Broker-Dealer of the Future transcript

The following is an edited transcript of the round-table discussion. It was moderated by InvestmentNews news editor Bruce Kelly and InvestmentNews reporter Jed Horowitz.
InvestmentNews: What does the recent economic turmoil mean for the business of financial advice, and what does it mean specifically for your firm?

Mr. Schwartz: This is a time when our advisers really earn their keep. When the market’s going straight up, I wouldn’t say the business is easy, but certainly, they aren’t sweating a lot. They’re getting a lot of phone calls these days. I don’t think it’s as ugly for the advisers as it was, say, in mid-2002. But certainly, there’s a lot of uncertainty there.

InvestmentNews: Are the advisers more worried or concerned?

Mr. Schwartz: Up until 90 days ago, most of our advisers were cruising. When we were at the top producers conference [of Cambridge Investment Research Inc. in Fairfield, Iowa, in] March, for example, most of them were having a good year. I don’t think they’re in as big a hole as they were in 2002 when the market had been going down for three years and they had clients with 50[%], 60[%], 70% losses. Most people’s clients are down maybe 15% at this point because they didn’t have 100% in equities, so the stress level on the advisers, I don’t believe, is at the level of anywhere near it was then.

InvestmentNews: How does this transform the business?

Mr. Nagengast: We’re the good guys in the industry right now. We don’t have the conflicts of the investment banking and the ties to the product manufacturing, so this is a great time to be in the independent channel. And we’re seeing the best recruiting we’ve ever seen, opportunities presented to us that were just unfathomable months ago, getting interest from wirehouses and the like. I think what advisers are looking for is strong support, and they don’t want to be burdened down with the bad press — the stigma that’s been attached to the wirehouses. If they’re looking to jump and make a move, now is the time.

Mr. Bloom: We also feel it’s going to be a tremendous opportunity for us to acquire some advisers. Certainly, Bank of America [Corp. in Charlotte, N.C.] will be trying to retain [New York-based] Merrill [Lynch & Co. Inc.] advisers, but it’s going to increase the velocity of advisers who are thinking about going independent. Mentally, it’s been much more difficult for the clients. They have a hard time differentiating between the firms on Wall Street and our firms. So we’ve been spending a lot of time creating communication for the advisers to get out in front of their clients and help them calm their clients.

InvestmentNews: What exactly have you done in that regard?

Mr. Bloom: We put out a piece on the difference between an independent firm, like Commonwealth [Financial Network in Waltham, Mass.], and what they’re seeing on Wall Street. We’ve reassured them in the strength of our primary clearing partner.

InvestmentNews: Does this transform the business?

Mr. Roth: Very much so. It solidifies the role of the independent adviser. It’s going to enroll us into the flight to quality. The individual investor is looking for sound, prudent financial advice. It’s a great recruiting opportunity for everybody.

InvestmentNews: When you’ve tried to recruit wirehouse advisers, what has been the biggest sticking point, and how might that have changed, given what’s happened?

Mr. Antoniades: The biggest challenge in recruiting wirehouse advisers is the fact that in the independent space, the concept of unified managed accounts and separately managed accounts has not evolved and is not priced at a place where we can truly compete and justify the economics typically associated with independents. So we always say control, ownership and freedom are the reasons to go independent, and higher pay is a symptom of that. But in reality, we know a lot of advisers consider independence because of the higher compensation.

InvestmentNews: How does anxiety on both the client side and the adviser side affect what you do in the short and long term?

Mr. Roth: It’s the flight to quality. That’s exactly what it is. There’s also the education of the adviser as to exactly what they’re getting into. This is an ideal time to communicate to the investor, communicate to the adviser by saying, “These are the tools that are available to provide safety and comfort.”

Mr. Nagengast: In terms of recruiting, it’s really switched the whole value proposition so that now the value proposition is the adviser, whereas in the wirehouse world, the value proposition had been the firm. That value proposition has eroded. Certainly, our industry is the huge beneficiary of that. I’ve been in this industry 14 years, and when we started, independents were an afterthought. This change in the value proposition at this historic time is clearly putting the adviser at the lead of the value proposition, and that is what a lot of these struggles are about in our industry right now.

InvestmentNews: How do you, as independents, demonstrate your financial solidity?

Mr. Schwartz: In our community of independents, we have ones owned by [American International Group Inc. of New York] who have always promoted themselves as being the strongest, safest, and you would join them because of their strong capital. And then you have the other extreme, the really small broker-dealers, five of which have been sold in the last four months to other broker-dealers. So all of a sudden, there’s potential for the midsize independent broker-dealers to show that they’re the safest place. I personally have always made our audited financial statements available to anybody who asked for them. So I think it is an opportunity for midsize firms to just lay out their finances right on the table and say, “Hey, the really small ones are being bought up because they’re too small to compete, the really big ones are part of these big conglomerates that aren’t as safe as you thought they were,” and it strengthens the position of people like Commonwealth.

InvestmentNews: But the big guys always like to say how the midsize guys can’t do it, because they don’t have the capital, they don’t have the heft.

