August 3, 2015
By Dan Jamieson, Financial Advisor Magazine
Perversely, independent B-Ds would benefit if advisors were feeling a bit more pain.
That is to say, if equity markets were to sour, or if a major independent firm were to screw up, more advisors might be motivated to change firms.
As it is now, though, things are going well and movement is sluggish.
“It’s a very slow environment,” says Larry Papike, president of Cross-Search in Jamul, Calif., a recruiting firm for independent reps.
“For the first time ever, firms are calling me, saying, ‘Send me some business!’” he says.
Papike and others credit the lackluster pace to the IBD industry itself, which has done a good job of supporting advisors without any major slipups with technology or failed mergers that motivate advisors to find new homes.
“There are just no major drivers forcing advisors to change seats,” Papike says.
“Nobody moves until they’re in pain,” agrees Andrew Daniels, managing principal of business development at Commonwealth Financial Network. “You have to be hurting to want to change, especially in upward-trending equity markets.”
Industry turnover remains historically low at under 5% per year, according to Steve Pirigyi, executive vice president in charge of recruiting at LPL Financial, thanks to a six-year bull market and the lack of any major developments that would force advisors to shop around.
Cambridge Investment Research president Amy Webber still sees recruiting deals at around 35% to 40% of annual production—high for an independent firm and usually only available near year-end when firms are trying to reach recruiting targets.
Those richer deals “may be a product of smaller pipelines, and firms don’t feel they can back off,” Webber says.
The major headline event last year was the purchase of Cetera Financial Group by RCS Capital Corp. (RCAP), and the subsequent accounting scandal at American Realty Capital Securities (ARCP). Real estate mogul Nicholas Schorsch, a controlling shareholder of both ARCP and RCAP, later ended his associations with the firms.
Observers had expected some fallout over the Cetera deal and the accounting fiasco, but advisors at the RCAP-owned B-Ds haven’t rushed for the exits.
Spillover from the ARCP accounting scandal has faded as people have realized Cetera and its broker-dealers are independently run, says Adam Antoniades, president of Cetera Financial Group.
Doin’ Just Fine
Despite the recruiting lull, individual broker-dealers say they’re doing just fine in their recruiting efforts, helped along by the long-term shift toward independent platforms, the success of the independent channel and inflexible management at the wirehouses and insurance-owned B-Ds.
The maturation of the independent side has changed the perception of the channel for the better, says Ron Edde, co-founder of Millennium Career Advisors in Carlsbad, Calif.
“Three or four years ago, it was typically small teams going independent, and the perception was they were the ones who couldn’t make it in the wirehouses,” Edde says.
“Now I can say unequivocally that the people moving from wirehouses are not moving from a feeling of disenfranchisement as much as they are running to something,” he says, namely an opportunity to run their own practices and do better financially.
So despite relatively tepid turnover, independent firms are still attracting a decent amount of new recruits.
LPL added 372 net new advisors over the trailing 12 months ended March 31, 2015. In calendar year 2014, LPL added 363 reps, up from 321 in 2013.
“One of the big changes over the last 12 months we’re seeing is larger and larger groups” of potential recruits in addition to individual reps, Pirigyi says. “And that’s the same through all channels. … Larger groups are not happy with their broker-dealers.”
Cetera Financial Group’s broker-dealers recruited $23.5 million in net trailing-12-month production in the first quarter, up from $20.9 million in the fourth quarter of last year and just $6.2 million in the third quarter.
“The pipeline is probably as strong as ever,” says Antoniades. “A lot of people are beginning to explore” their options, he says.
RCS Capital Corp. (RCAP), closed its acquisition of Cetera about a year ago, and “it takes about a year to get back to speed” with recruiting, Antoniades added.
AIG Advisor Group’s four B-Ds—FSC Securities Corp., Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services—had recruited $3.5 billion to $4 billion in assets for the year as of mid-May, says Kevin Beard, the firm’s executive vice president of acquisition strategy and recruiting. For all of 2014, the firm’s B-Ds attracted about $6 billion.
