Conference Call: Survival tactics for the independent broker-dealer

Now that everyone from Merrill Lynch & Co. Inc. to H&R Block Group Inc. wants to be in the financial planning business, brokerages that cater to independent financial advisers must transform themselves to stay competitive, industry experts told 550 attendees late last month at the Financial Planning Association’s annual broker-dealer conference in San Diego.

Mark Tibergien, a principal with Moss Adams LLP, an accounting firm in Seattle, said the one disadvantage independent broker-dealers have is that, unlike bigger full-service competitors, they lack a national strategy. He recommended that independents develop “franchise strategies” that unite their far-flung registered representatives and communicate to consumers the firm’s services.

Another challenge facing independent broker-dealers, Mr. Tibergien said during a panel discussion, was that many are so worried about “leakage,” or raids by competitors, that they don’t focus on growth. “Veterans say they don’t have the time to manage and produce,” he said. “It becomes a capacity issue.”

Mr. Tibergien recommended that independents develop more of a “firm relationship” with clients that provides one-stop shopping, which he noted was the reason why many broker-dealers are talking to banks and accountancy firms.

Larry Papike, president of Cross Search Inc., an executive recruiting firm in El Cajon, Calif., that works primarily with independent broker-dealers, said he believes the biggest brokerages’ move into financial planning was more an opportunity than a threat.

Mr. Papike, who was also on the panel, said most of the growth he’s seeing in the independent broker-dealer market is coming from the larger full-service firms. “I predict more reps moving in droves from the wirehouses and regional firms to our business.”

James Putnam, managing director of national sales at LPL Financial Services Inc., the nation’s largest independent broker-dealer with more than 3,000 reps, commented from the audience that about 85% of the reps his company recruits are from the wirehouses.

Still, Mr. Putnam added that not every wirehouse rep fits his firm’s model; many of the more successful ones came from wirehouse satellite offices, which often operate more like independent firms. “Are wirehouses going to be the panacea for the independent broker-dealer industry? No.”

Mr. Papike said the main challenge facing independent broker-dealers will be maintaining their sales forces. “If you’re not taking care of your broker and making sure they’re happy, they’re now going to be out the door,” he said.

Mr. Papike said he hears from reps daily that their firms don’t have the staffs to serve their needs. “Some staffs don’t return calls to their force for two or three days.”

Mark Hurley, president and chief executive of Undiscovered Managers LLC, a Dallas investment firm, said in an earlier presentation that independent broker-dealers in the near future “will work harder, earn less and struggle to retain clients” unless they change their business models.

Mr. Hurley predicted that only 40 to 50 companies, from Merrill Lynch on down, will dominate the financial planning landscape. The rest, he said, will have to specialize or go the way of the dodo.

“Any industry you look at, either you constantly innovate and upgrade what you do or you experience margin compression,” he said.

He added that the large companies will also use professional marketing networks to get clients, who will then be introduced to a team of advisers, including, for instance, an estate planning expert and a money manager.

Of course, he said, most firms will resist the change, while others will not be able to recruit enough qualified people to make the changes or won’t have enough money.