Mr. Schwartz: Every firm tries to use its strengths. If you’re a really small firm, you say, “Well, we have the ability to know you personally.”

Mr. Nagengast: It’s the focus on the business line. When you look at the independent B-Ds, we have a focus on a very specific business line, and that business line can be summarized as supporting the independent adviser. We don’t have business lines out there where we’re taking positions in markets and participating in investment banking, putting capital at risk. Our business line is providing practice management, client acquisition, making a host of products available, industry-leading technology. The more that we get the point across to advisers about what our business model is and how we profit from their success, and that we’re aligned together, that’s how we’re going to continue to grow and have success in these markets.

Mr. Bloom: We’re all large enough to be able to fund the infrastructure, but we’re also small enough to know our customers really well and be in touch right on the ground level. It’s actually a perfect balance.

Mr. Antoniades: But I would suggest that it works the opposite to what you think. The fact that these big organizations that historically used size as a means to cast us in a poorer light, I’d suggest has leveled the playing field, because anybody can go out of business today. We’re in a better position to really make a case for having a core competency that is very much vanilla — it’s very clean, very risk-averse, very easy to understand from an economic perspective. And like [Mr. Schwartz], we put our numbers out for everyone to see. I think really creating that transparency helps overcome a lot of those concerns.

InvestmentNews: One the findings of the Pershing/InvestmentNews study “The Broker-Dealer of the Future” was about the talent shortage. Where will you unearth these advisers in the future?

Mr. Schwartz: Certainly, in our case, recruiting has been going incredibly well. Last year was far and away our best recruiting year by 50%, and this year is at least 50% above that. There’s always an opportunity to get new advisers, because there are other firms that aren’t doing as well. At the same time, we’re all focused heavily on continuity planning for our top offices. You bring in somebody who’s not ready today, but over five to seven years working with a master, they are ready. In our opinion, you need two junior advisers for every senior adviser you’re letting go. If you bring in two people with contrasting skills and give them five to seven years to mature, I think you can build it that way.

InvestmentNews: And how much more do you have to give them to attract them from the wirehouse?

Mr. Schwartz: He needs to understand the opportunity. Most of our most successful advisers are entrepreneurs. But taking over a mature practice doing $200 million in assets and helping to build it to $500 million and then to $1 billion requires a different talent set. You do still need a rainmaker, but you also need more people to run an institution.

Mr. Nagengast: We are addressing this problem with a renewed focus on building our branch culture and our support for branches. Next year, we’re going to be rolling out a new program called Junior Adviser Boot Camp on how to bring people into your practice, move them up, get them trained so that they’re ready to take over the practice. The difference between that and the wirehouses is, you have somebody there who’s very committed and has a stake in the success and future of that junior adviser, versus bringing in a class of 100 people and seeing what sticks against the wall.

InvestmentNews: Wachovia [Corp. of Charlotte, N.C.] on Monday afternoon had a conference call with 40 or 50 independent recruiters and said to them, “Hey, we are gunning for these Merrill Lynch guys. Go out and get these Merrill Lynch guys for us.”

Mr. Roth: We do this. The role of a clearing firm has really changed over the last four or five years. Before, you traditionally looked to a firm just to do execution and clearing, and now what’s happening is, they want us to actually sit in tandem side by side with the recruiters to help recruit those advisers. They want us to sit down and do a comparison between the products and services. In years past, we had no role in that. One stat that we look at quite extensively is [the automated customer account transfer service]. It helps us benchmark who we’re winning and who we’re failing against. The wirehouses are losing to the independents — no question about that. But one of the things that I think is absolutely critical is the retention of those top advisers. There’s always going to be the recruiting. But it’s the retention of those top advisers and the succession plan that are the two key points.

Mr. Antoniades: First of all, what are we doing today? I suggest to you we’re doing nothing different to what we always do. The phone is ringing more than it’s ever rung. And it’s Merrill brokers. So I think the last 48 hours [after BofA announced Sept. 15 that it would buy Merrill Lynch] have served as a tipping point for all those people that weren’t sure whether independence was right for them, and finally, it’s tipping them over the edge. This is an event that’s going to cause a lot of them to call us. Our value proposition has to stand on its own two feet.

InvestmentNews: When the phone is ringing, are they asking what you can give them for their stock right now? What are the questions they’re asking you, and in what order are they coming?

Mr. Antoniades: The Merrill guys feel safe for the time being, but they decided they’re going to start seriously researching and analyzing firms. By the way, we want them to analyze other firms, because we want it to be a good fit. We want them to select the right value proposition so that it becomes a stickier relationship.

Mr. Nagengast: A lot of them want to move to an existing branch. It makes that first step to independence a lot easier. So that’s why we’re really focused on these calls we’re getting, channeling those leads out to our branch expansion network and those advisers who have been building a branch. I think that’s where we’re going to have some real success — placing those wirehouse people immediately in branches so they’ll hit the ground running rather than spending their first month trying to get the phone contract, the secretary, the computer set up.

