Creating a list of outstanding players — one meant to predict who is going to do great things, alter the industry forever or bomb — isn't easy. We could have easily picked the heads of 10 different brokerages — from Merrill's Bob McCann to Commonwealth's Joe Deitch — simply because their intense competition for advisors, assets and growth will continue to exert powerful force on our readers.

Indeed, after cutting close to 90,000 employees, or around 11 percent of the field's workforce, between 2001 and 2003, retail brokerages started hiring again in 2004. Now they're on a binge, recruiting top advisors like mad and fiercely battling each other for the wealthiest clients. In some cases their moves are getting results — Merrill Lynch, UBS and Morgan Stanley are humming along this year.

But despite their strong showing recently, Morgan Stanley and UBS Wealth Management U.S. still have a few things to prove. That's why we chose James Gorman and Marten Hoekstra, the heads of the firms' retail units, respectively, as two of our Ten. So far, Gorman seems to have gotten Morgan's struggling retail brokerage back on track, but a full turnaround is far from complete. Over at UBS, Hoekstra needs to bring the U.S. retail operation up to global UBS standards.

In another corner of the industry, registered investment advisory land, RIAs are also gunning for growth. One of our Ten is Ruediger Adolf, a former American Express exec whose new Focus Financial Partners is out hunting for stakes in fee-only RIAs and offering them assistance in a number of business areas. Will Focus become the next National Financial Partners? Will Adolf succeed in finding top-quality RIAs who are ready to sell a piece of themselves?

These days, even regulators are on the hot seat. Industry executives and trade groups — even the NYSE's John Thain — say that the SEC and NASD have been overzealous. And now some of them are pushing back. Mary Schapiro, who will become the head of NASD at the end of this year, is one of our Ten: She's already trying to improve communication with members of the industry in an effort to make regulating a more cooperative effort.

Another regulator to watch is Andrew Donohue, the new head of the SEC's division of investment management. Unlike his predecessors, Donohue comes over from the industry. Will his career at Merrill make him a better regulator? Perhaps, like Schapiro, he will make an effort to get more industry input, which will result in more efficient regulation.

In asset management, the game has changed. Open architecture is becoming the rule, and this played out in two big deals. Merrill Lynch and Smith Barney unbundled asset management from distribution by selling or swapping their asset-management operations to asset managers, retaining a stake. BlackRock was one of the players in this game — it will close a deal to acquire Merrill Lynch Investment Management in October. Merrill will take a large minority stake in the resulting firm. Larry Fink, another member of this year's Ten to Watch, is BlackRock's chairman and CEO. Meanwhile, Catherine Gordon, over at Vanguard, is rejiggering the firm's call center advice services.

Two other members of this year's list are Rob Arnott, chairman of Research Affiliates, a pioneer in a new investment strategy called “fundamental indexing,” and Man Investments, the U.S. arm of the U.K.'s Man Group, which is considered a good proxy of retail investors' appetite for hedge funds.

Finally, we included Ben Bernanke in this year's list. The new Fed chairman has got a tough act to follow in Alan Greenspan, as well as a troublesome economy to manage. During his first year on the job, his words will have had a major impact on equity markets — mostly negative. He'll take some getting used to.

As a parting shot, we should tell you that we sometimes joke in editorial meetings that we are going to include “You, The Advisor” in our Ten to Watch. There is something to be said for keeping a careful eye on individual reps. In many ways, there has been no better time to be a rep, especially the sophisticated fiduciary kind. Everyone, from top wirehouses to bank trust departments to boutique RIAs, wants these reps so that they can attract wealthy clients and their assets. So, we didn't name you this year, but, as always, we'll be watching you, too.

The Innovator

Rob Arnott

Age: 52

Position: Chairman, Research Affiliates

Location: Pasadena, Calif.

Education: University of California, Santa Barbara

When the first indexing vehicle was launched back in 1971, professional investors derided it as “striving for average performance.” Even one of its early proponents described indexing as “a weird damn thing.” Funny views when pondered today: An estimated $3 trillion is now invested in sector indexes.

