The following is an edited transcript of a webcast, “Recruiting in 2014: Risks, Challenges and Opportunities.” It was moderated by Greg Crawford, deputy editor at InvestmentNews, and Trevor Hunnicutt, a reporter.
InvestmentNews: Jodie, what is your point of view on the recruiting marketplace?
Jodie Papike: I really had to take a look back at the last couple years and think about the major changes that have taken place in the marketplace as far as what broker-dealers are bringing to the table. It's pretty staggering the differences between what a broker-dealer is offering advisers today as opposed to before the crash in 2009, whereas when I look at that broker-dealer model of five years ago, I felt it was really more about high service levels and good technology. Today I feel like firms either stayed the same, and tried to give the best technology and service that they possibly could, or they made tremendous advancements in areas such as practice management, succession-planning tools, and have really taken their broker-dealer to the next level to where we are today, with some firms now being a true partner to the advisers that they have on board.
InvestmentNews: Tom, what is your perspective?
Tom Daley: For background, I spent the majority of my career working with financial advisers as they were giving consideration to making a change. I think it's really important to take a snapshot of what's happened in the past. When I look at working with advisers 13, 14 years ago, the landscape was a lot about the wirehouses, and regionals had strong representation. National branding was really important in the adviser's mind as they were giving consideration to making a change. The independent space, primarily the broker-dealer channel, was growing. The Internet at the time was providing greater functionality to the advisers, so the advisers could trade in client accounts, they could access client activity. They could re-balance their portfolios. But it was still kind of in a growth mode.
When the reps were moving, primarily going independent, it was individual or solo practitioners that were looking to make a change. They were setting up individual offices, and time to time, we came across a couple of advisers that maybe were giving consideration to moving at the same time. So that was kind of the landscape of what we traditionally helped 13 or 14 years ago.
The emphasis today is, advisers want to create and carry their own brand. That's paramount in their business and what they're trying to deliver in their service to their clients.
They're trying to deliver an individual image to their clientele, and their clientele, vastly baby boomers, are very driven by the relationship with the adviser. And so they're very focused on what the adviser can do, and they're not as driven by that national kind of branding, if you will.
Secondly, advisers today have the mentality of seeking a partnering firm based on a combination of culture, compensation and support. Because it's still very much a relationship-shaped business, that's really what they're after.
And thirdly is the diversity of choices and options that have exploded over the years to the advisers to start looking at and exploring.
InvestmentNews: Cecile, what are you looking at this year?
Cecile Munoz: Our approach to supporting our clients is not just from onboarding advisers but from a macro perspective, across the enterprise of how we help our clients bring the talent, the human capital and the leadership that will create a robust and scalable practice to which advisers will be attracted and retained. I remember back in the day when we were recruiting for RIAs and we had to stop and say, “That stands for registered investment adviser,” and not that we were out there recruiting for people to sell [individual retirement accounts]. It's not only the diversity of choice but also the blending of choices that have come about.
But from our client perspective, what they're very, very keenly focused on, I'm going to categorize into three areas. No. 1 is finding what we call the future skills: finding the human capital and the talent that possess the skills that will be needed and utilized, and will be the differentiation among broker-dealers, be they independent or large B-Ds like a Merrill Lynch/Bank of America.
And second is finding leadership that will make those decisions and pull the levers to make the decisions, be they on a technology perspective, how to effectively integrate social media into the tools that are used not only by the adviser but by the firm itself.
And lastly is how to create a sustainable, scalable succession strategy. And it's not only a succession strategy but then how you create a methodology by which you attract and retain the next talent, the next generation.
And the last point that I'll share there is post-financial-crisis. There has been a real transformation from both the advisers as well as the consumers. They ask a lot more questions. They're a lot more informed.
InvestmentNews: Jodie, you mentioned that there is customization. There are a lot of offerings that weren't available to advisers years ago. What are broker-dealers doing to attract and retain advisers?
Ms. Papike: You have to consider the size and strength of the broker-dealer. So I don't know that we can compare what the midsize firms are doing and being successful with, versus the larger firms, because it really is different in what they can offer people. So I think when we look at the midsize firms, the ones that are having success, they may not be able to offer compensation for people moving over. And they might not have the slickest technology, because they don't have the deep pockets and they don't have the resources to offer what the larger firms can offer.
So the midsize firms or smaller firms are really focusing on flexibility. The recruiters that they have in place have really figured out how to communicate that value proposition to the appropriate marketplace in such a way that it gets people's attention and is different than what everyone else is doing.