Mr. Bloom: We’ve all talked about the incredible opportunity that the events of the day are going to create, and I’d echo [Mr. Antoniades’] sentiments as that we’re not doing that much differently. We’re going to alter our media campaign a little bit. We’re going to do a slight shift in some of our direct mail to take into account what’s going on in the marketplace. Our focus is on growth. It’s on servicing our existing advisers. We’d rather bring on five great advisers than 10 or 20 OK advisers. We want to make sure it’s a great cultural fit. The products are a level playing field. I think historically, they stayed at the wirehouses because they had unique or special products. Well, they’re not so special, are they? They want a good partner. They want the right fit. Our phones are also ringing a little more.

InvestmentNews: What are the questions? What do they ask you first?

Mr. Bloom: They’re not panic calls, but they’re very concerned. They feel they almost have to explore what’s out there now. They may fit culturally, they may have a great book, they may do terrific business, but they have to have a certain entrepreneurial bend to work with any of our firms, and certainly going into an existing branch makes that easier. But they want to talk about payout. They want to know about separate accounts. Nobody’s asking us to buy their stock. That’s not something we would typically do. The ACATs do come up. They certainly want to know about National Financial [Services LLC in Boston] or Pershing [LLC in Jersey City, N.J.]. They typically want some financial assistance in paying the ACATS fee, and we’re certainly willing to step up to the plate there, but our focus just remains on the existing advisers. We’ve got 1,300 or so terrific advisers, and the cost of acquisition to bring new folks on, versus investing a fraction of that money into the existing advisers who know your system, they know your business, it’s just a far better investment for us.

I’ve seen that transformation, over the past couple of years, where we don’t service financial advisers anymore; we service small-business owners. In our practice-management area, there’s a whole focus on what it means to be the [chief executive] and working on your business instead of in your business.

InvestmentNews: Are there are a lot of guys calling you whom you don’t necessarily want to hire?

Mr. Bloom: Typically, 50% of the calls that come in are screened out immediately. The ultimate goal is to have that visit to one of our two home offices. Once they go through that daylong visit and they raise their hand and want to join, about 15% or 20% of them we won’t take. It has to be a good fit. It’s the type of business. We want to work with nice folks. Maybe it’s more of a family atmosphere than other firms, but it has to be a good fit.

Mr. Antoniades: They’re just tired. They feel that they’ve been cheated, they feel that they’ve been lied to, and that’s motivating them to consider an avenue of independence. Our job is to help them make that transition from running a practice to being a business owner, and it’s a big transition for them. Probably the most successful thing that we’ve had happen is this concept that we will fund the growth of our advisers with a capital infusion. When we look at what’s caused us to grow this fast, it’s the idea that we have cash, right, and the ability to invest in our business. So we’ll lend money to people for any number of different reasons. The biggest success we’ve had is in helping people acquire tax-planning practices and [certified public accountant] practices.

Now, when we first started doing that, everybody laughed at us. They said, “What the heck are you guys doing? You’re going to give someone money, lend them” — sometimes forgivably by the way, not always — “lend somebody money to go buy a CPA practice? How does that work?” The reality is, the economics, demographics, every aspect of acquiring a tax planning practice or an accounting practice is far superior to buying a book of business. It’s cheaper, there are more assets for the amount of money that you’re spending, and you have a predictable conversion rate if you’d like of CPA assets or tax-planning assets to brokerage assets.

Now, as a business owner, I have another product that I can sell my clients, which invariably makes them stickier.

InvestmentNews: Are you promoting that aspect more than ever now?

Mr. Antoniades: We’ve probably supported 20 to 30 acquisitions of CPA or tax-planning practices over the last 18 months. The reality is, it’s about helping an adviser understand that they’re running a business, and in running a business, there’s a broader consideration into how you go about doing that.

InvestmentNews: And is that financing profitable or is it really not about the small picture?

Mr. Antoniades: It is profitable, because most of the time, it’s not forgivable. But again, it’s about modified behavior. Our job is to find the three or four things that typically prevent our business owners from competing and help them overcome that. And that takes more than just putting products on a shelf. It takes holding their hands and walking them through a process of beginning to modify their behavior and think like business owners.

InvestmentNews: What if you do such a whiz-bang job at supporting your brokers who are becoming advisers, and then they walk? The conflict of interest on Wall Street was the investment-banking side and the retail-brokerage side, right? In your business, the conflict is: How do you grow through fees and wind up not losing the adviser completely?

Mr. Bloom: I don’t see that as a conflict at all. Any business is at risk in any industry when there’s no value proposition. So you either provide value or you don’t, and if you don’t, you don’t deserve to retain the business. We’ve been in the fee-based business since the mid-’80s.

Last year, our revenue from fees exceeded that from commissions. About 90% of our advisers utilize our fee platform. We’ve priced it so that as their assets rise, we share the economies of scale with the advisers. They understand the value proposition that we bring to the table. That they make more money and do a better job for their clients if they can outsource some of the things that we do really, really well and price them very competitively. It allows them to leverage their time and their talent.

