Independent-contractor broker-dealers and their registered representatives face pressure on all fronts, from recruiting and proper practice management to compliance and the best way to build up their businesses.
NEW YORK — Independent-contractor broker-dealers and their registered representatives face pressure on all fronts, from recruiting and proper practice management to compliance and the best way to build up their businesses.
Those topics — and more — were discussed last month at a round table of industry executives, consultants and advisers held here at the office of InvestmentNews.
Round-table participants discussed several key issues, including:
• The importance of preserving fees for reps and advisers which come in the form of trails, such as 12(b)-1 fees.
• The need for independent reps and advisers to join the Financial Services Institute Inc. of Atlanta, an industry trade group for independent-contractor broker-dealers and their advisers.
• The potential impact
down the road on recruiting at
independent-contractor firms, due to Wachovia Corp.’s pending acquisition of A.G. Edwards Inc.
• The realization that although big upfront bonuses for recruits to switch broker-dealers are enticing, many top reps look beyond the dollar signs when joining a new firm.
• The difficulty of explaining why certain accounts must be charged a commission.
“The biggest issue on the table for most advisers now is trails, preserving trails,” said Arthur F. Grant, president and chief executive of Cadaret Grant & Co. Inc. of Syracuse, N.Y. “When I came into the business a long time ago, once you made a mutual fund sale, you were onto other things.”
“I hate to tell you how brokers headed for the hills when they were getting calls from irate clients because their mutual fund had gone down as much as the market,” he said. “Today, brokers are there for their clients when they’re needed, particularly in bad markets.”
Independent-contractor reps and advisers have to speak up and participate in organizations that represent their industry, panelists noted.
“I think the advisers have to participate in the FSI because there are so many regulatory issues out there right now,” including 12(b)-1 fees, said John Rooney, principal in San Diego for Commonwealth Financial Network of Waltham, Mass. “Why not support the one organization that’s fighting tooth and nail to preserve the status of the industry?”
Recruitment
Big acquisitions can create instability, and that causes concerns for advisers involved in the deal, the panelists said.
Along with the pending acquisition of St. Louis-based A.G. Edwards, Linsco/Private Ledger Corp.’s purchase of three broker-dealers owned by Pacific Life of Newport Beach, Calif., “created a bit of concern among advisers,” said Paul T. Lally III, co-founder and president of Gladstone Associates LLC, an investment banking firm in Conshohocken, Pa. That’s “because the adviser is asking us the question, ‘If I partner with another broker-dealer, what is their long-term strategic plan,’” he said. “Are they going to be sold in the next two to three years?” LPL is based in San Diego and Boston.
Recruiting is incredibly competitive, and broker-dealers are throwing more money at reps than ever before. But some reps want more than a fat check to join a new firm, panelists said.
“The smart advisers get nervous when they hear the big numbers,” said Joseph “Joby” B. Gruber, president and chief executive of Financial Service Corp., FSC Securities Corp. and Advantage Capital Corp., all based in Atlanta.
“If you’re getting somebody recruited away from the organization and they’re receiving [an upfront bonus of] 30%, 40%, and they start at 95% payout, [advisers] start to put paper and pen together and they’re saying, ‘Tell me how that broker-dealer is going to be in business five years down the road.’”
Others agreed.
Reps and advisers “recognize if they take that check they’re going to get some short-term gratification,” said William C. Van Law III, senior vice president and national director of business development for Raymond James Financial Services Inc. of St. Petersburg, Fla. “But they’re going to find themselves in a position that’s very similar to what they had before. I think they’re looking for something different. They’re looking for a culture.”
And if one adviser had a wish, it would be for technology or compliance to simplify how accounts can be managed.
“The client has a million dollars, why does an individual account have to have a minimum for advisory?” asked Doug Flynn, co-founder of Flynn Zito Capital Management in Garden City, N.Y., whose practice is affiliated with LPL Financial Services, Linsco’s broker-dealer. “A lot of colleagues just don’t even advise 529s [college savings plans]. They don’t even bother. How can that be the right answer for clients?”
