077 advisors surveyed.

Calling the Help Desk

Desired technical support for advisors, based on differing business models.

…but wealth managers need more support.

What kind of support do you want most?

Percentage of reps answering “yes” to various needs.

Wealth Manager Investment Generalist Product Specialist
Advanced Product Training 85.7 83.8 47.8
Investment Management Proposals 62.6 82.4 20.9
Concentrated Positions/Restricted Stock Positions 78.0 68.4 27.6
Estate Planning 83.5 70.5 6.7
Retirement Distribution Planning 48.4 51.3 4.5
Charitable Giving/Philanthropic Planning 75.8 58.6 9.7
Retirement Planning 40.7 49.3 12.7
Deferred Compensation 36.3 37.6 0.0
Asset Protection Planning 79.1 65.4 9.7
Tax Planning 60.4 12.4 15.7
Source: Prince & Assoc., March 2005, 1,077 advisors surveyed.

Smith Barney Payout Grid

Production Range Payout (%)
<5 years <9 years >9 years
0-124,999 33.25 25 25
125,000-149,999 33.25 27 26
150,000-174,999 34.25 32 30
175,000-199,999 36.25 34 32
200,000-249,999 37.75 35.5 34.5
250,000-299,999 38.75 37.5 36
300,000-349,999 39.25 39.25 38.25
350,000-399,999 39.5 39.5 38.5
400,000-499,999 40 40 40
500,000-749,999 41 41 41
750,000-999,999 41.5 41.5 41.5
1,000,000- 43 43 43
Payout does not account for bonuses or other awards.

Merrill Lynch Payout Grid

Production Range Transaction-Based Payout (%) Annuitized Payout (%)
0-199,999 32-35 38
200,000-399,999 32-37 40
400,000-599,999 33-38 41
600,000-799,999 34-39 42
800,000-999,999 35-40 43
1 mill.-1.249 mill. 36-41 44
1.25 mil.-1.749 mill. 37-42 45
1.75 mill.-2.499 mill. 38-43 45
2.5 mill.-4.999 mill. 39-44 45
5.0 mill.-over 40-45 45
Payout for transactions varies depending on ticket size.
Payout does not account for bonuses or other awards.

Morgan Stanley Payout Grid

Production Range Transaction-Based Payout (%) Annuitized Payout (%)
0-150,000 30 (< 8 years exp.) 33
0-200,000 25 (> 8 years exp.) 25
150,000-199,999 32 35
200,000-249,999 33 36
250,000-299,999 34 37
300,000-349,999 35 38
350,000-399,999 36 39
400,000-599,999 37 40
600,000-799,999 38 41
800,000-899,000 39 41
900,000-999,999 40 41
1,000,000-over 40 42
Payout does not account for bonuses or other awards.

Who's Got the Most?

Wirehouse FAs outproduce advisors at smaller firms.

Firm Type Average Production Average Assets Under Management Average Fee-Based Assets Average Number of Clients
Wirehouses: $680,000 $74 million $31 million 320
Regionals: $510,000 $59 million $21 million 270
Independents: $360,000 $36 million $11 million 280
Source: Prince & Assoc., March 2005, 1,077 advisors surveyed.

Which Model is Best?

The wealth manager model vastly out-produces the others, even with fewer clients.

Business Model Average Production Production Increase from Prior year Average AUM Avg. Fee-Based Assets Number of Clients
Wealth Manager: $980,000 44.1% $103 million $71million 80
Investment Generalist: $490,000 14.0% $60 million $26 million 330
Product Specialist: $510,000 59.4% $21 million $8 million 210
Source: Prince & Assoc., March 2005, 1,077 advisors surveyed.

UBS Payout Grid

Production Range Transaction-Based Payout (%)
0-68,749 28
68,750-74,999 29
75,000-82,499 30
82,500-89,999 31
90,000-98,999 32
99,000-137,499 33
137,500-149,999 34
150,000-164,999 35
165,000-191,999 36
192,000-199,999 37
200,000-219,000 38
220,000-411,000 39
412,000-499,999 40
500,000-549,999 41
550,000-686,999 42
687- 43
Reps get 4% more zfor wrap/managed account business.
Payout doesn't account for bonuses or other awards.

LPL Payout Grid

Production Range Transaction-Based Payout (%)
0-34,999 0%
35,000-99,999 77.5
100,000-149,999 79
150,000-249,999 80.5
250,000-499,999 82
500,000- 83
For packaged products:
100,000-249,000 91%
250,000-and up 92

Wachovia Payout Grid

Production Payout (%)
First 9,000 per month 20%
Over 9,000 per month 50
Payout does not account for bonuses or other awards.
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