“This year should be a lot better,” Beard says. “We have an active pipeline from other independents and even wirehouses, and on the acquisition front, we’re seeing a lot of activity from firms looking for succession plans or wanting to [sell their] broker-dealers because of increased costs and regulation.”
Raymond James Financial Services had 3,422 advisors in the independent channel as of March 2015, and that was up by 134 advisors from a year earlier.
Last year, the firm set a record for recruited revenues and should set another milestone this year, says Scott Curtis, RJFS president. The firm does not disclose recruited assets or revenues.
Most of RJFS’s recruits come from employee channels, advisors who “are now at the point where they want to take more control [and] become independent business owners,” Curtis says. “It’s driven by ongoing frustrations at the wirehouses.”
Recruited revenue at Cambridge will be down slightly this year to around $50 million, says Webber, but that’s after growing 13% last year.
The firm is getting a lot of looks from recruits, but getting the right fit has been more challenging, she says.
“It does feel that fee-based advisors are moving less,” Webber says, “and our business is more highly geared toward fee-based.”
Commonwealth is on track to recruit $50 million in production this year, up slightly from last year when the firm brought in just under $47 million, Daniels says.
Strong markets and improved service at most of the major B-Ds has lengthened the sales cycle, he adds.
“That said, there remain enough instances of firms not taking care of advisors that [we’ve] continued to thrive in our recruiting efforts,” Daniels says.
“We see a lot of advisors who are just uncomfortable with what I call the ‘big boxes,’” large B-Ds that are very inflexible, says Rich Babjak, chief executive and founder of World Equity Group, a brokerage firm based in Arlington Heights, Ill., with 175 reps in 70 offices handling about $3.5 billion for clients.
The firm has had success picking up unsatisfied reps from wirehouses and insurance B-Ds. It added 14 new people in April, and at press time in May it was set to bring on another 20 or so in the next few months, Babjak says.
Unhappy advisors can also get a boutique experience within a large supervisory office like Cooper McManus, says Arthur Cooper, co-founder of the hybrid firm in Irvine, Calif., and one of the biggest offices of Securities America. Cooper McManus has 57 advisors in eight states.
“Last year was a record year, and this year we’ll have another record if everyone in the pipeline closes,” Cooper says. In 2014, the firm added eight advisors and $206 million in recruited assets.
Meanwhile, HD Vest is hoping to add more than 600 new advisors this year to its existing force of 4,500, up from the 455 additions landed last year.
Last year, HD Vest rolled out upgraded technology and planning tools, which along with a revamped web-based marketing effort are helping attract talent, says chief executive Roger Ochs.
Most of the firm’s recruits are tax professionals who are new to the wealth management industry, but on average they have 400 to 600 tax clients who could be converted into financial planning clients.
Ochs counts about 220,000 tax preparers who are not offering financial advice.
“The size of the market is still huge for us,” he says.
Recruiting In Bulk
In fact, big offices of supervisory jurisdiction like Cooper McManus have become important recruiting avenues for IBDs, offering support for breakaway brokers who don’t want to go through the pain of starting their own businesses.
“The captive guys think they understand what independence is like, and the reality is, they have no clue,” Cooper says. “They’re always shocked how stressful [going independent] is.”
The high level of transition support that B-Ds and large OSJs offer has helped attract captive recruits, like wirehouse producers.
“Previously [captive reps] thought [independents were] on an island and figured they had to get their own technology, do their own payroll, find office space and figure out whom to affiliate with for clearing services,” Edde says. “But that’s all been done for them. Now they’re pretty much aware that those things are available.”
Steve Dudash, president of IHT Wealth Management, an LPL Financial office based in Chicago, targets wirehouse reps by offering what he describes as a “plug and play” high-end office.