Mr. Roth: The fee-based business is here to stay — no doubt about it. I think you’re going to see a new kind of adviser who wants the flexibility of not only doing the fee-based business but also the commission-based business. Cerulli [Associates Inc. of Boston] had the statistic that there are about 96,000 independent advisers, versus only about 16,000 [registered investment advisers]. They’ve got a great opportunity to convince them. As long as they have a unique value proposition, they’ve got it. They can control it. They can dictate it. That’s a great opportunity.

Mr. Nagengast: We’ve been supporting the hybrid model for 15 years, so it’s nothing new to us. I would echo it’s all about having a strong value proposition. One of the things I stress with all of our advisers is that regulation is not going to get any less stringent, and don’t you want a strong partner who’s watching your back? It’s been a strong story. We’re not threatened.

We highly support the hybrid model. We think it’s a great model. It’s here to stay.

Mr. Bloom: A lot of the advisers view compliance as really burdensome and an added expense to their business. We work with a lot of individual RIAs, and they really em-brace the compliance. I view our compliance prowess as one of our marketing points. We have all these controls and processes that we use for the advisers who are affiliated with our RIA. As we’re talking to the outside RIAs, we just say, “Hey, we’ll just turn these processes right around, make them outward-facing, and we’ll help you make sure that you protect your business.” These are small-business owners. They’re owners of very valuable businesses. They want the compliance. They want to see what they’ve worked their whole lives to build protected.

Mr. Schwartz: Seventeen years ago, we said we were the broker-dealer that would focus on fees for advisers who wanted to do a combination of fee or commission business. They didn’t invent the term “hybrid” until 15 years later when we simply were doing it. We’ve been 50% fee-based for 10 years and are now about two-thirds fee-based.

Twenty years ago when I was a $2 million broker-dealer, my two largest offices that did $1.5 million dollars of business both went fee-only. So I lost 75% of my production to fee-only 20 years ago. At that point, I thought it was the end of broker-dealers as we knew it, and when we started getting very active in the fee business two or three years after that, I really thought I was late to the game. Obviously, looking back at it, I was very early to the game.

Statistically, this year, we’ll recruit about $75 million of new business, of which 85% will be doing fee business when they join or will be doing fee business within 12 months. This year, we’ll probably lose about $3 million in business to fee-only. About 40% of our growth comes from the growth of existing advisers, and we expect that to be more like 60% or 70% later on. There are going to be always some that are do-it-yourselfers that want to go completely to [The Charles Schwab Corp. in San Francisco] and give up their securities licenses.

But I think our job is to make it a compelling story for them not to, and part of that is the value-added propositions that we’ve been talking about. The other part is to price your fee-based model in ways that make it not so compelling to leave. If you’re charging somebody 30% of their fees to be with your program and they can go to Schwab and get 100%, a lot of the people are going to go. But if the differential is 5% or 10%, and for that, you’re going to show them how to grow their business more and add value and save time on performance reporting and in compliance.

We have a tool, for $1,200 a year, we basically run the compliance side of somebody’s RIA for them. Legally, we aren’t running it. They’re still the chief compliance officer. But we’re giving them all the tools. Some of them are spending $20,000 a year doing that with an attorney. [Errors and omissions] insurance, which costs a couple thousand dollars a year through us, could cost $20,000 or $30,000 to somebody as a stand-alone RIA without a broker-dealer. So if a broker-dealer puts their attention on it, they can build a compelling fee-based model that will keep advisers in the game with them.

Early on, we realized that many advisers were just using us as a stepping ground to go fee-only a year later, and we’ve certainly done a better job of weeding those out. In our case, we’re really looking for the people that see the hybrid model, the combination of fee and commissions as their long-term business model, and then it’s our job to add enough value so they never change their mind.

We talked a lot about how many people we’re going to get from wire firms because of all this difficulty. Five years ago, about 1% of our recruiting was wire firms. Today, it’s only about 10%, maybe 15%. Maybe five years from now, it’s going to 20% or 30%. A lot of the advisers are not just coming from wire firms because they want to break loose. That’s a relatively small percentage. A lot are coming from the other 95% of the broker-dealers out there that are not offering these things — they may say they are, but the bottom line is the advisers aren’t seeing it. And so our biggest success is taking people that really do want a broker-dealer, already are familiar with the independent channel, but their current broker-dealer isn’t living up to what they thought it would live up to.

InvestmentNews: Is there anybody that’s gone fee-only and then asked to come back?

Mr. Roth: We’ve seen it. We have actually seen it. Yes.

Mr. Schwartz: We have at least six offices that have been fee-only when they joined us. Two of those had left us and came back. The other four had gone fee-only previously and then came back to us.

Mr. Bloom: For us, even if they’re fee-only, I’d love to have them as clients. They may not want a broker-dealer. But, again, we’re selling infrastructure. We’re selling efficiencies and leverage.

Mr. Roth: We’ve seen the perception that life is better on the other side. But then, as you both mentioned on the compliance side, they said, “Wait a minute. Now I’ve got to outsource the compliance,” and it’s not as rosy as before.

Mr. Bloom: The advisers who are most appreciative of what we do on the RIA side are the ones who have run their own RIA. They experienced it. They go, “Oh, the grass isn’t greener. Boy, that’s a lot of work.” So then they come to appreciate what the firm does.