So some examples of that might be flexibility with a hybrid model. That's something that's definitely a hot button in our environment today, because there are so many question marks and so many gray areas when it comes to whether someone is going to develop their RIA and stay with a broker-dealer and be a true hybrid, or they're going to break away completely, or they're going to use a broker-dealer's corporate RIA.
As far as retaining advisers goes, the top firms are not keeping their advisers solely based on service anymore. They may keep some people happy, but I've even heard of advisers leaving even though they're pretty happy with their firms, because they want more.
I worked with an adviser not too long ago that was with a firm and had been there for a very long time, and he was pretty happy. The service levels were pretty high. But when he went to his firm asking for help with a succession plan, there was really not a program in place to help him do that. And he found a firm that had a turnkey platform available for him and implemented a lot of those things before he even moved over to this firm. And it was enough to get him to move.
InvestmentNews: Because of the range of options that are available to advisers who want to go independent, is that creating analysis paralysis for them where they decide not to go independent, because they don't know which is the best one?
Ms. Papike: All the options create confusion and an environment where it takes a lot of time and consideration and thought in figuring out really what the best model for your business is. There's no question that advisers are going completely independent. But I'm seeing this reverse trend of advisers' seeing what all their options are, going RIA-only and then realizing that the broker-dealer model is very good for them. It gives them almost an extra insurance policy in their business, and another resource so that they're not alone out there.
InvestmentNews: Cecile, you talked about helping firms create the right ecosystem but trying to make it so that their value proposition is clear and not overly complicated. How do you manage that?
Ms. Munoz: When we speak to or when we work with midsize firms, it's slightly different when we're dealing with your very, very large firms. But when you're dealing with midsize firms, we always start with an assessment that the leading executives have to go through where they really have to be clear as to what is it that this particular firm — what is their culture?
Because to me, their culture is a representation of what they believe they do very well or what they aspire to do very well. Every adviser that you bring on board is bringing their own DNA and mixing with your corporate DNA. And at the end of the day, it's going to evolve into something different than you intended was going to be the direction of your firm.
InvestmentNews: Tom, what are some recruiting trends for 2014, and why are advisers moving?
Mr. Daley: We were mentioning the diversity of choices today that financial advisers can choose from in this marketplace, both nationally and on a local level.
When we look at the opportunities today, you have some of the wirehouses that have created independent channels for financial advisers. You also see some independent financial advisers giving consideration to becoming employees of those firms and kind of reversing the trend. Secondly, the independent broker-dealers have really continued to evolve. Many of them are really in great shape today and they've evolved with the market. They've grown from what I will say was a traditional full-service broker-dealer model and they've grown into a model that gives more flexibility to the financial advisers. They offer the adviser hybrid solutions where an adviser can be affiliated with the broker-dealer and own an outside RIA. Or the adviser could be an RIA only with the firm.
Or lastly, one of the trends we're also seeing is, some of the financial advisers are becoming fee-only investment adviser representatives affiliated only with the broker-dealer's corporate RIA, which is really interesting and didn't exist two years ago.
The second thing we're seeing, in terms of opportunities, is the custodian and clearing firms have really made a major impact in increasing the options and opportunities for the independent financial advisers.
But what I would say is, it's really the outcome of the competitiveness of the broker-dealers, the custodians, the clearing firms that's really created capabilities today that they've delivered a much more diverse landscape of local and national opportunities that financial advisers can either join up with, align with, or a lot of people will say, tuck in with.
InvestmentNews: Tom, wirehouses have provided equity in the past that has proved not too valuable. On the flip side, some strong teams are building startups and giving out equity. Do advisers value the equity opportunity of joining an earlier-stage business as opposed to a mature firm?
Mr. Daley: Advisers are seeking independence, and one of the reasons they seek independence is to be able to take on equity in their own business. And based on the efforts that they're giving, there is tremendous value in that. They look at aligning with another group or a larger entity. One of the big benefits of that is, they're going to build scale. And with that probably comes a higher return in the valuation of that business. And so I'm a big believer in being able to pick up the equity through ownership and doing so by creating what I'll define as somewhat of an ensemblelike practice, where it's multiple advisers coming together to provide services, take advantage of scale, leverage pricing and build an infrastructure.
And I think that's a great business model for an adviser to look at.
InvestmentNews: How do you all recruit for the future, given that the average adviser is over 50?
Ms. Papike: The problem has really come from the fact that we used to get our younger generation of advisers for the most part coming from a wirehouse because they have the training programs. The independent firms were taking younger advisers from the wirehouses. And those training programs have picked back up here over the last couple of years, so that's advancing a little bit more.
