The total population of financial advisors in the United States is declining, and fewer reps are joining independent broker/dealers. What's an indie b/d to do?
In the case of many of the larger indie b/ds, the answer is: upgrade their ranks with veteran recruits or help the reps they have become more productive. “With recruiting wins scarce recently, top IBDs have to find a way to get bigger books or get more out of their existing advisors,” says Tyler Cloherty, an analyst with Cerulli Associates. “And they have the resources to accomplish it.” To that end, they're doing everything from investing in new technology to increasing payouts and offering advisors the ability to form their own RIAs.
So far, it seems to be working. Such indie b/ds as LPL Financial, Raymond James Financial Services, and Commonwealth Financial Network, have notched solid increases in revenues and assets. That's true even as, in some cases, the ranks of their reps have been down or flat.
Certainly, recruiting wins have been hard to come by. The total number of reps at independent b/ds was 102,689 in 2004; that decreased to 97,792 in 2010, according to Cerulli Associates. And it's projected to drop to 97,473 by 2012. When you factor dually registered reps into the equation, the numbers look a little better — 107,400 in 2004 compared to 110,565 in 2010 and projected to grow to 112,046 next year, according to Cerulli — but the IBDs are by no means on a major growth trajectory. For every five reps recruited by the average independent b/d in 2010, another six on average were lost, according to a study by FA Insight for the Financial Services Institute. What's more, the total number of producing advisors fell at a six-year compound annual growth rate of 0.9 percent, according to Cerulli, and it's not likely to pick up appreciably.
It's not surprising, then, that a number of top IBDs say they're interested only in higher producing reps and, in fact, have been shedding their ranks of underperformers. “Over the past few years, we've asked a number of folks to find a home elsewhere,” says Bill Van Law, national director of business development for Raymond James Financial Services. According to Andrew Daniels, managing principal of field development at Commonwealth, the firm turns down about 65 percent of prospective advisors; its minimum annual revenue requirement is $250,000, up from $100,000 in 2005. “We're looking to grow the firm with a select few high-end producers,” says Daniels, who expects to add about 100 advisors this year. Year-to-date, the average production of new advisors joining Commonwealth has increased 25 percent to $352,000.
The name of the game is scale — having the resources to offer both the services and technology likely to appeal to advisors, especially those with bigger books. “A more sophisticated rep with greater complexity of clients and services can really benefit from a good technology platform or other services,” says Dan Inveen, a principal and research director at FA Insight. Industry leader LPL, which had 11,876 advisors and $297.3 billion in assets in 2010, according to Cerulli, for example, has the wherewithal to employ a 45-person business development team that recruits new advisors, a 40-person business consulting group that helps with practice management ,and a 28-person advisory and brokerage consulting office that offers advice about investments. Advisors with more than $450,000 in revenues also get a “relationship manager” who helps with practice management questions. Commonwealth, for its part, is completing a four-year project to overhaul its performance reporting system.
Nathan Parkhurst, part of a three-person team of former UBS brokers, left the wirehouse about three months ago, lured by Commonwealth's technology and back office support. “We thought about moving to another wirehouse, but that seemed like going from the frying pan into the fire,” says Parkhurst, whose Knoxville, Tenn.-based firm, Cumberland Wealth Management, has about $150 million in assets. “This way, we have the technology and resources to serve our clients.”
Cetera Financial Group is focusing its scale to increase the productivity of existing advisors. Formed about 18 months ago when private equity firm Lightyear bought ING Advisors from ING Groep NV, Cetera says it can provide reps at its three b/ds, Financial Network, Multi-Financial and PrimeVest, resources that no single firm could have. “Each b/d appeals to a different market, but the firm offers economies of scale by creating centralized compliance and technology,” says Cloherty. In addition, Cetera has invested in improved technology and practice management education and advice aimed at helping its advisors gather more assets. “We've ramped up our investment three or four times in this area,” says Barnaby Grist, executive vice president, wealth management. That includes everything from new data aggregation software with which reps can build better financial plans to three-day long courses in how to boost growth. Over the past year, while the number of advisors has grown 2 percent, to 4,841, assets have increased 18 percent.
