Regionals, independents see light in wirehouse gloom

Regional and independent brokers such as LPL Financial, D.A. Davidson & Co., Raymond James Financial Inc. and Stifel Financial Corp. are thriving while brawnier brokers struggle, but the firms' executives have deep concerns even as they rev up their recruiting.
"The business model looks great, but our clients are suffering," said William Johnstone, president and chief executive of Great Falls, Mont.-based Davidson. "That's going to affect us near-term." Speaking in New York last week at the annual conference of the Securities Industry and Financial Markets Association of New York and Washington, Mr. Johnstone and other executives said they see nothing but trouble in the days ahead as investors open October account statements.
"Our clients are getting clobbered," said Ronald Kruszewski, Stifel's chairman and chief executive, who worries about a repeat of October 1987, when phones suddenly stopped ringing after weeks of "unbelievable" volume. St. Louis-based Stifel has 1,250 advisers, including 200 in its independent Century Securities Associates Inc. channel. Clients have been heading to the cash exits and require deep psychological handling, said Chet Helck, president of St. Petersburg, Fla.-based Raymond James. Cash balances have been rising "at ferocious rates," and the firm's 4,300 brokers and independent advisers are spending much of their time parsing insurance coverage from the Securities Investors Protection Corp. and the Federal Deposit Insurance Corp., while reassuring clients that Raymond James won't be the next Wall Street casualty. "Getting through this mess is our most immediate job," Mr. Helck said, admitting that the panic on some days grips advisers and executives as well as clients. It also makes the task even harder. "It's never been this way, to this extreme, for any of us." Grappling for an advantage, advisers at smaller firms that avoided the leverage-based woes of Wall Street giants are well-positioned to offer "objective advice," Mr. Helck said, even if that advice is focused on managing emotions. Investors now realize that there is "risk in everything" and have lost confidence in their own abilities, he said.
Bill Dwyer, president of Boston-based LPL's independent-adviser-services division, went further. An adviser can emerge as "something of a hero" if he or she can get clients to "stop thinking about the next 30 minutes and think about the next 30 years," he said during a conference panel on the changing landscape of the financial services industry. Succeeding at that against the din of 24-hour business channels and the angst of statements is crucial, Mr. Dwyer said, because client "money is in motion." Advisers also are on the move, according to the executives. LPL, the biggest independent-brokerage firm, with some 11,500 advisers, expects to add a net of 700 advisers this year — exceeding last year's total by 18%, with just under one third coming from other independs and slightly less from wirehouses. Revenue from 2008 recruits also should exceed last year's record year by 19%, based on trailing-12-month production from their former firms, Mr. Dwyer said. Inquiries about joining LPL are up about 150% from one year ago, he said, and about 200% from brokers generating $1 million or more of fees and commissions. But profit margins are being squeezed, Mr. Dwyer added, be-cause of rising recruiting, technology and regulatory costs. Turning to Mr. Helck for confirmation, he said: "You've been pretty aggressively recruiting." Mr. Helck didn't directly respond but noted that the firm's internal-communications costs are certainly rising in the current crisis. Advisers are "looking for confidence," he said, triggering a flood of in-branch visits, videos and e-mail to advisers that is five to 10 times higher than the norm. Stifel Financial, which in recent years purchased retail broker Ryan Beck Holdings Inc. of Florham Park, N.J., and the capital markets businesses of Baltimore-based Legg Mason Inc., has been fielding calls not only from brokers at larger firms but also from investment bankers shopping other brokerage firms, Mr. Kruszewski said after his presentation. He wouldn't comment on what firms are being hawked but said his company's Stifel Nicolaus brokerage unit — despite opening 29 branches this year and hiring actively from brokerage firms such as crosstown rival Wachovia Securities LLC — fears growing too quickly. "Our firm has been successful because we have no regional managers and no product managers," Mr. Kruszewski said. About 99% of Stifel's business is done directly between its 1,200 advisers and clients, he added, and "you almost have to give people who come out of business school a lobotomy" so they'll stay unobtrusive. While Stifel is prospering, Mr. Kruszewski envies the even fatter margins of the smaller, privately held D.A. Davidson, a fact he said he knows through his personal friendship with Mr. Johnstone. The Montana executive didn't comment directly, but said brokers that focus on advisers don't need to spend much capital to thrive. "We don't win the game with cutting-edge technology," Mr. Johnstone said. D.A. Davidson has about 300 brokers, is recruiting and also is weighing the possibility of an independent-brokerage channel, he said. Mr. Johnstone cautioned, however, that "nothing is imminent" about the independent plan, which could cause conflicts with the firm's current brokers. The executives spoke last Tuesday, when the Dow Jones Industrial Average reversed weeks of carnage with an almost 900-point gain, but each lamented the damage that all-news business channels with instant analyses inflict on advisers and clients. "If you see me watching CNBC, you should shoot me," said Mr. Johnstone, who along with other panelists gave interviews after their panel to CNBC and Bloomberg TV. Mr. Kruszewski said CNBC does have some predictive value. A strong sign of the bottom of the market could come when the network begins laying off some of its popular anchors, he said. E-mail Jed Horowitz at jhorowitz@investmentnews.com.