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AIG Advisor Group: They’re Back

by Paul Menchaca and featured in Financial Planning
October, 2009:

It is late afternoon on the last day of August, and Larry Roth sits in a beige and ivory conference room on the 15th floor of One World Financial Center in Manhattan. The setting sun is beaming through a large window behind him. Most of the office has emptied out for the day. Roth, the CEO of AIG Advisor Group, is considering the question at hand: After relentless bad publicity for a massive government bailout to rescue a company rendered nearly insolvent by the reckless deal making of a small unit in London, wouldn’t it have been easier to have made a clean break from the troubled parent company?

I don’t think that’s true at all,” Roth says. He gives several compelling reasons why the 11th-hour decision made on Aug. 14 by Robert Benmosche, AIG’S new CEO and president, to nix a deal for the advisor group was the right decision. For one, he credits Benmosche with reenergizing the advisor group and recommitting resources to build its business. Roth also maintains that a large, diversified insurance-based financial services company remains a great environment in which to grow a broker-dealer. The AIG Advisor Group, he says, offers a quality platform, quality products, excellent technology and a commitment to continue investing in that technology.

“I think a private equity transaction could have been great,” Roth says. “I think it would have served the advisors well. It would have brought us closure. But it would not have brought us clarity for six or 12 months.”

Had the advisor group been sold to a private equity firm—and a deal was indeed imminent—advisors would have been left with many questions, Roth says. They wouldn’t know how committed the new management would be to investing in technology. They wouldn’t know whether the new management would want to go self-clearing. Perhaps most important, they wouldn’t know whether the new management would want to combine the network’s three broker-dealers—Royal Alliance of New York, SagePoint Financial of Phoenix and FSC of Atlanta—into one brand.

What’s In A Name?

But still, talk about bad karma. AIG remains, essentially, a zombie company, with 80% owned by the U.S. government, which has infused $170 billion since the 2008 collapse. In the public lexicon, in fact, AIG is synonymous with the credit market freeze and subsequent economic meltdown. As this story went to press, The Wall Street Journal reported that U.S. prosecutors were planning to convene a grand jury to consider indicting Joseph Cassano, the former head of the AIG Financial Products unit, for securities fraud. “The AIG name is not a positive,” Roth admits. “I don’t think there is anything I could tell you with a straight face that is great about the AIG name at the moment. But I do believe that we not only have closure, we also have clarity and a CEO at AIG who understands our business. That’s very meaningful.”

Plenty of challenges still remain for the Advisor Group, which lost about 18% of its trailing 12-month production over the last year, with the biggest hit coming in the first six months when AIG seemed to be in the news every day. Roth and his team must revive a recruiting business that had become all but dormant because of the government bailout and uncertainties about whether the unit would be sold. They must hope that an ambitious advertising plan for its three broker-dealers succeeds at reaffirming their strength and stability in a crowded field. They must retain the top advisors who are getting heavily recruited by their rivals. And, of course, they must do something about that name.

“It had gotten to the point where we had AIG letters taken off all of our corporate credit cards because we couldn’t go to dinner with an advisor and pay for dinner without concern that someone at the local restaurant would say, ‘whisper, whisper, we just had somebody from AIG’,” Roth says. “I mean that’s how silly it was.”

Brand New

The reemergence of the AIG Advisor Group from what Roth terms as “not the most enjoyable” 12 months of his 25-year career is already in full motion. The recruiting, the marketing, the conferences, the meetings, it’s all happening.

“We’re back in business now,” Roth says.

But when your business was on the brink of being sold by a company that was on the brink of bankruptcy, plans for a rebranding are intrinsic to the story of its rebirth. At the time this article went to press, AIG Advisor Group was in the final stages of hiring a branding consultant to help it with the makeover. The process will likely be completed by the end of the year at the latest.

The toxicity of the AIG name is obviously not lost on Roth—for the past several months the company has been referring to itself simply as “The Advisor Group.” Although it is not yet known what the company brand will look like after its makeover, Roth says it is almost certain that the initials AIG will be permanently dropped.

That would appear to be a smart move, as some observers think that any line that can be traced from the broker-dealers back to its controversial parent company is troubling. Bill Bergman, chief analyst for AIG at Morningstar, says that although there are some positive things happening at the company, such as the solidifying of its leadership, it’s unclear whether the stain of the past year can ever be completely lifted.

“Inherently the brand’s been damaged and I don’t know how long it’s going to take to recover,” Bergman says. “You watch kids walk around in soccer jerseys with AIG on them and all you can think about is how we’ve had the worst financial meltdown since the Great Depression and they were central to it. The brand is important.”

Roth says the network brand “should reflect our strength and economies of scale. Our broker-dealers are each unique and each have a small broker-dealer feeling, but at a network level, we can provide financial advisors with products, services and support that only a large network can.”

