The economic crisis is only going to get worse. Advisors are not only concerned with their clients' portfolios but the financial stability of their own broker/dealers. What happens to advisors when a firm takes a nose dive? And is now a good time to make a switch?
It's been happening for months -- front-page headlines splattered with the name of yet another financial giant that just toppled. The fate of thousands of reps and billions in fees and commissions has been left at the mercy of a tumultuous market. For Bill McGovern, the volatility of it all brings back memories of the 1987 crash, which left advisors scrambling to make sense of the change that hit them so hard.
"The crash really hurt a lot of financial advisors for a period of months while they were trying to figure out a transition out of it," says McGovern, founder and CEO of B/D SEARCH, a St. Petersburg, Fla-based firm that searches for key personnel and senior management at broker/dealers. "In the market today, finding a firm or being with a firm that's not in the news is becoming an issue. Many of these firms are seeing their names plastered in the headlines, and I think the brand equity of the firm is being called in the question. Clients attach some value to brokers being associated with brand name companies, but I'm not sure companies are generating the same brand equity today that they used to have."
Write-downs, auction rate securities investigations and crashing stocks have taken a toll on brokers' deferred compensation. AIG's Advisor Group (which includes AIG Financial Advisors Inc. of Phoenix, FSC Securities Corp. of Atlanta and Royal Alliance Associates Inc. of New York) was put on the chopping block as part of a major asset sale to pay back the $85 billion bailout. The decision to sell would compromise the fate of almost 7,000 registered representatives and financial advisors.
What happened with full-service brokerages like Merrill Lynch and Lehman Brothers has marked the last straw for advisors who are now turning to firms like Fidelity and Schwab. And they're bringing the high-net-worth clients with them. Within a week of Bank of America's plan to acquire Merrill Lynch, Scott Dell'Orfano, executive vice president of Fidelity Institutional Wealth Services, told Brett Philbin of MarketWatch that Fidelity had already spoken to "10 firms (of advisers) with roughly $8.5 billion to $9 billion in assets," and that if all those firms were to become clients, "that would be more business than we have done in the first six months of the year."
"Now is not only a good time to be affiliated with somebody independent, but someone who is out of the press," McGovern says. "This could be a very good time for brokers to be with firms that don't have a lot of visibility."
Even for those not looking to go independent, the pressure to move elsewhere grows stronger with every intuition that their firm may in financial trouble. McGovern can't emphasize it enough; the first question an advisor should be asking himself when reevaluating his broker/dealer during this time is, "Can my broker/dealer withstand what is going on?"
"If there are any signs or indications that the broker/dealer is in financial trouble and turmoil, it may be a good time to find another broker/dealer. The public is getting very nervous about the financial stability with a lot of these firms," McGovern says. "Brokers are not only wrestling with how is their clients' portfolio doing but how is their firm doing financially?"
Financial recruiting firm RJ & Makay in September proclaimed the sale of Merrill Lynch to Bank of America had triggered "one of the largest and most historical talent feeding frenzies in recent history." The size of a firm like Merrill means more than 2,000 brokers could end up with a competitor, commented Darin Manis, CEO. Shortly after the sale, calls came in from several Merrill advisors to the Colorado Springs, Colo.-based company as many were waiting to hear about their retention packages.
"With the average Merrill FA having about $100 million in assets this is clearly a unique and welcome recruiting opportunity," Manis said.
A good time to recruit?
It's a feeding frenzy, as Manis puts it. And the massive transition of thousands of advisors from major firms has left opportunity for some aggressive recruiting.
"Some of the financial packages that are being offered are really attractive," says Terry Herr, CFP, CLU, managing partner for Herr Capital Management in Chicago. "Broker/dealers are willing to pay a lot of money up front to get your business. Some people will put different things out there, whether it be straight out cash or forgivable loans of 20 to 35 percent of your production."
But is it too aggressive? Herr explains one problem right now could be that there is too much focus to recruit rather than to retain. There is so much attention on hooking those high-net-worth reps that somehow existing reps could be overlooked and the firm/advisor relationship could be negatively affected.
Another problem that presents itself within the recruiting process is that advisors don't have all the capabilities to ensure a firm is right for them. There are variables that need to be researched such as technology, administrative support, products, platforms and costs associated with advisory- or fee-based business, and (most importantly in this market) financial stability of the firm. This is where outsourcing that research using companies like McGovern's B/D Search becomes very useful.
"One of the things (advisors) should be looking for is a company that is operating and managing itself and that they are financially sound and solid," McGovern says. "Also look for what cost is associated with a broker/dealer? You may not get the highest payout but if you find a firm that is financially sound, that's more important than percentage points in payout. If you find a firm that provides a financial platform in which you can grow and build into the future over the next five or ten years, that is important."
In the long run, both Herr and McGovern agree the deciding factor when reevaluating a broker/dealer relationship ought not to be what can my b/d do for me right now, but for my future? A key question then becomes how can my broker/dealer help me to grow my business?
To stay or to go?
Ultimately, the shaky market is costing everyone, advisors and broker/dealers alike. As compensation packages are directly affected by a firm's performance, dramatic spending cuts are the biggest forces driving advisors to leave.
"There is no question that the turmoil in the financial services industry has profoundly impacted many leading investment firms, as there has been an unprecedented volume of negative media and market activity in the past 12 months," said David Lo, director of investment services at J.D. Power and Associates shortly after the release of the 2008 Financial Advisor Satisfaction Study. "In this situation, it's tempting to cut spending -- particularly with regard to support functions and customer service -- to combat financial challenges. However, one of the most important actions is to renew focus on the advisor experience. Providing premium operational and administrative support will help ease concerns and allow advisors to grow their business and offer top-notch service to their clients."
But even in the midst of uncertainty, many advisors are choosing to stay put, McGovern says.
"A lot of brokers are so preoccupied with trying to figure out what's going on in the market and trying to keep up with their clients and keep their clients calm and most of them aren't even thinking about making a move. Brokers don't like to be put in a box, being challenged over their firm affiliation. It's tough enough when they have to provide advice, support and try to calm the fears of their clients, but if they're affiliated with a firm that's in trouble and it's all over the media then I think brokers are coming up with a double whammy -- managing their clients' portfolio and managing their credibility."