In a bid to stand out among their peers and to be more competitive in the marketplace, an increasing number of small to midsize independent-contractor broker-dealers are offering sophisticated compensation plans, including stock ownership, to their affiliated registered representatives.
NEW YORK — In a bid to stand out among their peers and to be more competitive in the marketplace, an increasing number of small to midsize independent-contractor broker-dealers are offering sophisticated compensation plans, including stock ownership, to their affiliated registered representatives.
The firms that have offered sweetened compensation most recently are Investors Capital Corp. of Lynnfield, Mass., and Girard Securities Inc. of San Diego. The two firms reported $76.8 million and $33 million, respectively, in gross revenue last year.
They join the ranks of other such firms with sophisticated compensation plans, including American Portfolios Financial Services Inc. of Holbrook, N.Y., Cambridge Investment Research Inc. of Fairfield, Iowa, and NEXT Financial Group Inc. of Houston. Each of those firms has an equity participation plan.
And other broker-dealers give stock to reps in isolated situations, industry observers said.
Equity participation typically comes in the form of stock options, and they have value if the broker-dealer has an initial public offering or is sold, observers said.
Acquisition insurance
And some reps want the stock options as a hedge against the acquisition of their broker-dealer, observers said.
“It’s kind of a hot or cold issue” for reps, said Jonathan Henschen, president of Henschen & Associates, a recruiting firm in Marine on St. Croix, Minn. “The reps who are into it are those who had a firm sold out from under them.”
“They think, ‘I’m gonna be a player, like the owner’” of the firm, Mr. Henschen said.
Such plans simply are another indication that the independent-contractor-broker-dealer marketplace has matured, some say. Wirehouse firms long have used deferred compensation plans — usually tied to stock — to retain brokers.
Stock participation, deferred compensation and larger signing bonuses are becoming expected perks in the minds of some advisers, said Dennis Gallant, president of Gallant Distribution Consulting of Sherborn, Mass.
“Deferred comp has just become mainstream when it comes to advisers,” he said.
In the past, reps’ expectations simply were focused on their broker-dealers’ payouts and the value of their practices at the end of their careers, Mr. Gallant said.
“It’s a sellers market, so [the reps] get to dictate better terms,” he said. And smaller broker-dealers also are able put such plans into place with more ease than larger broker-dealers, “because their target is a much smaller number,” Mr. Gallant said.
This summer, Investors Capital intends to roll out a deferred compensation plan for reps who produce more than $200,000 in fees and commissions, said Tim Murphy, the firm’s president.
Part of the motivation for the plan is the burden of taxes, he said. “As you get people making more money, they don’t want to pay taxes,” Mr. Murphy said.
The adviser will choose the amount they want to contribute to the plan, and then Investors Capital essentially will foot the bill on the taxes for that contribution. The plan is in its proposal stage, but about 200 of the firm’s 750 affiliated reps and advisers would be able to make contributions, Mr. Murphy said, adding that in some cases, Investors Capital would match those contributions.
Girard Securities is creating two different pools of ownership, said chief executive Richard Woltman.
One pool will go to employees, who receive stock options to acquire 20% of the company’s stock. Each employee will be eligible to participate.
The firm’s 110 affiliated reps also will be able to acquire 20% of the firm’s equity in the form of a stock appreciation rights program.
Girard announced the plan in May at a meeting of top producers.
Family business
“We’re trying to reward the people here and keep this as a family enterprise,” Mr. Woltman said. In fact, family is at the core of the development of the new plan.
Mr. Woltman’s daughter, Melissa McGuire, restarted Girard’s retail business in 2002 following a period of time when the company mostly was inactive, except for its municipal bond underwriting. She later died from cancer at the age of 37.
“This is a unique situation, because of the family,” said Mr. Woltman, whose wife, Kaye Woltman, is the firm’s president. She contributed 40% of her ownership in the company for the plan.
Mr. Woltman’s family long has been in the independent-contractor-brokerage industry. He owned Sentra Securities/Spelman & Co. Inc. of San Diego and sold it to SunAmerica in 1998.
“It’s bittersweet, because it’s a legacy to our daughter,” Mr. Woltman said. “When she passed away, we felt it was her company, and we wanted to keep it her company.”