Everyone who was interviewed for this article—both at the corporate and advisor levels—insists that the AIG name never figured prominently in their marketing, even before the crisis. Advisors say that for the most part, it’s been business as usual.

“September [of 2008] was a pretty intense time in the eye of the storm,” says Michael Cullen, a principal of Cullen Financial Advisors in San Francisco, who uses SagePoint Financial as his broker-dealer. “But if you’ve done the right job in positioning yourself with your clients, this really is something you can put to bed pretty quickly.”

As AIG’s situation went from bad to worse, Cullen immediately sent out a letter to his clients reminding them that they weren’t a client of AIG or AIG Advisor Group. In fact, Cullen noted that his firm was the only entity that was a client of AIG or of any of its affiliates. The firestorm occurring at the parent level, he assured clients, would have no impact on their business with him.

“I would say to any advisor whether they’re in the AIG network or LPL or whoever to let it be a cautionary warning to you to position yourself appropriately and sell yourself to the client. Don’t sell your broker-dealer,” Cullen says. “You’re the person whose advice they’re buying.”

Closure And Clarity

On the flip side, however, the presence of Benmosche, a former rival at MetLife, has been pronounced in more ways than one since he was named president and CEO of AIG on Aug. 10. A born-and-bred New Yorker, Benmosche’s reputation for blunt talk is well known in the industry. “Benmosche is a bull in a China store. He says what he wants to say and he really doesn’t have any filters on the repercussions,” says Jonathan Henschen, president of Henschen & Associates, a Minnesota-based recruitment firm.

Sure enough, shortly after taking the helm of AIG, Benmosche lashed out at New York Attorney General Andrew Cuomo’s criticism of AIG’s bonus plans in March, saying he “doesn’t deserve to be in government.” He later apologized for the comment, but according to a report in The Wall Street Journal, AIG board members planned on discussing how to better manage him during a board retreat in mid-September.

From the perspective of many in the AIG Advisor Group, however, Benmosche’s presence has been rejuvenating. Roth and most of his senior management team have known him for about 20 years through business dealings. In fact, Roth asserts that Benmosche understands the life and retirement services industry, and the broker-dealer industry, as well as any other executive in the field.

“He knew our business because he competed with us in his MetLife days,” Roth says. “He had acquired businesses like ours. He has a very high level of respect for financial advisors.”

More than anything, perhaps, Benmosche has brought what Roth refers to as “clarity” to the company. Within four days of being hired he called off the proposed sale that had left the advisor group, its broker-dealers and the reps in limbo for nearly a year. According to Roth, there was no shortage of buyers for the group and almost all of them were private equity firms. The interested buyers were “very well-respected firms” with a deep knowledge of financial services and an understanding of distribution, Roth says. The sale was so close to happening that senior management at the advisor group was busy helping the potential suitors understand the ins and outs of the business.

“Because we were anticipating a sale in the near term we had drafted a very complete communication plan [for the broker-dealers],” Roth says. “We had timelines built, we had templates built and a lot of the things we were going to tell the advisors about the new ownership were already written.”

He adds, “It probably would have been healthier for the business had we decided not to sell it earlier, but in order to have made that decision we would also have had to say that we’re going to continue to operate in a competitive fashion,” which would have meant being able to have client meetings with the reps and conduct training sessions. Soon after his arrival, Benmosche signed off on a national education conference the first week of October in Atlanta. He also approved a joint meeting with top advisors for Royal Alliance and SagePoint that same week in California.

“Those meetings are a testimony to Benmosche’s understanding of the business,” Roth says, emphasizing the importance they have on getting the company back up and running normally.

Jeffrey Vahanian, president of Vahanian & Associates Financial Planning in New York City, which uses Royal Alliance as a broker-dealer, says that up until Benmosche’s hiring, “the leadership [at AIG] was not taking a firm, decisive stance of its own,” which left people throughout the organization unsure of what decisions they could or could not make. A firm can’t say it’s going to do something if it doesn’t know whether it can deliver on the promise, he notes. “Nobody’s going to want to stay with an organization if they’re going to be told you’re staying, but [management is] still going to act frightened,” Vahanian says.

He adds that he’s been impressed with how Benmosche has operated from the top with a sense of confidence, without fear or concern for how the public or government will respond, but instead with a focus on what’s best for business.

“I’ve got no problem with that,” Vahanian says. “I think it’s a good thing.”

Priming The Pump

Between November 2008 and February 2009, the AIG network lost about 18% of its advisors based on revenue to competitors. “Generally speaking, they were not the top advisors,” Roth says. He adds that a “vast majority” of those that left were low-performing reps, and that the attrition “has slowed considerably.” But Roth acknowledges that the group’s better advisors are being approached by most of their major competitors “with all kinds of sales pitches,” including the promise of substantial signing bonuses and escaping the AIG name.