Dudash left Merrill Lynch last year and has recruited $600 million in assets, opened a second office in Naperville, Ill., and has a third location coming in St. Louis.
The wirehouse advisors he targets are “sick of being told how to run their practices by middle management who are failed advisors or were never advisors,” he says.
All reps at IHT work as W-2 employees just like they do at big firms, except that they own their books and get a higher payout, Dudash says.
Another recruiting strategy independent B-Ds are using: acquiring other B-Ds.
AIG Advisor Group has a unit dedicated to scouting out broker-dealers that might be ready to throw in the towel. The firm is targeting B-Ds with $3 million to $75 million in revenue, Beard says.
“We have a strong pipeline” of firms, he says. “These are firms that have done well and have a great business, but they have no succession plan, or they’re seeing increased costs” to recruit, compete and meet the growing regulatory burden.
Papike, the recruiter, has a list of about 700 smaller B-Ds that he’s targeting as potential acquisition targets.
The idea is that a small B-D can become an OSJ of a larger firm, keep its independence, retain its people and gain the resources of the larger firm.
As an OSJ in a larger organization, the B-D gets more robust technology, practice-management support and marketing heft—all useful in attracting recruits, Papike says—while ridding itself of time-sucking back-office activities like compliance and operations.
Succession Planning Ties
These days, you can’t talk about recruiting without talking about succession planning at the same time.
It’s the rare advisor or team that’s not thinking about succession-planning when thinking of changing B-Ds. In fact, succession planning is often the driving force behind a move. When older advisors join with younger professionals, one of the parties often joins the other’s B-D.
“I’m steering [older] people toward larger B-Ds thick with reps in their local area,” says Jon Henschen, founder of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn. “There is more opportunity to sell a book that way” and get financing from the broker-dealer.
Firms themselves are getting more aggressive in helping reps with succession plans, Henschen adds. The help from firms can include assistance in finding matches within a firm, but also help with searching outside the B-D for suitable mates, he says.
“When I’m talking to young advisors, they want to know what the potential is at Commonwealth to be a successor,” Daniels says. And senior advisors, who usually have a five- to 10-year work horizon, “want to know what sort of talent pool exists to place their books with.”
Over the last year, LPL’s Pirigyi estimates that about a third of the succession plans the firm has worked on involved purchasers who were outside the firm.
Bigger firms or offices with multiple advisors are at an advantage, Dudash says. With a larger office, clients of a retiring advisor have more new advisors to choose from and are likelier to stick around and earn the retiring advisor a higher payout. Plus, larger OSJs can get bank financing, says Dudash, who started his firm with the idea of attracting aging reps. He currently has about $300 million in assets coming over from recruits who will be retiring in the near future.
Employee advisors, especially, have huge incentives for going independent before retirement. When structured correctly, the independent firms they set up can create an asset they can sell at a higher price then they’d get from a commission-splitting scheme at a wirehouse or employee firm. And the sale of an independent practice may be taxed at lower capital gains rates while the advisors face ordinary-income tax treatment with a sunset plan at a captive firm.
A wirehouse advisor might get a multiple of one-times trailing-12-month production with a sunset plan, Dudash says, but could probably double that value by going independent. Add in the benefit of a lower tax rate, and a $1 million producer could net $1.6 million as an independent versus $650,000 at a wirehouse.
“This is a big deal to a lot of wirehouse advisors,” says Edde. The difference “amounts to hundreds of thousands of dollars, sometimes millions.”
In addition to the financial and psychic benefits the independent broker-dealer channel has always offered, the succession angle should play out for some time in the recruiting wars. It’s no secret that advisors are aging, and although many have kept working past the normal retirement age of 65, at some point old age will finally catch up with them and more will have to arrange for a successor.
“Americans overall are living longer, which means advisors are, too,” Daniels says.
“So instead of retiring in their 60s, advisors are now looking to retire in their 70s,” he says, and “our corner of the industry is well positioned for that.”