I feel that the way independent firms have done that organically is by helping [offices of supervisory jurisdiction] grow their practices. And I have seen a lot of very successful OSJs that are looking for that younger talent and they're incentivizing these younger advisers by bringing them in, training them and then giving them a piece of their books of business as they have more success, or giving them clients that maybe are too large and they can't service their entire books of business.
InvestmentNews: There is a question from an audience member who kind of flips that around: If you want to become a financial adviser in the near future, what advice would you have?
Ms. Papike: I think the problem for young advisers obviously is that it's very hard to enter our marketplace. And there are two routes, basically. Either you start at a wirehouse or a regional firm where they give you training programs. But the problem with that is that it is a very difficult way — it's a good way to start in the sense that you get all your training and everything, all the education that you need. But it is a very difficult way to start in the sense that the book of business that you're developing is very difficult to take once you put that time and effort into developing that book.
So someone five years in at a wirehouse, it's that much more difficult to bring those clients with you if you eventually want to go independent. If I were a young adviser looking to get into the business, what I would try to do is find a local branch of an independent firm or an RIA that was looking to expand and was interested in bringing on new talent. They're looking for young talent because that young adviser brings something to the table that they don't have, which is an understanding of the things that we touched on, which are social media, Twitter, Facebook, all of these things that the adviser of today's generation is still trying to get their hands around.
Ms. Munoz: This area of future talent and future skill is an area that we are spending a tremendous amount of time on with our clients. And if you look at the statistics from 2004 to 2008, we lost a total of 4,000 advisers. And of course, that trend continued through the financial crisis. In 2008, the age of the adviser was 49 years old, with 14% over the age of 60 even back then. So clearly, the issue of the aging adviser is just getting much more critical.
When you're talking about NextGen, how do we create a firm that is going to attract and retain this talent? The challenge is that from my perspective, we're still doing it very much in a male-centric voice. And we're not recognizing the shift that has occurred in the Millennials, in the next generation, as well as even the shift in the value proposition that people coming into financial services are looking for. And we need to start addressing it from that perspective, where we take a look at what is the real value, what is the work that we do in financial services, which at the end of the day is a very humble and just as critical as having a great physician, which is creating an environment, creating a path to reach financial well-being for you and your family.
And if we look at where we can go out and recruit this kind of talent, the right firms align themselves with [The] American College [of Financial Services], which is producing some great, wonderfully trained [certified financial planners]. Certainly, Deena Katz and her group down at Texas Tech University do a formidable job. But then you have other firms that are figuring out how to do it very well, like Merrill Lynch. Their numbers are staggering, how quickly they're growing those recruits.
And if you look at, again, unfortunately, the numbers that came out in the fall of 2013, for the first time ever, we lost our role as leaders in bringing the best and the brightest of the Ivy League B schools to Wall Street. They're going everywhere else but coming to us. So to me, it is a fundamental problem that we as an industry have to address.
InvestmentNews: Behavioral finance has become a huge way of thinking about a relationship and working with clients. What are some of the broker-dealers doing in, say, technology to attract not necessarily just the next generation but established advisers?
Ms. Munoz: I think that the smart firms are marketing where their talent is consuming information. And what that means is, we can no longer look at content from a brick-and-mortar perspective. If you look at some of these firms, Edelman [Financial Services] is another great example of how fast [chairman Ric Edelman is] growing and how well he has done in terms of both scale and success in recruiting and retaining advisers. He's growing talent almost on a community-by-community basis. And he's growing people that have a very authentic voice as financial planners that resonates with their communities.
Brokers commit to a real training and development process, an onboarding process beyond 30 to 60 days. It is at minimum a year commitment. It is an expensive proposition, right? It's a proposition that has not only a cost factor but a time factor. But there are other solutions that you can implement that are great from the standpoint of stabilizing your work flows on a sustained basis. And that's the concept of mentoring and coaching that also includes reverse mentoring, which is your next generation mentoring your older generation, as well as your older generation mentoring your younger generation. And it becomes a win-win situation for both parties.
InvestmentNews: Is the Financial Industry Regulatory Authority Inc. rule requiring disclosure of transaction compensation a game changer?
Ms. Papike: I think it's definitely a game changer at the wirehouses. I think that when a wirehouse adviser is looking at the proposition of having to explain to their client that they just received a million-dollar check in order to move over to another wirehouse, that becomes a very difficult conversation and it becomes difficult to try to justify why you were getting that kind of compensation to move.
