The brokerage business is good — or better, at least. The market is climbing slowly, firms are showing a profit and hiring again (albeit after massive layoffs), and, according to industry studies, affluent investors are in search of advice.
The bad news is that the mutual fund fiasco and impropriety at many firms have thrown the money industry into ill repute. Studies show that many affluent investors do not trust the integrity or knowledge of financial advisors. Regulators are constructing hurdles out of stacks of disclosure documents and threatening to trim broker paychecks by restricting or banning 12b-1 fees, revenue sharing and soft dollars.
It promises to get worse. The Senate Banking Committee recently heard from a panel of angry — and powerful — consumer advocates, including Barbara Roper, director of investor protection at the Consumer Federation of America. In her comments before the Committee, Roper highlighted the problem of brokers “representing themselves as advisors, when, in reality, they are salesmen,” pushing product.
Given this climate, this year's Outstanding Broker Awards are a refreshing reminder that there are still exceptional reps working in the industry. The nominees and winners of the 24th annual awards by and large belong to a class of reps likely to avoid the probing eye of regulators, because, simply, they have nothing to hide.
The 10 winners have years of experience building their practices, and they know what it takes to retain clients and how to push a practice through the rough spots.
With an average of nearly $300 million dollars in assets under management, the winners as a group place among the top 5 percent of the industry, according to Cerulli Associates, a Boston-based research firm.
The business models and backgrounds of each of the awards recipients vary widely. Some are wirehouse, born and bred; others are proud independents. Some favor financial planning and in-house investment management; others lean on third-party research and independent management. Some started their careers with the stated goal of becoming a financial advisor; others backed into the industry.
Whatever their specialties or unique histories, all have practices with one thing in common: clients who stick with them through thick and thin. The reason for this is simple. The clients trust these advisors.
“Good financial advisors share their insight and expertise with their clients, but truly outstanding brokers do more,” says James Donley, the president of Wachovia Securities' private client group. “In helping their clients achieve their financial and life aspirations with professional, objective advice, great brokers strengthen the bond of trust that is the underpinning of client relationships and indeed, professional success.”
One of the best ways to measure the trust placed in an advisor is by the number of referrals. A referral, after all, is a double vote of confidence: Not only do I trust this advisor enough to keep my money with him, I'm also comfortable recommending him to my friends.
According to a study done in December 2003 by the Spectrem Group, a Chicago-based consulting group, a rep's character might be the ultimate predictor of skill. In a Spectrem survey, 41 percent of ultra-high-net-worth investors said trustworthiness — not investment performance (19 percent) — was the most important factor in deciding whether to stay with an advisor or not. (Keep in mind, this survey came on the heels of three years of sustained market declines that caused untold number of portfolio implosions.)
With advisors struggling to provide value-added investment council in the bear market, other components of the relationship may have suffered, says Stephen Gresham, executive vice president of Phoenix Investment Partners' private client group. Gresham says advisor alpha — that unexpected value an advisor brings to an investor — has to be a balance between investment council, wealth advice and relationship value.
“If you can't prove your investment alpha, you better be trying to strengthen those other two legs of the stool,” says Gresham.
Unfortunately, brokers are fighting an uphill battle. Stories of heroic, altruistic brokers, while they exist, simply don't make the front pages of newspapers and magazines (except this one, of course). While most brokers run ethical, client-focused businesses, the industry's conflicts of interest (directed brokerage, soft dollars, investment suitability) and its failings (missed breakpoints) have created a crisis of the very thing that investors value most: trust.
According to Golin/Harris, an international public relations firm, trust develops gradually, so the results of the firm's 2002 Trust Survey mean the brokerage industry has some work to do.
Using a random sample of 700 Americans, Golin/Harris compiled a “trust score” for 24 different industries. The Brokerage/Wall Street category ranked 21st — third from the bottom on the trust scale and a very long way from the average score. By contrast, banks received a trust score nearly 10 times higher, and three times better than the average. The oil business and insurance industries rated only slightly worse than Brokerage/Wall Street.
Fortunately, firms seem to be aware of the problem, and are taking steps to rectify it.
Bob Sabelhaus, director of Legg Mason's private client group, agrees with the findings in these studies for one reason — he did his own and found similar results. As director of the firm's elite group of rainmakers, he knows the importance of trust, especially when it comes to the wealthiest clients, who don't need to see a pointed dorsal fin to know when sharks are circling.
In order to improve client service and relationships among its big producers, Legg Mason — which recently won JD Power and Associates award for client satisfaction — hired a consultant last September to determine what million-dollar clients desired most in an advisor.