Mr. Antoniades: I do think that the RIA-only model is disruptive to our business model. We’ve only lost two advisers to it our whole time really that I’ve been with First Allied [Securities in San Diego], which is the date it opened. But I do see it as a challenge to the model. I think you need to be able to articulate your value proposition in an unbundled pricing model. We’re unbundling our pricing so that we can clearly articulate the price for a particular service that a fee-only adviser might be able to obtain. We’re working with our preferred custodians to be able to present a truly hybrid solution. So I do think there is a challenge to our model. It’s our job as CEOs to respond to that. And to get together with our combined teams and really develop solutions that combat that. We’re doing it, and it doesn’t concern me in the least. But to ignore it is a big mistake.

Mr. Schwartz: I’ve been worrying about it for 20 years. As I said, I lost 75% of my broker-dealer 20 years ago to fee-only, so I’ve been looking over my shoulder all that time. There’s one thing that’s going to be of considerable importance over the next three to seven years. Basically, regulation follows the money, but it doesn’t follow it until five or 15 years after the trend has already been in place. The regulation on broker-dealers is probably at least five times, if not 10 times as much as on the RIA side. So when the regulation on the RIA side is so light compared to the broker-dealer side, it naturally pushes dollars more toward that side. However, the regulators ultimately will rationalize the regulation between these two sectors. There have been a number of calls for [a self-regulatory organization] for the RIA side. That is going to happen, in my mind. I think there’s a good chance it will be [the Financial Industry Regulatory Authority Inc. of New York and Washington]. It may not be who people want, but it’s the most proven regulator in this sector.

InvestmentNews: With what has happened, when the dust settles, what will the regulators look for and what will they look like?

Mr. Schwartz: What will happen is that all the different rules that apply to the broker-dealer side will apply on the RIA side, so an RIA that today is spending $10,000 a year to do compliance or $20,000, will be spending $80,000, and it won’t be as attractive to become an independent RIA, unless you have at least $200 million or $300 million of assets, maybe even $500 million. That’s not to say there won’t be plenty of people that are RIAs on their own, but it won’t make sense at $50 million or $100 million. Now, let’s face it, all the things that are being focused on to regulate us are probably not being paid a lot of attention to by the [Securities and Exchange Commission] and the [Department of the Treasury] right now.

InvestmentNews: Variable annuities suitability rules don’t look so important right now, do they?

Mr. Schwartz: We probably to some degree [get a free pass] for a while, but then it’ll pick up again. It’s really five, eight years before you’ll see the RIA regulation up there. But, ultimately, there will be an SRO for RIAs. They’re just not going to let tens of thousands of people become RIAs and just sort of go willy-nilly with a once-every-seven-years audit. They’re going to be audited every year. They’re going to have the same advertising rules as any Finra member and so on down the line. The bad news is that that’s going to be more work for us. The good news is that we’re in a good position to take advantage of it because it’s easier for us than it is for advisers, and that’s going to be a positive for the hybrid channel compared to the totally fee-based channel.

I think most larger independent broker-dealers who are at $200 million to $500 million today, will be $1 billion-plus then, and they will have fee-only people, commission-only people and combination, and they’ll get to service all of them. In 20 years, there will be only one license, and it will cover both fee and commission, and they might throw insurance in there, because it’s all interrelated. There should be one license that covers it all and one or two regulators that cover it all, and entities like us that can take advantage of it, we will be able to offer all those things to the advisers.

InvestmentNews: Anyone else on the future of regulation?

Mr. Roth: I think you’re going to see [the Glass-Steagall Act of 1933] being restored.

InvestmentNews: How do you make sure you’re investing intelligently in technology?

Mr. Antoniades: It’s tough. We bring in the business owner or the adviser and try to understand what their needs are. But at the end of the day, technology has its ups and downs. Every time we launch a new piece of technology, our service levels dip a little bit, and then we get it right. Other than compliance, technology is the fastest-growing department in the organization. And I don’t think that’s going to change. Sometimes we over-complicate solutions, and our new direction is really around creating solutions that bring efficiency. Straight-through processing is key for us so we can go directly from the business owner all the way to the custodian, and only deal with exceptions. That’s key to delivering scale, and that’s a big focus for us.

Mr. Nagengast: We really use a plug-and-play approach. Our strategy is to invest vertically in the products and then integrate information horizontally across applications and be a leader in how in-formation flows between applications. If you take that plug-and-play approach, if one of your specialties gets behind or needs to be replaced, it’s very easy to replace it. We want to excel in making all those applications interoperable. This industry is also about choice, and giving advisers choice of applications. Some of those will be free and some will be pay-for-use-type applications. For instance, basic account aggregation of brokerage, non-brokerage data we offer for free, but if you want something more sophisticated with performance reporting, we’ll offer a pay-for-use additional application.