But Rob Arnott, founder and CEO of Research Affiliates, would agree with the early critics. Arnott says cap-weighted indexes have inherent deficiencies that cause a “structural drag” on their returns. That is, any index that is based on market capitalization “overweights every single stock that is trading above its fair value and underweights every single stock that is trading below true fair value.” The solution? Create a “fundamental index,” where you weight each stock using other, more objective (fundamental) measures of value, like sales, dividends, profits and book value. In this way, Arnott says, you'd have beaten the market by 200 basis points per annum going back to 1957, the first year of available “clean” data. The phenomenon is still in its infancy, but growing fast. Research Affiliates has $14 billion in AUM (including institutional, subadvisory and licensing agreements) — up from $4 billion two years ago. But not everybody is convinced. John Bogle and Burton Malkiel, the intellectual grandfathers of indexing, say high expenses and taxes would drag down performance to market returns. And, further, the “fundamental” indexes have a small-cap value bias. Still, you can bet fundamental indexes might find a warm reception among retail advisors looking to avoid putting clients in growth indexes that are disguised as “the market.”
David A. Geracioti

The Manufacturer

Larry Fink

Age: 53

Position: Chairman and CEO, BlackRock

Location: New York

Education: UCLA (Bachelors and MBA)

Larry Fink, who founded BlackRock in 1988 and built the company into one of the world's premier bond managers, acknowledges that most mergers don't work. But Fink's latest deal — swapping nearly half his company for Merrill Lynch Investment Management (MLIM) — will succeed, he says.

There is little reason to doubt him. And not just because of his past triumphs: At the tender age of 28 he was named a partner at First Boston, and helped introduce mortgage-backed securities — today, a $4 trillion market. And, of course, his present firm's performance speaks for itself ($454 billion assets).

This seems like a brilliant move for both parties: BlackRock gets Merrill Lynch's asset-management unit and Merrill retains a 49.8 percent stake in the combined entity. BlackRock, which has never been able to leverage its strong institutional reputation in the retail world, will get access to Merrill's 15,000-strong distribution network while simultaneously reducing its dependency on the fixed-income market. For MLIM, it may open new sales channels, ones that previously viewed it as a rival. And the new BlackRock substantially reduces the conflict of interest Merrill reps have in selling funds. Still, significant roadblocks lie ahead. Can he merge two distinct institutions with very different products? “If anybody has a shot at being the next Warren Buffett, I think Larry Fink is the guy,” says Dick Bové, a securities analyst at Punk Ziegel. “He's one of the most unique guys out there in the money-management industry.”
Kevin Burke

The Watchdog

Mary Schapiro

Age: 51

Position: Chairman and CEO of NASD

Location: Washington, D.C.

Education: Franklin & Marshall College

Before Mary Schapiro takes over from Robert Glauber as chairman and CEO of NASD, now slated for the end of August, she'd like to get your perspective on things. Seriously, coffee with Wall Street's new top cop, anyone?

Schapiro's “listening tour,” as she calls it, is hardly an admission that regulators went too far over the last few years, but it is an attempt to build bridges to those affected by rules and regulations. In a speech she made in the spring, Schapiro said the cost and pace of regulation “will always be dictated by need and circumstance…but we are ever pliable in considering the best solution to the problem.”

If it's not a kinder gentler regulatory body she'll be leading, it should be a more helpful one. With its Ahead of the Curve initiative, Schapiro's NASD would be more cooperative, tacitly acknowledging problems (in things like Notice To Members releases). With Congress and the SEC mulling the fate of self-regulation, Schapiro has to show that the system works.

Firms have long been complaining that the NASD would rather fine them than guide them through honest compliance questions. But there are skeptics. “There's often a disconnect between what NASD execs say and what staff does,” says one publicity-shy attorney. “So far, she's at least saying the right things, so we'll see.”
John Churchill

The Chief

Ben Bernanke

Age: 52

Position: Federal Reserve Chairman

Location: Washington, D.C.

Education: Harvard, MIT

Pity new Fed Chief Ben Bernanke: He has to choose which is a bigger threat to the country's economic health, a slowing economy or rising inflation. There are signs of both phenomena on the horizon. The worst outcome: 1970s-style stagflation

In his first six months, Bernanke was refreshing in his clear pronouncements (i.e., that recent inflation trends were “unwelcome developments”). But he rates some blame for the market's volatility on his very short watch. There's good reason to expect he will create less volatility in the coming year. “Investors are getting used to his ways,” says Nariman Behravesh, chief economist of Global Insights, a financial-advisory firm.

