For indie B-Ds, it isn't all gloom and doom

The fantastic growth among independent broker-dealers came skidding to a halt last year, but the results were far from disastrous — with some firms taking advantage of recruiting opportunities despite the revenue declines. According to an InvestmentNews survey of leading independent firms, the top 25 broker-dealers saw gross revenue collectively shrink last year, the first time in recent memory that such a widespread downturn has come to pass, industry executives said. Combating a stock market that went into free fall in September, which compelled many clients to cash out of equities and invest in less lucrative cash products such as certificates of deposit and money market funds, the top 25 independent broker-dealers saw gross revenue drop 2.1% last year from 2007. The top 25 individual firms reported $11.7 billion in gross revenue, according to the survey. But on the back of a sharp market decline in the fourth quarter and the first quarter of this year, 2009 is shaping up to be even more difficult for many firms, executives said. One key to understanding last year's results and how lean this year may be is the manner in which broker-dealers close their books for the quarter. Many firms bill their representatives' clients in advance or at the start of the quarter, rather than at the end. That means that last year's fourth quarter, which saw the Dow Jones Industrial Average drop 23.6%, and the first quarter of this year, when the Dow decreased 15.3%, will have an impact on broker-dealers' top lines this year, executives said. Financial advisers' assets under management have shrunk severely, observers said, and their fees are down. Clients, meanwhile, are still sitting on the sidelines, loath to put cash back into the market.
"From a revenue perspective, '09 is going to be a tough year, period," said John Peluso, chief executive of Wachovia Securities Financial Network LLC of St. Louis. Although recruiting is running at record levels for Finet of Richmond, Va., which will be re-christened Wells Fargo Advisors Financial Network next month, revenue generated from advisers already affiliated with the firm has fallen sharply this year, he said. Such "same-store sales" dropped 32% in the first quarter, compared with a year earlier, Mr. Peluso said. For reps and advisers, that means that Finet's fee-based practices got another pay cut April 1, he added. Last year, many firms offset the difficult markets through strong recruiting, executives said. "We had a really good recruiting year last year, but you needed to just to stay even," said Russell Diachok, chief executive of Geneos Wealth Management Inc. of Denver. "We were damn happy to be flat." Geneos saw its gross revenue drop 3.3% to $68.1 million last year, and that was in the face of recruiting reps and advisers who generated about $15 million in gross revenue, Mr. Diachok said. Among the top 25 individual broker-dealers, whether or not they were part of broad networks that often change and shift from year to year, just seven broker-dealers saw gross revenue increase last year from 2007. Meanwhile, 15 of the leading firms saw gross revenue decrease, while three broker-dealers reported that their revenue was basically flat last year from 2007. That falloff comes after four years of solid growth, when the top 25 broker-dealers and networks averaged an annual-gross-revenue growth rate of almost 21%, according to InvestmentNews data.
"The market has disguised flaws," said Chet Helck, chief operating officer of Raymond James Financial Inc. of St. Petersburg, Fla. "The independent-contractor segment of the industry has had a long sustained growth period," he said. "I would say the segment has matured, and it now has to perform on merit." Uncertainty and anxiety permeate the thousands of advisers at two leading insurance-company-owned networks: the AIG Advisor Group and ING Advisors Network. That is a recruiting opportunity for competitors, according to executives and recruiters. "This year could be a stellar recruiting year because of the problems some firms are having in retaining brokers," said Jodie Papike, vice president of Jamul, Calif.-based recruiting firm Cross-Search.
She pointed to the various wirehouse firms that have cut payouts to low producers or given scant retention bonuses to smaller-producing reps, pushing potential recruits into the arms of independent firms. The three broker-dealers in the AIG Advisor Group — FSC Securities Corp. of Atlanta, Royal Alliance Associates Inc. of New York and SagePoint Financial Inc. of Phoenix — have been on the block since last fall, and this month, the three firms said that they are laying off 10% of back-office staff and consolidating certain operations. Among the top 25 broker-dealers, the sharpest single drop in gross revenue was at SagePoint Financial Inc., formerly AIG Financial Advisors. SagePoint's gross revenue dropped 21% last year, hitting $370 million. Meanwhile, ING Group NV of Amsterdam, Netherlands, said this month that three of the four broker-dealers in its network — Financial Network Investment Corp. of El Segundo, Calif., Multi-Financial Securities Corp. of Denver and Primevest Financial Services Inc. of St. Cloud, Minn. — face another round of strategic reviews that could lead to their sale. Ms. Papike said that the firms with the strongest recruiting efforts — about 30% of the market — understand what clicks with advisers right now. "The winners know who their targeted adviser is, and they know how to sell their platform," she said. No doubt, brokers are in play, executives said. "We're talking to two really huge FNIC offices, and one is in transition right now," said John Rooney, managing principal in the San Diego office of Commonwealth Financial Network, which is based in Waltham, Mass. "They're tired of the uncertainty." "I haven't spoken to many FNIC reps in the past five to seven years. Now I'm talking to them," Mr. Rooney said. "Inertia in this business is legendary," he said. "Now, reps are being hammered by this uncertainty, so they're going to move." E-mail Bruce Kelly at bkelly@investmentnews.com.