The other thing is, we only build when we see that there’s a clear void in the industry. Where we have seen a clear void is the treatment of non-brokerage information. That’s where the clearing firms have really missed the boat. The other thing is spending your money wisely. The first part of that is getting the input from the field, and we have very sophisticated ways that we do that. We have a field technology department where their focus is just to be the eyes and the ears of the adviser and representative of the field. Then you have to bring all the disciplines of the firm to the table to help prioritize projects.

Mr. Bloom: Technology is one of the pillars that the firm stands on. For us, it’s all about having a great process and great people to run the process. The real value that we bring to the table is in the integration of all the different pieces. Once you decide what the advisers need, then you get down to a buy-or-build decision. There are certain things we will build because we think we can do it better than what exists out in the marketplace, and then there are things we wouldn’t think of building because great solutions exist out there in the marketplace. Once you make the decision to build, how are you going to build? We’ve done a lot of our development offshore over the past 18 months and that’s proven to be really, really beneficial. They do great work. They do it at a very good price. Then we also have what we call Commonwealth Labs, and that’s our way of putting things out for the advisers to play with, so we don’t go too far down the development path on something that they wouldn’t appreciate or we don’t have exactly right. We get some great suggestions.

Mr. Roth: As the largest clearing firm, we’re in a real dilemma because we have the 1,100 consultants of all the broker-dealers that say to us that we always have to drive technology in a different direction. In spite of the fact that our technology budget is $350 million, we never have enough rolling out. You can never satisfy the masses. I think efficiency is the name of the game. Like other clearing firms, we’re pushing more of that technology to the field because that’s what they want. That’s what we hear loud and clear.

Mr. Nagengast: A lot of the industry is straight-through processing in a brokerage world and the big thing next is going to be straight-through processing in the non-brokerage world. We really feel that we’re there already in a straight-through environment in the non-brokerage processing.

Mr. Schwartz: A lot of us grew up in an era where we saw the prior generation of really large independent firms and the big wire firms build a lot of technology that be-came a legacy system that they couldn’t escape. Most of us have avoided that by the plug-and-play approach, where you get the best of breed and then you sew it together in an efficient manner, and then build when it is absolutely essential, recognizing that even if you build it yourself, you may be unplugging it and putting in something else. All of us rely heavily on the technology of the clearing firms. The two major clearing firms spend hundreds of millions of dollars every year on technology. So we have a big leg up by having these clearing firms that understand us and build stuff that we really need. Pershing has a program where they can help us outsource the building of something overseas if we’re not big enough to go out and do it all ourselves. So the clearing firms have a very big role. That’s been a great thing for the midsize firms like us.

InvestmentNews: The pressure to support the baby boomers is so great, how do you get it right?

Mr. Schwartz: What you’re basically talking about is switching from the era where everybody is in an accumulation mode, which advisers and we love because money comes in but it never leaves, to a mode where every month money is going out. And there’s the issue of making sure the client’s going to have enough money. Also, how do you keep the advisory practice and the broker-dealer and the clearing firm from losing assets all the time?

We’re all going to come up with similar solutions, but with our own flavor. Our flavor has always been the fee-based side. So one of the key things we’re building and focusing on are several models that are fee-based solutions for this. We’ve seen some solutions coming from the insurance side — the variable annuities and various other insurance-related guaranteed income distribution products for retirement, and certainly those are being refined and have some value. We’re trying to have at least three different models related to fee-based solutions. There are the classic bucket strategies where you have this bucket of money for the next five years, [then] the next five years. There’s some value in that, especially for smaller clients. It’s not super-sophisticated, but it’s easily understandable, and there’s a lot of protection there. The problem is, there’s no magic.

I saw an article in a magazine as I was flying in on the plane about a guy that has figured out how to do 6% distributions from day one in-stead of the traditional 4% distributions, and basically his solution is that he picks better mutual funds and performs better. The problem with non-equity investments, with income investments, is that for every bit of higher return, you always have higher risk, and usually the amount of higher risk is disproportionate to the higher return. Unfortunately, it does come back to basic fundamental principles of asset allocation. But there are some ways to structure it so at least the client isn’t having to make really tough decisions every week. Even though it’s oversimplified, the bucket-type strategies have some functionality and prudent asset allocation and expectation-setting for the clients that are really important.

InvestmentNews: Advisers feel that there isn’t the right thing out there in terms of retirement products. How are you dealing with anxiety and questions on that front?

Mr. Bloom: We’ve attacked that a couple years ago. It’s hard to argue with the demographics that there begins to be a pretty big outflow of assets from the bigger pot, but I think the better firms are going to take advantage of this and they’re actually going to see incredible opportunity to gain market share. In the accumulation phase, people have different advisers and they’ll spread their money around. As they start to go on into the decumulation phase, they’re going to consolidate those assets. Two years ago, we had a retirement income conference, and the focus of it was to help position the advisers as the income experts in their communities. So whenever somebody starts to enter that stage of life, [they know that] “hey, you have to speak with John,” or “you have to speak with Sally.” We’ve helped them with creating educational pieces for the client. Our research folks have helped them do some modeling on how to create the better portfolios.