In the independent space, I think it's a completely different conversation because the dollar amount that we're talking about for an independent adviser to move is a completely different ballgame than it is at the wirehouse. But I think the real distinction is the fact that if it does come down to it, and advisers are going to have to disclose the compensation. If an independent adviser has to go to their client base, it's not going to be fun to explain it. But I think if an adviser has to explain the actual cost of a transition — the termination fees to move accounts, the signage, the downtime that they're going to have in order to transition their book of business over — those costs can really add up.
And I think explaining that to a client, they're savvy enough to really understand that. And I think it's going to really affect wirehouses. I think that's probably why they're mostly in support of the rule passing. And I think in the independent world, it's not going to affect most firms, because most of them don't offer any kind of upfront compensation. But for the ones that do, I think that the adviser is going to be able to explain it to their clients and it's not going to be much of a factor at all.
Mr. Daley: I think there are a lot of unknowns about the timing of when this is going to come out. But looking at advisers' going from wirehouse to wirehouse, we're not going to see the mass moves that we've seen in the past in recruiting. I think advisers are in a much better position today. I think they've built more-sophisticated businesses. And as they look to move, I think what we're going to see overall in the industry is, they're going to be very specific as to why it is that they're moving.
Is there a market of advisers that have to be concerned about the disclosure? Absolutely. But I think the majority of the market of advisers that are looking to move are very specific about why it is they're going to be making the change. For those advisers that are looking to go independent and move that business that way, it's very explainable to the client as to, they're not going to get rich in transition going independent. The deals that are offered going independent are really about trying to help the adviser set up the business and get back on their feet and help absorb some of the client costs in making the change.
But I don't think it will be an issue for them. Moving wirehouse to wirehouse, if an adviser is moving for all the right reasons in an up market, I think it's very explainable to the client.
InvestmentNews: Cecile, what will the truly successful firms focus on this year?
Ms. Munoz: I think that they would be the firms that are focusing on high numbers of recruitment, although recruitment is an ever-present goal. But those firms that are focusing more on truly helping an adviser build a better practice, communicate better with their clients, all the way down to advisers themselves connecting with their clients — as there is potential in the very near future for a transition of that wealth from the baby boomers to the next generation — is No. 1.
No. 2, helping those advisers grow their practice organically from a service perspective and from a human capital perspective as well, and in essence creating their own succession strategy.
And lastly is the not-so-fun stuff, those firms that have built the right operational optimized organization that can weather the regulatory changes and compliance changes.
Ms. Papike: I think broker-dealers have a very difficult road ahead in the coming year in the sense that regulation has gotten to the point that walking that fine line between keeping your advisers happy and dealing with the regulators is an extremely difficult tightrope. And I feel like if broker-dealers don't walk that fine line carefully, they're going to not only be unable to attract new people, but they're going to lose the folks that they already have on board because people are unhappy. So some of the people that we see leaving are leaving because they feel like compliance has gotten so heavy-handed that they can't manage to stay at their current firm.
And I try to explain to people that it's not all the broker-dealer's fault — that they really are having to deal with the regulators more so now than ever. And that they're trying to service you and they're trying to keep you happy, but they're also trying to protect everybody that's involved with the broker-dealer.
The most successful firms have figured out a way to have that kind of intimacy where they can deal with their advisers on a one-on-one level and keep their advisers happy.
InvestmentNews: Jodie, when you have that conversation with an adviser, what is the response?
Ms. Papike: For the most part, when someone really understands all the pressure that broker-dealers are under, and all of the rules and regulations and changes that are coming their way, and they really understand that dynamic, and it's not just the broker-dealer coming to them and saying, “Hey, you need to change these things because I want you to,” they understand and they're willing to adapt to that, and they're willing to work together. [Problems arise] when a broker-dealer approaches an adviser and says, “This is what has to happen and here's a drop-dead date,” and there's no explanation or education behind it.
And sometimes I feel like there's a disconnect between compliance and operations, and all the different departments. And it's not a top-level service from the top down. It's almost as if each department is functioning separately. And it really has to be that every department is in harmony so that not only can you attract new advisers but you can keep your existing advisers feeling like they're part of a team.
InvestmentNews: Will the regulation parity between the Securities and Exchange Commission and Finra close this year while advisers are going RIA-only to escape Finra?
Ms. Papike: There is so much confusion as to, well, if I go RIA-only but I still want to do some broker-dealer business, why does my broker-dealer have to have any influence on that? Why do they need to supervise that business? Why do they need to take a piece of it?
And again, it goes back to that education process and saying, well, because Finra is involved, the broker-dealer has to oversee that business and they're liable for that business. And so I feel like there's no clear path for advisers and there is so much gray area that there has to be some clarity that comes about.