August 1, 2017
By Dan Jamieson, Financial Advisor Magazine
Recruiting activity among independent broker-dealers is regaining momentum now that the DOL rule is back on track.
Many advisors have been evaluating their broker-dealer relationships in light of the new requirements the DOL will impose. Big firms like LPL Financial and Raymond James are changing their payout formulas in response to the rule and others are likely to follow.
But independent broker-dealer execs say that some recruits in the pipeline held back on making decisions early in the year after President Trump ordered a review of the rule. That gave opponents of the DOL plan—including many B-Ds and independent reps—some hope that the rule would be indefinitely postponed.
But the U.S. Labor Department ended up delaying the initial implementation for just 60 days, to June 9, with potential changes still in the works and a full rollout set for January 1, 2018.
While implementation was up in the air, “some firms slowed down the work they were doing” for DOL compliance, and some advisors “also slowed down their search efforts, until they got greater clarity,” says Bill Morrissey, managing director of business development at LPL Financial.
“Some advisors went on hold, but they’re now back in the fray,” says Jamie Price, chief executive of the Advisor Group of broker-dealers.
Although reps move for a variety of reasons, preparation for the DOL rule is still at the top of the list advisors use when they evaluate a new B-D they might want to join. “Every single recruiting engagement today begins with, ‘Tell me about your DOL strategy,’” says Amy Webber, chief executive at Cambridge Investment Research.
The large B-Ds are hearing from both individual reps and smaller, competing firms, about a possible affiliation. Faced with higher costs and regulatory burdens, owners of smaller B-Ds are looking to sell out and retire—or continue by becoming the OSJ of a larger firm. Some independent RIA firms are in the same boat, B-D execs say, and are ripe for a move to the corporate RIA of a brokerage firm. Stand-alone RIA firms “don’t want the [regulatory] risk anymore,” Price says.
But the DOL rule is prompting some advisors affiliated with B-Ds to also examine the alternative. Scott Collins, director of brokerage independence at TD Ameritrade, reports that he is seeing as much interest from independent B-D reps going RIA-only as he is from wirehouse brokers considering breaking away and going out on their own.
Meanwhile, advisors are aging and in need of succession plans. Fees are under pressure, and client expectations have grown. All these factors have forced reps to take a hard look at their B-D partners, Morrissey says. The DOL rule has become an “accelerant” to underlying trends in the market, Morrissey says, echoing a common refrain among other industry execs.
That’s made for a good recruiting environment, adds Jodie Papike, executive vice president of Cross-Search, a Jamul, Calif.-based recruiting firm.
The DOL rule and industry consolidation have forced firms and advisors to make major changes, Papike says, “and change means people need to know what their options are. … Advisors are looking and seeing things they didn’t know existed at [other] firms. … There’s a feeling other platforms and models might be better.”
“So it’s really a reflective time,” Papike adds. “‘Do I change my business model, or change my B-D?’”
Recruiter Jon Henschen, of Henschen & Associates in Marine on St Croix, Minn., says most advisors who are in the market for a B-D want a larger firm.
“For small firms of under 100 reps, it’s been a real stretch for them in attracting people,” Henschen says. “They’re swimming against the current … advisors are more confident with large firms—firms with scale that they feel can survive the DOL.”
Advisors have been forced to look elsewhere if their current B-D will no longer support the type of commission business they are doing, such as brokerage products in IRAs and direct business with product sponsors. As a result, firms that have promised to support commission business or allow direct business have been using those things as recruiting tools.
Commonwealth is one firm that is requiring advisory accounts for IRAs, but Andrew Daniels, managing principal of business development, says the decision hasn’t impacted recruiting. “The type of folks who join here … are largely fee-based anyway,” he says. “They’re bringing in books [of business] north of 80% advisory.”
Commonwealth’s target this year is $60 million in recruited revenue, and as of midyear the firm was “pretty much on pace,” Daniels says. Last year, Commonwealth brought in more than $50 million.
“We have our greatest success [with advisors] coming from other independents,” Daniels says. These are usually firms “that have gone through an upheaval, where economic changes or rapid growth is impacting service, or there’s been a cultural shift.”