“Overwhelmingly,” says Sabelhaus, “the response was ‘I just want to find someone I can trust.’”
If an advisor can earn a client's trust, he or she will earn their assets, and perhaps their friend's assets too. When asked how they wanted to be introduced to an advisor, respondents said “Through a satisfied client,” echoing other studies' findings.
So what can brokers do to earn a client's trust? Doug Schultz, an RIA, former stockbroker and co-author of the book Brokerage Fraud (Dearborn Trade Publishing, 2001) says brokers who want to establish trust must walk the walk.
“Because the honest broker is going to say the same things to prospective clients as the dishonest broker, his actions have to differentiate him,” he says. “Simple as that.”
Schultz says brokers have to make sure investments are suitable, while resisting easy compensation kickers.
“Class B shares are a good example. And flat-fee equity accounts — if a client doesn't trade often, they simply shouldn't be in this type of account,” says Schultz. “You might make less money following this model, but you'll be building a business of clients that will stick with you if you leave, bring you more money and introduce you to their friends. Trust is the building block.”
From there, say industry experts, the business that is built on top of that trust is easier to grow if it has a narrowly focused clientele.
The top brokers generally carve out a specialty born of comfort. Ted Ridlehuber of Cannon Financial Institute in Athens, Ga., says, “The most common reason for not effectively building a business is a lack of niches.”
But developing one isn't a walk in the park. “It's easier to teach investment management than it is to build niches,” says Ridlehuber.
But any niche can be profitable if you plug away at it — even one made up of nonprofits.
Outstanding Broker Michael Hull, a Smith Barney rep, has fashioned a thriving managed account business in Madison, Wis., out of charitable institutions and religious based nonprofit organizations. The private-client culture of stocks and bonds didn't gel with Hull when he came to Smith Barney's Madison, Wis. office in 1995, so he took his mathematical and medical background, combined them with his affinity for health care and charity, and picked up the phone.
“When I came there was no natural market for me,” he says. “I knew a couple of doctors, but I mainly had to just start dialing.”
He set to work contacting organizations and offering to review mission statements and spending objectives. While most of his clients are local, their programs reach across the nation.
His clients are unique not only because of their abundance of goodwill. “They have to spend everything they make each year,” he says.
For a lot of people, not just brokers, matching Hull's contributions to community within the setting of work is a tall order.
And that's fine, says Dennis Ceru, director of retail brokerage and investing at TowerGroup. When clients walk in the door they're primarily looking for something much simpler. “They want honest answers to complicated wealth questions they can't get their arms around,” he says.
They're vulnerable, so they want what he calls the “peace-of-mind quotient”: Goal-oriented advice, such as “How can I finance my children's education?” and a step-by-step plan of how you're going to get them there.
Scoring a Goal
“Getting them there” is a huge part of what makes a broker outstanding. Put another way, there aren't any brokers out there achieving wild success by just being really trustworthy.
According to the Spectrem Group's survey, few ultra-high-net-worth investors believe in their brokers' investment skills. Among those who reported not using a financial advisor at all, 41 percent said the biggest reason was they felt “more knowledgeable than an advisor.”
Still, if this doubtful segment can be converted, the industry could really make a killing. According to Smith Barney's 2003 Affluent Investor Survey, 51 percent of the affluent do not have a financial advisor, even though 80 percent have brokerage accounts. And though 80 percent of investors lost money over the past three years, 25 percent are in search of more advice — a sentiment most strongly exhibited at full-service brokerages according to the study.
Unfortunately, other numbers in the study are less buoying. For instance, even though 50 percent of respondents said they didn't have an advisor, 49 percent of those felt they didn't need one. Another 41 percent were under the impression that “advisors just recommend what they get paid to recommend.”
This all suggests that building out your value is the first step to achieving that balanced alpha. One increasingly common way for brokers to optimize their value quotient is by creating a team, says Sabelhaus.
“Running millions of dollars effectively isn't a job for one person if you're trying to provide the highest level of service to a client,” he says.
Dick Gottfred of William Blair & Co., and an Outstanding Broker Awards winner, would agree. He hired his daughter Lindsey in 1999 to help handle the workload he'd inherited when Blair chose him to temporarily manage their high-net-worth private investor group.
Gottfred said getting the group firing on all cylinders and truly working as a team took a couple years. “It's like a marriage; you go slowly and work out the kinks as they appear,” he says. “Walk before you run.”
Gottfred says a majority of his clients are of the long-term, growth-oriented variety, but some occasionally demand short-term performance. The diversity doesn't bother him at all.
“We urge our customers to call whenever they want — that's the nature of the business,” he says. “You have to make people comfortable. After all, it's their money.”