The 1984 movie Repo Man had a number of irreverent things to say about society, but none so memorable as its nose-thumbing at the nation's obsession with branding.
As the movie's antihero, Otto, wends his way through the car-repossession business, he encounters a steady parade of generically branded products — “FOOD,” “DRINK,” “BEER.” The product nonplacements speak to both the centrality of branding in our lives and how similar products eventually blur in the eyes of consumers, often rendering branding efforts moot.
These are concepts registered reps understand, all too well. Had Otto been magically transported to a modern-day brokerage office, he could well have met with an “ADVISOR” about “FUNDS” and the firm's “HOLISTIC WEALTH MANAGEMENT SERVICES.”
Indeed, most retail financial advisors hawk the same products and the same processes — employing the same sorts of modeling and number-crunching techniques — all the while, spouting the same jargon.
At the same time, though, the pressure on a rep to stand out from the crowd is enormous, because, as anyone who has ever purchased a can of “SOUP” knows, the low profit margins on commoditized products and services are the primary attraction to those who buy them. If a rep's going to make a living from the low-end crowd, he's going to have to do it by generating volume. The main alternative is to aim higher — at high-net-worth clients.
“It's challenging in terms of keeping profit margins high,” says Maya Ivanova, research analyst at Rydex. “What's happening is that advisors are spending more time with existing clients instead of getting new ones — they're concentrating on more qualified clients, clients with larger accounts.”
An increasing number of reps are taking this tack, but many discover that the cost, and time needed, of doing this business is steep — necessitating more volume. It's a damned-if-you-do, damned-if-you-don't scenario, and many brokers are puzzled as to what to do about it.
Pushing Down on You
The commoditization of the brokerage industry might be easier for individual reps to deal with, were they not under such intense pressure in virtually every other aspect of their professional lives.
Differentiating yourself from like-minded competitors is tough enough. Throw in rising expenses, waning trading activity (off 60 percent from its peak, according to Sanford Bernstein), unprecedented regulatory and compliance scrutiny, and clients who demand more time from advisors than ever and you've got one tough road to hoe. It adds up to “the most severe market for reps in the last 20 years,” says Rick Nummi, GunnAllen Financial chief compliance officer.
The industry suffered a sharp downturn following the late 1990s bull market, but a good recovery in 2003 gave advisors — and their clients — hope. Though 2004 wasn't as bleak as 2001 through 2003, steadily rising expenses threw water on the enthusiasm of many advisors. The average return on assets for broker/dealers now hovers around 37 basis points, down from 50 around 2000, the SIA says. In addition, the average fee a broker earns per trade has dropped by 25 percent in the last four years, according to SIA chief economist Frank Fernandez. “Profitability looks very good, but this was attained mostly through continued cost controls and productivity gains, but very little top-line growth,” says Fernandez.
Even as these pressures mount, clients are becoming aware that fierce competition among financial advisors means customers can ask for better service. “The client demands are much broader, and advisors are looking for a central source to gather the things they need,” says Bill Dwyer, managing director of branch development at LPL Financial Services.
Though the rise in the market in the latter part of the year was heartening, economic indicators were unsteady, boding poorly for retail activity, which lags economic performance anyway.
“While the country's economic statistics tell a retail broker that the nation is no longer in a recession, his own revenue numbers are still telling him that he is facing terrible times,” wrote Sanford Bernstein analyst Brad Hintz. In the 1980s and 1990s, declines in retail commissions from the peak to the trough usually lasted three quarters — and then took an additional 11 quarters, on average, to regain the previous peak level. After the retail commission peak in the first quarter of 2000, it took 13 quarters to bottom out in the first quarter of 2003.
Bigger Is Better
Even though these forces are taxing reps in unprecedented ways, many recognize the need to differentiate themselves and are taking appropriate action. Some, like Raymond James affiliate David Yvars, find that throwing extra effort into getting to know clients can increase retention to the point that new-client recruitment is not such a heavy burden. Yvars' book is not huge — just $65 million in assets. But he's proud to say that in his year at Raymond James he has not lost a single account.
“Learning about someone's personal set of circumstances is so important, who they're married to, who the children are,” Yvars says. “Getting that total picture is where the value is really added…asset retention shows people are happy.”
But, on balance, reps are attacking the commoditization issue more aggressively, overhauling their practices or to provide soup-to-nuts services to clients. Such efforts are expensive and time consuming, and about the only way to justify them is to focus squarely on clients who can generate big returns. Hence, the rising obsession with high-net-worth clients.
From a firm's perspective, bigger is simply better right now. “Asset management has become more and more commoditized, and it takes larger pools of assets to make the same amount of revenue or profitability for the firms,” says Curt Peterson, a branch manager at Smith Barney in San Francisco, where he oversees about 50 advisors.