Raymond James Financial Services had a record recruiting year last year, says the firm’s president, Scott Curtis. “This year, while we’re not on the same pace, we’re still having what looks like our second best year we’ve ever had.”
RJFS doesn’t report recruiting data, but as of March 2017, the firm had 3,663 advisors in total, an increase of 243 from the same period a year ago.
Curtis says a “degradation of service” at competing independent firms, and at the wirehouses “an erosion of flexibility,” is driving advisor moves. At the wires, incentives to push lending products rub many the wrong way, he adds.
The Advisor Group doesn’t disclose recruiting data, either, but Price says its four B-Ds—FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial Services—are as a whole on track to hit internal targets. “And we’ll probably come in above” target, he says. The Advisor Group is also seeing more large teams than in the past.
“I get a sense … scale matters now, that advisors want to make sure the firm ‘has my back’” as the DOL rule takes effect and the industry moves to a fiduciary model, Price says.
Price was somewhat surprised at the high retention rates among Advisor Group reps as the firm went through ownership and management changes (Price himself took over last November). He chalks that up to a desire to affiliate with a firm that can make adequate investments for the future.
Through the first half, Cambridge was on pace to recruit about $50 million in production this year, which is typical, but well below the record $82 million brought in last year when some advisors and small B-D recruits were in a “panic” over the DOL rule, Webber says. “But it could be another record year” given the changes afoot. “We may not know until December,” she says.
Cetera Financial Group also doesn’t disclose numbers, but recruiting “is shaping up very nicely. We’ve had a very strong first half [and] close to the best year we’ve ever had in the aggregate,” says Adam Antoniades, president. The draw? Advisors want a firm with the resources to help them “thrive in a fiduciary world,” he says.
LPL is seeing “remarkably steady” recruiting, Morrissey says. The company doesn’t provide data on recruits, but in the first quarter its advisor count was 14,354, up by 261 year over year. In calendar year 2016, LPL gained 323 advisors.
The DOL rule has also helped recruiting at 1st Global, a Dallas-based B-D catering to CPA firms.
CPAs “generally view themselves as fiduciaries as part of their profession, and maybe they’re paying a little more attention now” to becoming wealth managers given the DOL’s action, says David Knoch, president of 1st Global, which serves about 100 mid- to large-sized accounting practices that together have 900 professionals working as advisors.
The interest among CPA firms to add wealth management services is high right now, Knoch says, with the recruiting pipeline “stronger than we’ve seen in a while.”
DOL rule aside, independent broker-dealers are cautiously optimistic about attracting a few more recruits from the wirehouses this year, given the cutbacks in recruiting bonuses at most of the big firms. “Transition assistance has never been the basis upon which people transition to us,” Antoniades says. But with the pared-backed deals, “we think there’s ultimately much more opportunity to recruit from the wirehouses.”
Others aren’t so sure. Daniels notes that UBS pulled back on deals a while ago, and that hasn’t made much of a difference in landing UBS advisors. Others note that Wells Fargo Advisors has not yet cut back on recruitment incentives, so wirehouse folks still have options to land a hefty check.
Then there’s the fact that many captive reps just aren’t constituted to run their own businesses. Managing an office instead of just servicing clients is not something they want to take on.
“The first decision is, ‘Do I want to be independent?’” Curtis says. Many don’t. On the other hand, independent offices that run a tuck-in model where a wirehouse rep can join as an advisor will probably be able to attract some big-firm recruits, he says.
Wirehouse brokers “tend to concentrate toward an LPL or Raymond James,” Henschen says. “They want that brand name—they feel they need it.” Plus, the fiduciary rule will encourage more to simply set up a pure RIA firm, he predicts.
LPL’s Morrissey says the firm recruits across all channels, and in addition to the wirehouse market, he expects to see action out of the insurance company-owned B-Ds.
“Even prior to the DOL, the trend line around insurance B-Ds hasn’t been great,” he says. A number of insurers have dumped their B-D units as proprietary insurance sales have suffered.
“That business is getting more and more difficult,” Morrissey says.