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Commonwealth Financial Network: Taking practice management to a higher level

No other firm has defined, developed and executed practice management as well as Commonwealth, and for that, they are important.

With humble beginnings, founder Joe Deitch went through the natural struggles of a new/young business owner. Knowing that he had a lot to learn, Joe entered the Harvard Business School OPM (Owners of President’s Management) program. Commonwealth had its struggles in the mid-’80s, with firms going out of business at a rapid pace, the tax reform act of 1986 and the October stock crash of 1987 creating a very difficult environment in which to operate a financial services business. Joe has attributed the Harvard OPM program to his firm’s survival through this difficult market, as well as the 1989 birth of their Practice Management Department.

Today, Commonwealth’s Practice Management Department operates with the philosophy that excellent wealth managers may not have all the tools necessary to be excellent CEOs of their own small business. Thus, the department gives the advisor more face time with clients by helping with the CEO functions (staffing, risk management, marketing, business planning and dashboarding) all of which are critical to the success of their practice, but none of which are in and of themselves revenue generating.

Raymond James Financial Services: Attracting wirehouse reps

Prior to the emergence of Raymond James Financial Services, independent broker-dealers were considered a fringe model for reps with insurance backgrounds. Raymond James made the independent model a viable, sought-out option for wirehouse advisors.

The early and mid-’70s were a very difficult time for Raymond James in a declining market that meant declining margins with the static overhead of a retail model.  In 1975, Raymond James acquired a struggling mutual fund sales and financial planning firm, Financial Service Corporation (FSC), and merged it into its existing independent broker-dealer – IM&R – along with most of its top talent.

For the years following, Raymond James grew substantially, bringing credibility to the independent broker-dealer channel that did not exist prior. By 1999, they changed the name from IM&R to Raymond James Financial Services and have grown to become the second largest independent broker-dealer. To this day, Raymond James maintains a primary focus of recruiting wirehouse advisors, averaging 85% of recruits coming from this channel.  In some years, like in 2009, recruits came almost entirely from wirehouse firms. Building a platform that has the look, feel, advisory platforms and technology similar to what wirehouse reps are accustomed to, but in an independent wrapper, has given Raymond James the success that it enjoys today.

Cambridge Investment Research: The hybrid model

Prior to the early ’90s, the hybrid model was rare and largely ignored, until Cambridge embraced it. The firm’s evolution as the leader of the hybrid model makes it important.

Founded in 1981, it wasn’t until the early ’90s that Eric Schwartz decided to follow the hybrid model as the wave of the future. The beginnings of this new business venture did not come easily, though, as the firm lost its two biggest offices (about 75% of its revenue) because those offices decided to forgo all commissions and become fee-only.

Eric’s first response was fear, anger and a wrong conclusion that the independent broker-dealer business was an obsolete model. Luckily he didn’t quit, and after listening to financial planners who wanted to do more fee business, Eric spent three years preparing for and designing the Cambridge way of making it easy to do both fee- and commission-based business.

After committing to both fees and commissions, the hybrid model really became active in 1995. Within seven years Cambridge revenues grew close to 20-fold—from modest revenues of $2 million in 1995 to $40 million in 2002. Fee-based business, the hybrid and commission business model, and the independent broker-dealer channel have gone from relative obscurity to a huge, rapidly growing segment of the financial services industry. Cambridge leads that wave because of their early commitment and vision of things to come.

First Allied: A focus on wealth management

By developing a platform consistently centered on a single target market (accredited investors and wealth management), First Allied has brought a focused approach to wealth management which makes them uniquely important.

Over the years, First Allied has built a comprehensive fee-based platform, broad range of alternative investments and private equity offerings. The firm has also built a client acquisition program that enables their representatives to capture new, high-net-worth clients that include doctors, federal employees and a retirement income program.

First Allied’s program sales initiative has brought a good deal of success, along with some obstacles. The firm has experienced some advisors who participate in the programs but have not followed the game plan. Or, some of these advisors have failed to follow up with qualified prospects in a timely and systematic manner and then pointed the finger at the firm for their lack of success. They have also experienced some advisors who lack the sales skills to consistently close the business. As a result, they have added actionable sales skills training to the wealth management training they provide in partnership with Cannon Financial Institute, both in the baseline Certified Wealth Strategist (CWS) certification training and the advanced Masters training curriculum.

The focused approach has worked well for First Allied as they consistently rank in the top five for average production per rep, which currently falls around $375,000. The advisors who engage in their wealth management and development program surpassed the GDC and asset growth of their own advisors who did not by 66% (2008–2011).

The Comprehensive Group: 100% advisory payout model

Only a handful of firms offer the 100% hybrid model. One that has proven it can be implemented successfully and profitably is the Comprehensive Group.

Tim Smith started the Comprehensive Group in 1998. In 2001 he took on partners to expand the company’s scope and further penetrate the hybrid market. Addressing this venture, Tim was quoted as saying, “We have strained at times to upgrade our technology on the fly, a bit like jumping aboard a moving train while holding an egg in each hand.”  Along the way, there have been numerous personnel issues—as with all companies—and of course challenges in meeting the regulatory requirements while still growing and maintaining profitability. The Comprehensive Group has marketed almost exclusively by serving as a resource to the primary custodial firms in the country, and receives referrals from them when they want to onboard a new RIA firm in need of a fee-friendly broker-dealer. They have grown at double-digit rates for more than 10 years now, going from 20 registered reps to nearly 260 now, plus staff. They have focused on little or no compensation on the RIA side, with a fair payout on the broker-dealer side.

The Comprehensive Group evolved into the 100% advisory payout model because Tim owned an RIA before starting the broker-dealer, and understood the resentment among advisors toward sharing those revenues with a broker-dealer. As a result, each deal they created was designed to eliminate any RIA revenue participation. In the vast majority of cases, they have been able to accomplish this.

Making this model work requires some give on the broke-dealer/commission side of the ledger by the advisor or production group. In addition, Comprehensive focuses their RIA oversight on proprietary, technology-driven solutions, which is both efficient and cost effective. Finally, they offer excellent service in those areas where they support an advisor, but they also limit those areas in number, so that they are not duplicating support they already have access to at the custodial firms. This enables them to keep costs down, balancing the lower revenue in the equation.

Who’s Next? 

If I were to do as Eli Broad did, and foresee future important independent broker-dealers, a recent entry to that space would be HighTower, which has made it to No. 12 on the 2012 Inc. 500 list of fastest growing private companies. In a few years, when we revisit the “important” independent broker dealers, I suspect HighTower will be among them.