Smith Barney is hardly alone in this belief. Morgan Stanley recently joined Merrill Lynch in imposing a cutoff for account sizes, telling reps that it would not pay for accounts with less than $35,000 in assets. Merrill accounts of less than $100,000 get forwarded to a call center.
Meanwhile, many other firms, from full-service to independent, are pushing to provide clients with any financial service that they're in need of, whether by acquiring mortgage companies or augmenting internal perks, such as concierge services.
“We do want to grow,” says Ron Tschetter, president of D.A. Davidson, a full-service firm based in Great Falls, Mont., with 275 full-time advisors. He says the firm is expanding wealth management training, as well as counseling for branch managers. “We have a firm belief that you grow or die.”
Independent firms see the benefit of having many different services at the advisors' fingertips. LPL executives in the last couple of years noticed their affiliated reps forming more partnerships with outside CPA firms and trust companies and decided to do something about it. In the last year, the firm has acquired a trust company, a mortgage company and an insurance agency, according to Dwyer. Since acquiring the mortgage company last September, advisors have done $400,000 in new mortgage originations, he says.
“Increasingly, we have reps who come from backgrounds like wirehouses, and they've asked us to build out things to buy off a common platform,” Dwyer says. “Clearly the ‘90s were a decade of product proliferation, and what we believe the coming years are is more about the application of product.”
Position of Strength
Still, top brass at the largest firms believe they're in a better position to deliver the sorts of differentiating services that will help their reps succeed. Merrill Lynch global private client head James Gorman said in November that the firm is keeping an eye out for potential acquisitions, large or small, that could add to the firm's size and scope. “The cost of training and compliance, the cost of financial advisors compensation is increasing,” he said. “The only way to offset that is through scale.”
Analysts expect similar moves from other large firms. Keefe Bruyette & Woods predicts that A.G. Edwards, the national firm with about 7,000 reps, is a perfect fit for a company like J.P. Morgan Chase or Bank One. Other firms are busy snapping up smaller wealth management firms to fold into their business. Wachovia, in September, acquired advisory firm Tanager Financial Services, and UBS, in December, announced plans to acquire century-old Julius Baer & Co.
Bob Gordon, president of Twenty-First Securities in New York, fondly recalled starting his firm in the early 1980s, but he is resigning himself to the fact that the pressures of a commoditized marketplace might make such firms part of an endangered species. He says independent advisors increasingly will flock to larger firms such as Royal Alliance, Raymond James Financial and LPL for help with compliance and legal issues. Without such aid, fledgling independent reps would scarcely have time to concentrate on the strategic aspects of their business.
“For the person opening his own place, it's getting almost impossible,” Gordon says. “I started off as a three-man firm, but with all these burdens, I don't know if I would have.”
Skills to Pay the Bills
But providing value-added services is not all there is to differentiation. Indeed, such services will end up not mattering if the right person isn't at the forefront of the business, says Jeff Roush, senior managing principle at CEG Worldwide, which consults to high-net-worth advisors. “If you don't have top individuals at the top of the house who can create intimacy and trust with clients, and pull it all together, the other stuff is all superfluous,” Roush says.
Roush says CEG has found that the most satisfied affluent clients were contacted about 28 times a year by their advisor, via emails, phone calls and in-person meetings.
Tschetter of D.A. Davidson says his firm believes frequent contact is an effective way for an advisor to stand apart from the competition. “We're small but we feel very close to the client — we have a high-touch policy and that's what separates us in our markets.”
Still, all these extras don't come cheap — particularly for independents. In a survey of registered investment advisors, Rydex Funds found that median expenses for RIAs rose to $710,000 in 2003 from $641,000 in 2002. Though complete figures for 2004 were not available yet, Ivanova says the trend of rising expenses continued.
The increases were for staff compensation, which rose 4 percentage points to 25 percent of total expenses, and legal and compliance expenses, which rose 153 percent. Amid all this, though, there is some cause for optimism. “Advisors think next year that those fees will remain the same,” Ivanova says.
Denise Reinert, general manager at Pearson Financial in Lake Oswego, Ore., says she's seeing such stabilization. Her firm, which is a Royal Alliance affiliate, has finally been able to absorb the rising compliance costs.
“I'm feeling like, let's move on — let's get on with it,” she says. “We're through the hard part, finishing out our systems, making sure our budget works.”
In terms of helping the firm's advisors compete for high-net-worth business, Reinert says the firm is making a priority of it, but it's not a single-minded concern. If some of the expense pressures let up next year, brokers will be free to immerse themselves in making their practices something special.
“I started here right before the market blew up, so I've been through the trenches with the tight budgets, the compliance, reps being kind of down,” she said. “I'm really excited about next year.”