If there’s one fallout of everything we’ve seen over the last couple of days, these guaranteed products hopefully in the future are going to be backed by real guarantees. So when you look at the silver lining, I think the products that will start to be offered will be a lot stronger.

Like a lot of the other things that we do, it’s just about helping the advisers position themselves, and we see it as an opportunity. You’re going to fight the tide a little bit because of the general outflow and demographics, but for the right advisers doing the right things, there’s going to be another real opportunity.

Mr. Roth: We just look at our retirement account base. The average account size in retirements is actually growing. What’s happening is they’re accumulating, they’re moving it into one trusted adviser. Those statistics are now all of a sudden catching our attention, because the average retirement account size now is growing. The answer to your question really goes back to training and education: training the advisers, educating them with the tool set that they have available. The rest will take care of it.

Mr. Nagengast: Our Imagine series is basically the Imagine workbook and workshops and it’s really to help the adviser in how to talk to their client about retirement. For a lot of these clients, it’s the first time they’ve taken a holistic approach to retirement and how it’s going to affect their lives. The second aspect is to make them an expert in income distribution through things like our income distribution solutions and income for life program. And we’ve developed a thing we call ROI, not return on investment, but reliability of in-come. It’s an assessment tool to talk to clients about that risk, but putting it in simple terms that the client can understand. That encompasses the whole picture, starting with Imagine and what they picture retirement being.

Mr. Antoniades: We look at it in three different pieces. There’s the point-of-sale planning piece. And delivering purpose-built tools that [are] relative to retirement [is] a key part of it. There’s a product side to it, which is the back end. The third piece is an element of expertise that I don’t think our advisers possess. Two and a half years ago we bought Greenbook [Financial Services Inc. of San Diego] and they have a pension administration group and actuaries. We saw it as a big gap relative to the knowledge base that our advisers possessed, and went out and acquired a firm that had a competency just in that. And we’re beginning to see the fruits of it. As we integrate those three pieces together, we should have pretty slick solutions.

InvestmentNews: Are they warming up to it?

Mr. Antoniades: Absolutely. We pair it up with a client acquisition strategy that’s very powerful. Last year alone we put 5,000 qualified leads in front of our advisers by using our strategy and our tools.

InvestmentNews: How are health care costs affecting retirement planning?

Mr. Antoniades: Clearly it’s a part of our retirement planning process.

Mr. Schwartz: There’s a natural emotional response when you get sticker shock on anything, be it a car or whatever else. Obviously, they came to a planner because they do want to plan things and be in control.

Mr. Bloom: They’re certainly addressing health care as they’re doing their planning with their advisers. We’re all going to be [affected]. Look at the demographics. There’s a large part of our country that has saved no money, and they’re getting old. Health care is going to be an incredible drain on the government.

InvestmentNews: Is anybody putting a specific product focus on that?

Mr. Schwartz: It’s just part of your income that you know you need a month and you know that number’s going to grow as compared to some things.

Mr. Roth: There are health savings accounts and stuff like that that people can leverage.

Mr. Nagengast: Insurance is becoming a bigger and bigger part of the planning process. Things like long term care.

InvestmentNews: There is a difference between the importance that you place on culture and the importance that the reps and advisers place on culture. They want to talk about compensation, payout and technology and then they’ll talk about culture. You guys want to talk about the culture and the integrity of the firm. How do you bridge that gap?

Mr. Schwartz: Culture is very important to us, and in the end, there is a percentage of advisers that we don’t take because we don’t think they will be easy to work with. They have a different mindset. That doesn’t mean we will reject them outright in some cases. It may just mean that we don’t offer them as quite as attractive an offer as somebody we think is really in our sweet spot that fits really well with our firm. But an adviser can’t say, “There’s culture and do they have it or don’t they have it?” The majority of offices that join us come and visit us and spend time, and at the end of that day they say, “You were just somebody I was going to check off the list. But now after meeting your people, I want to join.” Part of that is because they got to see our technology and other things. They may not ever use the word “culture.” They don’t have a box on their list for culture, but it becomes something. Also, I think that reps leave their existing firms when the culture changes. They just say management changed. They don’t understand it anymore. Our raving fans, the ones that rate us 10 out of 10 on our survey — we do a survey every year of all our advisers — are probably doing it mostly based on the culture, on the open architecture, on the broad principles, because on any given day, we still make a mistake in operations or don’t process something as fast as they’d like and they don’t give us a seven for it. But if they’re with a firm where they didn’t believe in management anymore, the same mistakes might get a seven.

So the culture is really important. It’s just not something the adviser puts a finger on and says, “That’s what I’m calling it.” Culture is also critical in a different way. It’s something that motivates and keeps your existing advisers there, but also keeps your staff motivated. They know what matters. They know what your principles are. They know that ethics and, in our case, flexibility and kindness, for example, are part of our value proposition. Those are the kind of things that keep you going in the right direction.

Mr. Bloom: It’s not tangible. It can’t be spreadsheeted. But when you look at our existing advisers, they actually understand and appreciate the culture. The challenge is, how do you make it tangible? We try and make it tangible in the service. We’ll throw out facts about the ratio of advisers to home office staff. At Commonwealth, it’s about three to one, and that’s very, very high for our industry. So it translates into us being able to offer more services and a higher level of service.