In self-defense, the advisor group has launched what it calls a “business-builder program,” which provides some of its best advisors funds to help them get back in growth mode. Roth says the loans are “another tool” to help them grow their practice. “It’s really designed to prime the pump for their growth and to get them back in business,” he says.

The retention package being offered to advisors is in the form of a two-year forgivable loan from the broker-dealers that will have to be paid back if a broker fails to meet unspecified production goals. The value of the loans will range between 2% to 10% of the broker’s “trailing 12” production.

One enormous challenge that AIG-affiliated advisors face has been the year of uncertainty at the corporate level, but the majority of their issues are market related, Roth says. Although their parent company has shouldered significant blame for its role in the financial meltdown, Roth says, “the entire financial services industry” faced numerous market-related issues.

“The thinking is that they’ve been loyal advisors of ours in many cases for 15, 20 or 25 years and they’ve been impacted by market and the AIG challenges,” he says about the loans. “We don’t want to lose them as advisors and they don’t want to leave. But when your business has been impacted and [a competitor] is waving a check, it would be appropriate to help them continue their business with us.”

Footloose

It is worth noting that almost everyone interviewed for this article has a long history with an AIG broker-dealer or with the AIG Advisor Group. In other words, their loyalty has mostly been proven. But Henschen, the recruiter from Minnesota, questions how many advisors are actually going to be similarly loyal if they had grown increasingly hopeful about a sale.

“You have the lifers who plan on staying no matter what, and then you have quite a few who are tired of the process and want to go,” he says.

Henschen, who placed many reps with FSC over the years before cutting off business because of the problems with AIG, says he’s “gotten calls from reps who now want to look at their options, so they have a Plan B if they decide to pull the trigger as well those that want to go now.”

Henschen adds: “[They wanted] a new company with a new story that would kind of revitalize their faith in the firm. And that’s gone now.”

Others point out that jumping ship is easier said than done. Cullen, of Cullen Financial Advisors, says that “it’s incredibly detrimental” to put clients through changes that aren’t absolutely necessary, especially after the trauma that everyone has gone through during the global downturn. Unless the broker-dealer truly wasn’t getting the job done, there just isn’t much of an motive to move your book of business, he observes.

Alexandra Armstrong, chairman of Washington, D.C.-based financial advisory firm Armstrong, Fleming & Moore, knows firsthand the challenge of switching broker-dealers. Armstrong and her three partners defected from FSC for the Commonwealth Financial Network on July 23, bringing with them 4,000 accounts and losing only one client. For Armstrong, the stress and mountains of paperwork involved with switching broker-dealers was preferable to the uncertainty that would linger by sticking with the AIG Advisor Group.

“We had enough uncertainty with the market,” she says. “You don’t just choose to switch broker-dealers [easily] and in fact we were talking the other day about how we are not even going to think about switching broker-dealers again anytime soon.”

Armstrong adds, “I didn’t want the insurance company to decide who it’s going to sell us to. And if it was private equity, all a private equity firm was going to do is build it up to sell it again.”

What makes Armstrong’s split with FSC more significant is that she had been a top-seller with the broker-dealer for 18 years, pre-dating the company’s buyout by SunAmerica. In fact, as a member of the FSC board she worked closely on that deal, which “made a lot of people rich,” she says. But Armstrong and her partners were also loyalists to Joseph “Joby” Gruber, the former chief executive of FSC who was ousted in April 2008 and later replaced by Mark Shlafly.

“Mark came on board in June [of 2008] and I didn’t meet him until December,” Armstrong says. “I understood because he had a lot of work in front of him but we didn’t feel the same loyalty and we felt free to look at our options.”

She says that FSC has been “very cooperative” with her firm during the transition, which is almost complete. Armstrong has heard from others in the AIG broker-dealer network that are also looking to jump ship.

“I don’t think it’s all surfaced,” she says. “It was surprising when they didn’t sell, but you have to wonder when they are going to change their mind again.”

Although retaining top-level reps is a key step in jump-starting business for the advisor group, reenergized recruiting and marketing efforts will also be central to its plans. The advertising budgets for the upcoming year will be “north of a million dollars” spread across FSC, Royal Alliance and SagePoint, Roth says. This budget will be at or above what the company spent in 2007, before the crisis hit AIG.

“In our business that’s pretty substantial,” Roth says. “We need to get back out there.”

The advertising campaigns will be intrinsic to the recruitment goals for the advisor group. Jeffrey Auld, president and CEO of SagePoint Financial, says the company will also maintain a recruiting team for each of the broker-dealers. In addition, the effort will include third-party recruiters to help establish leads, recruiting roundtables to support OSJ recruiting managers and a suite of transition services for new advisors.

