Buoyant capital markets and improving conditions in the brokerage industry have created a tough recruiting environment for independent broker-dealers. And given the generally positive outlook for the industry in 2013, it could remain difficult for firms hoping to grow by attracting new advisers.
According to Larry Papike, president of recruiting firm Cross-Search, more-stable brokerage firms and more-comfortable financial advisers are translating into less movement in the industry.
“Financial advisers are happier with their broker-dealers,” said Mr. Papike, who helps 75 different independent broker-dealers find new advisers. “We're not seeing the willy-nilly movement we did in the past because advisers are a happier bunch right now.”
The lack of any large broker blowups recently also has reduced the number of advisers looking for new homes. The struggles of firms such as QA3 Financial Corp., which closed, and Securities America Inc., which was sold, were an easy opportunity for firms to pick up advisers. With no large broker-dealers in major trouble now, however, the pickings are slim.
"STEP UP OR GO HOME'
“As weaker firms either step up or go home, it results in a tougher recruiting environment,” said Eric Schwartz, chief executive of Cambridge Investment Research Inc. Over the past five years, the average gross dealer concession of advisers his firm has recruited has been $60 million. Last year, Cambridge recruited advisers with $49 million in GDC to the firm. “There are less really weak firms to win advisers from now,” he said.
Securities America is a case in point. Two years ago, the firm was hemorrhaging advisers after sales of private placements led to litigation and problems with regulators. But Ladenburg Thalmann Financial Services Inc. acquired the firm from Ameriprise Financial Inc. in 2011 and has begun rebuilding the firm. A recent recruiting effort by Securities America resulted in the addition of 130 reps from Investors Security Co. Inc. in December and another 30 from Eagle One Investments in early January.
Advisor Group Inc.'s three brokerages — FSC Securities Corp., Sagepoint Financial Inc. and Royal Alliance Associates Inc. — stanched the outflow of advisers that began after its parent, American International Group Inc., hit a wall during the financial crisis. In fact, AIG last July added a fourth brokerage to its network, Woodbury Financial Services Inc., along with its 1,400 reps.
“AIG was a mess in 2008 and everyone wanted to leave the company,” Mr. Papike said. “They focused on their technology and what to do for their advisers, and now all the AIG firms are doing better.”
Cetera Financial Group, which includes three brokerages formerly owned by ING Groep NV, has expanded its recruiting efforts significantly in the past two years. “We had our best recruiting year since 1981 last year,” said Jay Vinson, vice president of new business development at Multi-Financial Securities Corp., one of four independent broker-dealers now owned by Cetera Financial Group.
Multi-Financial, recently renamed Cetera Advisors, recruited advisers with $52 million in total fees and commissions last year. “We're looking to grow aggressively in a manner that enables us to continue delivering value to our existing advisers,” Mr. Vinson said.
That could be challenging. Some of the favorite hunting grounds for independent broker-dealers — wirehouses and regional brokerage firms — are yielding fewer advisers of late, according to recruiters. The wirehouses largely have finished the culling of lower producers from their adviser ranks, and they and the regional firms have locked in many of the advisers they want to keep with retention money, the level of which most indie B-Ds can't match.
“In the past, 15% of my business was moving wirehouse reps. Last year, I moved one,” said Jonathan Henschen, president of Henschen & Associates LLC. He doesn't expect the situation to improve in the coming year. “A lot of wirehouse reps aren't cut out to be entrepreneurs and a lot of those who were have already left.”
Two other major channels for adviser recruitment — banks and insurance companies — offer better opportunities for independents. While many advisers in those types of settings have small books of business or have non-compete agreements that make it difficult to move to a new firm, industry leader LPL Financial LLC is having success in the channel. It recruits about 20% of its advisers from insurance companies, said Bill Morrissey, executive vice president of business development for LPL. He expects that to continue.
“Some advisers in the insurance channel are difficult to move, but a lot of them have traditional wealth management practices,” Mr. Morrissey said. LPL recruited a net 495 new advisers in the 12-month period ended Sept. 30, split roughly equally from wirehouses/regional brokers, independent brokers and banks/ insurance companies.
The best recruiting opportunities may be at other independent brokers. While overall adviser movement is down, industry dynamics continue to favor large firms such as LPL over smaller ones. With compliance costs in the industry up significantly in the past several years, smaller firms are finding it hard to invest in their businesses.
“There's a flight to quality happening in the independent channel at both the firm and adviser level,” Mr. Morrissey said. LPL brought in between 10 and 12 different independent adviser groups to the firm last year, by his estimate. “Shrinking margins and a more complex regulatory environment are driving consolidation,” Mr. Morrissey said.
The consolidation trend will continue. In fact, it may be one of the best sources of business for industry recruiters this year.
“Smaller independents don't have the money to invest in technology or on upfront recruiting packages. They have to spend it on compliance,” said Mr. Papike, who is working with several independent broker groups looking to affiliate with a bigger firm.
He said some of the groups are holding out for unrealistic retention packages, but that ultimately, they will have to make a move. “Once reality sets in, you'll see the smaller firms throw in the towel,” he said.
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