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The Problem With Success

Independent b/ds, with razor-thin operating margins, need to grow to remain profitable. Yet they must also maintain that small company feel. NEXT Financial Group walks the razor’s edge.


Okay, that may be overstating it a bit. But consider how a co-founder, Gordon D'Angelo, says he was inspired to help launch the Houston-based independent broker/dealer in 1998: by mulling over the business proposition in prayer.

At a company conference for Advantage Capital (now an operating unit of AIG and a member of the AIG advisor group), where he worked as a registered rep., D'Angelo was approached by four other Advantage reps. Tired of their company being bought and sold — about six times in a roughly 12-year period, he says — these four Advantage reps were looking for another b/d and asked him for advice. They knew he had been involved with the development of Jackson Hewitt Tax Services, now a publicly traded company with $280 million in revenue.

His answer was this: “Wherever you go, you cannot predict the destiny of that firm. The only way to control your own destiny is to start your own firm,” D'Angelo recalls. The four Advantage reps thought about that, then came back to him and asked him to start the company, he says.

At first he didn't want to do it, but then he felt he had to. “When I was praying about it, I was hoping to get a no, and I got a yes,” he says. “And I prayed about it again, and I got another yes — ‘Start the company.’ And the message was, ‘Give the company to the financial professionals.’ So I told the guys, ‘Listen, I am going to do it. I am going to work my tail off and start it.’”

And, so, with that, D'Angelo and his four colleagues put up $1 million, and launched Next as an independent b/d that would be owned by the affiliated reps. That was 1999. Today Next is a fast-growing indie b/d, and at year-end 2007, it had 882 independent-contractor advisors and 110 home-office employees. D'Angelo, the chairman and CEO of the parent holding company — and one of the more colorful b/d executives you'll find anywhere — says the firm has doubled its gross dealer concessions ($114 million in 2007) in two years.


But now, D'Angelo, who resides in Virginia Beach, has a high-class problem on his hands: how to handle such rapid growth. Quite simply: “Growth is the enemy to [entrepreneurial] culture — that is true of any growing company,” he says. And entrepreneurial culture is what independent broker/dealers are all about. Lately, some Next reps have been complaining.

Specifically, reps gripe that the quality of service from the home office has declined, that the firm is overly focused on growth to the detriment of reps, and that the family feeling of the place has faded. “There was just a climate of client enthusiasm, and I think a little of that glow has dimmed,” says one rep who has been with Next for six years. He no longer feels like Next is focused on its core business: its reps. After all, he says, Next was created to serve a bunch of entrepreneurs — reps who pulled together to lower costs, but who ran their businesses independently. He complains, for example, that phone calls to the home office are not always readily returned, making it harder for him to get things accomplished. “I think the home office does not necessarily grasp the idea that they're in business because there are some 700 reps in the field bringing money in, who need to have processes,” this rep says. Other reps echo his complaints.

It's up to D'Angelo to assuage the growing pains associated with building a profitable b/d. With his straight-shooting intensity, he may well be up to the task — he has to be.


Of course, Next is not the only independent b/d that has run into this problem. The aim of running any company is making it grow, and that is especially true in the independent b/d business. Because margins are razor thin (single digits), payouts high (generally 80 to 90 percent), and regulatory and technology costs soaring, scale is required to make a profit. And herein lies the paradox for firms like Next: They need to grow to maintain profitability, but they want to retain the “feel” of a small, entrepreneurial company to keep reps and clients happy.

“All independent broker/dealers walk this path of starting as a relatively small privately-owned organization, that has the family look and feel, and tends to focus on the customer, where everybody knows everybody else,” says Philip Palaveev, president of Fusion Advisor Network, a practice management consulting firm and network of independent advisors. “But as the firm grows, it is transformed into a sort of second generation organization with more than 100 employees. This is not a negative change, but it is a cultural transformation that is necessary. Broker/dealers like LPL and Commonwealth walked this path and went through this transformation in the late 1990s and the same may be happening to Next as it grows.”

Erik Schwartz, CEO and founder of Cambridge Investment Research in Fairfield, Iowa, can commiserate. Cambridge has grown from $500,000 in revenues in 1981 to about $250 million in revenue in 2007. “There has always been a concern in the industry: If you have 10,000 reps, how do you maintain a tight feeling and so forth?” asks Schwartz. “There was a time, 15 years ago, when a 1,000-rep b/d seemed very large. Reps can tolerate service going down from time to time, but if they think you're putting your [the b/d's] growth and profits above the quality of service, they think you're not really treating them as a top customer anymore.”


To regulate the growth and keep Next's affiliated advisors happy, D'Angelo is trying to start another b/d, “So we can give reps the service they deserve and supervise it appropriately as well,” he says. The idea is to keep the small-firm culture intact, but take advantage of scale by spreading management across multiple firms. D'Angelo says the firm has filed the applications and is waiting for approval from the Financial Industry Regulatory Authority (FINRA) to open the new b/d some time this year. The new b/d will clear through National Financial Services, Fidelity's independent clearing firm, to offer reps an additional clearing option. (Next currently clears through Pershing, an affiliate of the Bank of New York Mellon.) Next Financial Holdings, the parent company of Next Financial Group, already includes four other subsidiaries, including a marketing company and a succession-planning/M&A company.

Still, D'Angelo emphasizes that discontent at Next may not be as bad as some reps make it sound. Retention at Next remains high, for example, he says, without providing a specific figure. In fact, the firm tries to design career paths for all its employees in order to increase their longevity and help keep the firm's culture intact. What's more, the firm's service professional-to-rep-ratio is very high. “We try to keep our ratio of employees to representatives in the field force at a nine to one ratio, which is very good attention,” he says. And Next recently expanded the home office, spending $1 million to add another 20,000 square feet, so that the home office could remain in its original location.

D'Angelo also spends a good chunk of time in the field, visiting Next branches for “connection meetings” with OSJs and reps where they discuss marketing and growth. He currently holds about two “connections” meetings a month, but plans to kick that up to eight eventually. Good communication with management, he feels, should help to address reps concerns. “If there is any issue that the rep has, the rep can email the chairman,” he says. “Even if it is a Saturday or Sunday they get an answer immediately and they know this, and not only do they know this, the department heads know it … we get to the problem as quickly as we hear it exists.”

The main objective of growing the business, D'Angelo says, is to find ways to give back to the reps and provide them a voice in the direction of the firm. “Connection to the company was always our belief from the beginning,” he says. In fact, 85 percent of the company's shareholders are reps or employees, with no single rep owning more than a 10 percent share in the company. In addition the firm is governed by a board of directors made up of nine OSJs of the 10 directors.

Indeed, D'Angelo shows no signs of slowing the firm's growth. He projects that the Next empire will generate up to a billion dollars in GDC over the next 10 years, which would be divided among three to four b/ds. “You have to think for the long term,” he says. “For our future we hope we add more benefits for our reps, valuing their practice, succession planning, helping them buy new practices, build their businesses … if we help our people grow that helps us grow and that is what I see; it is a long term vision — not an overnight vision.”

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