Beacon Financial Partners about a year ago realized that it was time for the growing advisory firm to move to a more sophisticated broker-dealer.
Beacon Financial Partners about a year ago realized that it was time for the growing advisory firm to move to a more sophisticated broker-dealer.
After interviewing independent-broker-dealer giants LPL Financial and Commonwealth Financial Network, the firm chose Capital Analysts Inc., a much smaller firm.
Part of the attraction was Capital Analysts' novel compensation model, which is based on fees rather than commissions. Instead of the traditional method of taking a small percentage of what advisers sell, Capital Analysts gives advisers a 100% payout and charges an annual access fee.
That fee — which is $40,000 to $120,000 a year, based on revenue — covers the cost of custody, trading technology, compliance, licensing, errors-and-omissions insurance coverage, Morningstar Inc. research tools, original investment research, practice and succession management consulting, a portfolio analysis program, a customer relationship management system and a business management tool.
It covers the first three advisers in a group; each additional adviser costs $24,000 per year. Its tools work for registered investment advisers and hybrids.
Also, Capital Analysts doesn't charge fees that advisers typically either pass on to clients or absorb as part of their business costs, such as fees associated with individual retirement accounts, alternative investments or real estate investment trusts. The firm passes on certain trading costs, such as those incurred when clients want to buy directly from a mutual fund company. But increasingly, its advisers have moved away from products that charge clients transaction fees.
“The nickel and diming drives clients crazy,” said Greg Randall, managing partner at Beacon, which has 12 advisers and $500 million in assets under management.
Matthew Lynch, 47, chief executive of Capital Analysts, instituted the fee-based-compensation model in 2009, a time when the financial services industry itself was struggling with a deep recession and image problems, and a year after he became CEO. He joined the firm in 2006 after having been a director at advisory consultant Moss Adams LLP.
B-D MODEL BROKEN
While he was at Moss Adams, Mr. Lynch worked with hundreds of advisers and came to believe that the typical broker-dealer model was broken. Mr. Lynch believes that his model is one that provides advisers with stronger incentives to increase their assets.
“Few firms really help advisers grow,” Mr. Lynch said. “We're not really for someone just looking for a better payout; we're looking for firms that think of their own businesses as an asset for the future.”
Capital Analysts, which has been around since 1968 and is part of Western & Southern Financial Group, has 324 advisers and $8 billion under management. Although it has 26 fewer advisers now than before the fee-based model was introduced, the firm has $1.7 billion more in assets under management.
“We are growing in terms of assets with fewer advisers,” Mr. Lynch said. The firm is adding larger, more productive advisory firms and has added $1 billion in new assets just from advisers brought on since the 2009 changes, he said.
The advisers who left didn't do so because of changes in the compensation model, he said. They left because they specialized in the 403(b) sector or had other business interests that didn't fit with his vision of the future of the industry, Mr. Lynch said.
For Neil Waxman and Mark Ciulla, Capital Analysts advisers for three decades, the flat fee comes out to less than what they paid under the old model, and “they are giving us more services,” Mr. Waxman said. The fee even covered the administrative costs recently when they formed an RIA, “which is no small potatoes,” he said.
“It's a very lean model and generous from the broker-dealer,” said Mr. Waxman, whose Capital Analysts practice has three financial advisers and manages $500 million in client assets.
Mr. Ciulla said the compliance tools that Capital Analysts provides are especially valuable, even more so today than a few years ago.
“With compliance where it is now and where it's heading, it's important to have someone looking over our shoulder,” he said.
Capital Analysts is even helping with social-media issues, including helping the firm start a blog, Mr. Waxman said.
Regulatory reforms are pushing the financial services industry toward disclosure of more fees, and that process may reveal to advisers some hidden revenue sources of broker-dealers, Mr. Lynch said. Capital Analysts' fee structure is transparent, he said.
“I'm glad we made the move when we did,” Mr. Lynch said.
UNIQUE, NOT BETTER
Not everyone is enamored of Capital Analysts and its novel compensation program. While they don't disagree that it's unique and provides an incentive for adviser production, some industry analysts and recruiters question whether it is better than the industry standard and whether it's going to help the firm attract big producers.
“I'm not sure that it makes a difference,” Aite Group LLC senior analyst Doug Dannemiller said. In the end, the more the adviser produces, the more money he earns, just like with typical “compensation based on a grid,” he said. “This still incentivizes them to do a lot of business.”
Jon Henschen, a recruiter with Henschen & Associates Inc., questions whether Capital Analysts' technology is robust enough to support the larger financial advisers that Mr. Lynch wants to attract.
In order to compete with firms such as Commonwealth or First Allied Securities Inc., it also needs access to exceptional products such as private-equity deals, Mr. Henschen said.
“The flat fee is a good way to attract the biggest producers, because that is who would benefit the most from a single fee,” he said. “But they need more than just netting more.”
Mr. Dannemiller praised Capital Analysts' recruiting materials and its sales pitch.
“It's an active firm,” he said. “They're not letting the times pass them by.”
E-mail Liz Skinner at lskinner@investmentnews.com.