“We’re making even more enhancements to our transition services,” Auld said by email. “We’re ready to release a new website that will streamline the affiliation process and allow advisors to complete virtually all of their registration paper online, making it practically ‘paperless’ and even easier to join our broker-dealers.”

Auld adds, “We’re also focused on [bringing in] more recruiters to our firm. We work closely with our recruiters to develop business plans that help them recruit talent to our firm and achieve their financial goals.”

But one recruiter from Florida, who asked to remain anonymous because he does work with the AIG Advisor Group, says that the three broker-dealers lack well-defined value propositions, which others in the industry have and communicate to prospects. The problem stretches all the way back to when the firms were acquired by SunAmerica, which was later acquired by AIG, he believes.

“I think they got homogenized, where before they were three distinct companies with more definable cultures,” he says. “They’re still facing that issue. What are they going to be and what’s their value proposition going to be in the marketplace? [They need] something that says, ‘here’s a special reason why you should join us.'”

Auld, however, argues that “each of the broker-dealers has its own unique culture and history, and we will allow the advisors to maintain them.” He admits that recruiting was hampered while the advisory group was up for sale, but says that recruiting has already improved “significantly.” He did not give specifics on recruitment goals.

“A number of new recruits have joined us from our exiting advisors,” Auld says. “This is the best compliment we could receive from our advisors.”

But the recruiter from Florida says FSC, Royal Alliance and SagePoint need to follow LPL’s lead and bolster the number of recruiters they have out in the field. LPL’s well-known success in recruiting stems from the fact that “they reached out and touched a lot of people on the local level.” He has not seen that same effort from AIG’s broker-dealer network.

“The AIG broker-dealers have three or four people in the home office who do all of the recruiting from New York or Phoenix or Atlanta, and they’re not really courting these people,” he says. “They need to increase their presence in the field and really start talking up the firm. They’re not going to do that on a long-distance basis in their home office.”

Ready, Set Grow

When the stunning news came that the sale of AIG Advisor Group had been called off, Kent Porter, president of Diversified Financial Group in West Des Moines, Iowa, says, “The initial reaction was disappointment across the board.” His firm, which has used FSC as its broker-dealer since 1993, was excited about the prospect of sharing in the equity of the new owners. Although Porter says many of his clients don’t even know about the AIG affiliation, he admits, “shaking away from the AIG name was appealing.”

But after stepping back and considering his situation, Porter is now happy to have resolution. If the advisor group had been sold to a private equity firm, the deal could have taken months to close, essentially keeping everyone in limbo. He also points to the positives of the advisor group, including its sizable excess capital reserves and lack of debt. He also credits the efforts of Benmosche and Roth.

“These guys are sharp guys and they get it,” Porter says. “They’ve got a lot of experience in this industry and they see things from our perspective. They know what they need to deliver on.”

Morningstar’s Bergman sees two positive developments for AIG: Signs of a housing recovery and the new leadership. AIG, he notes, was “hit four square between the eyes” because it was so highly leveraged on the downside of the housing market. If housing finance begins moving in the right direction again, the company could be highly leveraged on the upside. For the six months ending in June, the company had roughly $60 billion in mortgage-backed securities, $32 billion in mortgage-loan receivables and $29 billion in mortgage guarantees, according to Bergman’s research. It is unclear what AIG still holds in credit default swaps. “AIG was acting almost like a clearing house or a central bank in the structured finance market, without the capital,” he says.

Bergman also points out that Benmosche’s hiring has brought stability to the company, and credits his decision to mend fences with former CEO Hank Greenberg. Bergman believes that Greenberg could open access to sources of private capital and other business opportunities, even now.

“It has led to a crystallization I think and some confidence within the company and among the customers,” Bergman says.

AIG is hardly out of the woods, though. The depth of its derivative losses remains unclear to this day, Bergman says. The extent to which the financial products unit infected the general insurance operations, too, is not really known.

“The loss of confidence spread outside the financial products unit into the general insurance operations, and they’ve been losing premium and cash flow as a consequence,” Bergman says.

Nevertheless, Roth sees more opportunities than roadblocks for the advisor group. He says the company still has plenty of capital and remains profitable. He’s willing to put the advisor group’s services, products and technology against those of any its competitors. He argues that almost all of the major independent broker-dealers they compete with are going through some sort of turmoil—either market-related or tied to a parent company. With a sense of direction now in place, he believes AIG Advisor Group—or whatever it is going to be called—is now ready to go out and aggressively market and recruit again.

“I think the next two or three years could definitely be the most exciting,” Roth says. “Luckily for us, our senior leadership is intact and our best advisors are intact. I’m quite confident. We’re going to go out there and slay some dragons.”