As you'd expect, a common response has been to raise payouts, cut selected fees, and offer other financial incentives. For example, in April, Commonwealth raised fee-based payouts to as high as 98 percent for advisors managing $500 million in assets or more, up from 95 percent, and cut ticket charges by 50 percent. According to Van Law, Raymond James recently instituted a deferred bonus plan through which it pays 2 percent to 10 percent of production, starting at $450,000 in revenues. And earlier this year Ameriprise announced it was giving its 7,000 franchise advisors a 100 percent payout for new clients with assets of more than $100,000 for the first year of the relationship; next year, the percent will be lowered to 95 percent. The number of such clients has increased over 20 percent since the policy was put in place, according to Donald Froude, president of the personal advisor group.
While LPL is targeting wirehouse and bank breakaways as well as existing independents for recruiting, other competitors are squarely setting their sights on breakaways. That's one reason, for example, that Raymond James started revving up its transition services two years ago, looking to offer more hand-holding to reps going independent for the first time. “We are focused on serving the higher-end advisor at the wirehouses and the more complex needs of their clients,” says Van Law. There's a team of 35 employees focused only on helping advisors make the transition; the firm also added a business consultant who offers advice on staffing, insurance, and the other typical issues faced by reps learning how to head their own operation. The firm also is starting to offer products attractive to breakaways, like non-purpose loans aimed at areas other than investments.
Thanks to these efforts, Raymond James has increased revenues and assets, despite a slight decline in head count. Average assets per rep increased from $38.2 million in 2009 to $44 million in 2010. The number of million-dollar producers grew from 84 in 2006 to 135 in 2011 and firm revenues increased to $1 billion in 2010 from $834.8 million the year before, according to Van Law.
There's also a big push to tap growing interest among advisors in running their own separate RIAs, rather than operating under the b/d's corporate RIA. Raymond James started allowing its reps to do that 20 years ago. In 2008, LPL rolled out its own platform. Now, other b/ds are investing in technology allowing the firm to provide custody services in-house and, in some cases, expanding the number of recruiters to attract hybrids. Cetera, for example, has doubled the number of recruiters working in this area and “invested heavily” to develop a platform allowing multiple custodians, according to Grist.
At the same time, there are some smaller b/ds that are making stabs at creative recruiting. Take Sigma Financial. About two years ago, the Ann Arbor, Mich.-based firm, with 650 reps, started to tweak its usual model, through which advisors set up and run their own offices. To that end, partnering with Upstream Investment Partners, a new advisory network, it opened up branches offering a variety of services that would appeal to former wirehouse employees. “With these branches, they can take care of their clients and know their branch manager is taking care of everything else,” says Jennifer Bacarella, director of firm development. Sigma now has eight branches with about 40 reps in Michigan, Texas and Illinois.
That's partly why Dennis Marrs, an East Lansing, Mich., rep with $50 million in assets, left Morgan Stanley in November 2010, to become an independent and sign on with Sigma. “One of my biggest fears about leaving a wirehouse was how do I do everything all by myself,” he says. “Now I don't have to worry about that.”
Tiny Cantella & Co., with just 240 reps, recently started offering no-interest loans to new advisors, to help tide them over during the first few months. Still, while the firm added about 25 reps last year, the same number it usually gets, says Jim Freeman, national sales manager, “We are working much harder to get that growth.”
Ultimately, of course, it's likely that many small b/ds lacking the resources to lure big books or boost advisor productivity will find the going tough. “The large networks are well positioned, but the smaller ones — they're going to continue scrambling,” says Alois Pirker, an analyst with Aite Group. At the same time, however, long-term, those large b/ds focused primarily on attracting larger books may also face a more difficult road. Quite simply, as the total number of advisors declines, they're likely to find the approach can only go so far. At that point, they'll have two choices: boosting productivity of their existing advisors or acquiring smaller firms with a pool of complementary reps. Says Dennis Gallant, president of Gallant Distribution Consulting in Sherborn, Mass.: “Just focusing on bringing in big producers isn't a sustainable strategy.”