We measure the advisers’ satisfaction as well. Right now we’re running at about a 94.5 satisfaction rate out of a score of 100. That translates into different things. Eight seconds is the service standard to pick up the phone, which translates to three rings. It all comes down to little, subtle things and the feedback that you get from the advisers. One of the nicest compliments I ever received was when one of our advisers said to me, “You know, you treat me like I treat my best clients,” and it’s that type of attitude and a passion for service, such as having [information technology] support on a Saturday.

Or if one of my advisers’ daughters just bought a digital camera and she’s having trouble uploading the pictures, getting it to work. So if a check didn’t go out maybe as quickly as it should, they understand, because they get the general culture of the firm.

Mr. Nagengast: First of all, this has always been a relationship business and always will be a relationship business. If you can bring all these things together of culture, which is practice management, extraordinary service, operational efficiency, and combine with relationships, it really comes down to business growth. That’s really how we see all this coming together. It all supports the representative taking their business from $100,000 to $500,000 to $1 million. We want to be known as the proven experts of taking people from $100,000 to $1 million. When we think of business growth experts, we feel like we’ve walked the walk, talked the talk. We’ve done it over time. We have great examples of programs where we’ve taken advisers on that path, whether it’s through fee-based programs or client acquisition. We see it all coming together …

Mr. Antoniades: It’s mission, vision, value, all of those elements that make an organization. It is true, it can’t be put on a spreadsheet. It’s hard for them to put their finger on it. But at the end of the day, it’s a philosophical issue. What’s your philosophy relative to the adviser? If you have an experience with compliance, are you going to form a rule that you apply to everybody without any question or are you going to have some type of subjectivity? Have you crossed some barriers that help you understand that a business owner is a separate business and you can’t assume that yours is the same as yours, and the same as yours? Those are some of the philosophical barriers that we as organizations have to cross every day in order to maintain the same culture.

Ultimately, that results in whether we’re treated as a vendor or whether we’re treated as a partner. If we’re treated as a vendor, then we have no choice but to compete as the low-cost adviser, and if we’re treated as a partner, then people can understand that we deliver value and there’s more to it than being the low-cost provider. Culture really speaks to how we’re perceived by our adviser — as a partner or a vendor.

InvestmentNews: Given the crisis that’s happening now at the big firms, if you had to put a headline on your next recruiting pitch, can you tell me what it is? And as an add-on, how successful do you think Bank of America will be in integrating Merrill, given that this deal was done in 48 hours?

Mr. Nagengast: To start out, “Our business growth experts will help take you to the next level.” That’s pretty much the same as what it’s been. I think Merrill will be run separately for quite some time and they’ll have difficulty integrating it across channels.

Mr. Bloom: I don’t see our message changing. We’ll stand for the same pillars that Commonwealth has stood for almost three decades. The marketing may be a little more targeted toward the recipients who will read it. But we’ll stay on message. It’s service, service, service.

As far as Bank of America and Merrill, I’m sure they’re going to throw a lot of resources and funds at trying to retain these advisers, and like anything else, the truth will lie in how well they execute it. But I don’t think there’s any question that there’ll be advisers leaving that organization.

Mr. Schwartz: I don’t see our message changing that much. We have certain core messages. They revolve around being the leader in the fee business. Flexibility in open architecture, which has always been a theme that we have had, and then the overall message of quality, practice management, succession planning, those things that help the adviser grow. Seven years ago, they didn’t want to hear about that stuff, and today that’s very central to the top broker-dealers.

Historically we have not gone after wire firms, broker-dealers. We’ll probably do a little more in that, but not a huge amount. Most people know us, so I don’t think it makes sense to suddenly change our message. But we’re probably not going to start advertising that our financials look wonderful or whatever else.

InvestmentNews: “Squeaky clean” is not for you as a pitch?

Mr. Schwartz: It’s a little bit early. We may see in 90 days that certain questions are coming up often enough that we want to add another bullet point on the bottom of the five bullets on an ad. But I don’t think that’s really necessary. People get it already. People recognize what the top independent broker-dealers are about, and you just want to keep on reminding them that you’re one of them, and hope that we still get about 50% of our new advisers from referrals and from existing reps, and another 20%, 25% from referrals from reps that are in the process of joining us. If things are working, you don’t have to change things just because somebody else failed.

Mr. Antoniades: Our message has always been helping entrepreneurs. Just because the phone rings doesn’t mean that those people that are making the call are in search of control, ownership or freedom. That’s really the motivation to go independent at the end of the day. I will say this, the Merrill guy is dealing with a higher-net-worth client than the average independent. We have invested a significant amount of money in building a platform that enables our advisers to compete for the high-net-worth client with anyone and win.

Ultimately, we may modify our campaign to really highlight our ability to go after a high-net-worth client.

Mr. Roth: We’re here to support these guys. With the market disruption, we’re here to give them the tools and the technology to be able to help gather and control those assets. That’s the name of the game so that message won’t change.