Everything else is a crapshoot, and Bernanke, like any central banker, has many things to worry about, things beyond his control. Rising oil prices and trade imbalances may lead to higher inflation. At the same time, a cooling housing market and a slowdown in consumer spending could send the economy into a slump. Behravesh thinks price stability is Bernanke's primary concern and, if anything, would “err on the side of raising rates.” So, we may be in for a few more rate hikes. If that curbs inflation, expect an easing of rates in 2007 and a soft economic landing.
Barry Rehfeld

The Hunter

Ruediger “Rudy” Adolf

Age: 43

Position: CEO and Founder, Focus Financial Partners

Locations: New York

Education: University of Innsbruck (Austria)

For reps who wish to go independent, there are literally hundreds of broker/dealers to choose from. But if you are a fee-only financial advisor (a holder of a Series 65), chances are you already are independent. Then again, sometimes independence isn't all that it is cracked up to be, particularly when an RIA's partners are nearing retirement or wish, for whatever reason, to monetize their book. With that in mind, some RIAs are seeking partners to fuel growth.

That's where Focus Financial Partners comes in. Led by Rudy Adolf, a former senior executive at American Express and partner at McKinsey & Company. Focus Financial's model is similar to National Financial Partners and Boston Private Wealth Management Group in that it buys stakes in fee-only investment advisors, taking anywhere from a 40 percent to 60 percent stake. The RIA principals get a mix of cash and units in Focus, which gives them liquidity and a potential payoff if Focus goes public, a la National Financial, which is an NYSE-listed firm, and Boston Private, which is listed on the Nasdaq. Just as important, Adolf says, Focus aims to add incremental growth of 3 percent to 7 percent above what the RIA could do on its own by offering assistance in marketing, business development, recruiting and technology.

Backed by the $9 billion private equity firm, Summit Partners, Focus made two RIA acquisitions in June, bringing its assets under management to about $4.5 billion (without its third-party administrator business, AUMs are about $2.5 billion). The goal, Adolf says, is to make 30 to 50 new acquisitions in the next three to five years.
Halah Touryalai

The Builder

Marten Hoekstra

Age: 45

Position: Head of UBS Wealth Management U.S.

Location: New York

Education: University of North Dakota, Kellogg Graduate School of Management at Northwestern.

The UBS Wealth Management unit in the U.S. has stood, ever since its 2000 merger with Paine Webber, in the shadow of UBS internationally. A longtime Paine Webber rep from North Dakota who spent four years in Zurich, Marten Hoekstra was appointed last June to change all that. So far, analysts like what they see: “We are impressed by the quality of the people we meet from this operation,” writes Bear Stearns analyst Christopher Wheeler in a June research report, “and [the unit] is fast becoming an opportunity rather than a drag on earnings.”

Hoekstra's challenges lay in continuing to build and leverage the UBS brand stateside (note the strong “You and Us” ad campaign). This should help improve upon 2005's low pretax profit margins (9.4 percent) and total client assets ($572 billion). That's partly a function of scale, say analysts. The addition of 800 Piper Jaffray reps — minus several top producers who've fled for rival firms — will help. So should Hoekstra's commitment to courting the more profitable mega-millionaire client — UBS' forte in Europe. More than 100 FAs have been certified to work in private wealth centers, catering to the richest 1 percent of the country, the first of which was opened on Park Avenue in New York in mid-July — five years after Merrill opened its first high-end branches. And, yet, Hoekstra can already brag: UBS reps were tops in average revenue per FA in 2005 ($711,000, compared to $710,000 at Merrill), according to Wheeler, who also says a new focus on rewarding reps more for “net new assets” than production — like the European private bank — resulted in $982,000 in net new money per advisor in the first quarter, more than any other firm. Europe's shadow may be fading.
JC

The Magician

James Gorman

Age: 48

Position: President and COO, Global Wealth Management, Morgan Stanley

Location: Purchase, N.Y.

Education: University of Melbourne (Bachelors and Law degrees); Columbia University School of Business (MBA)

James Gorman has had a strong start as the new head of retail brokerage at Morgan Stanley. But even bigger challenges may lie ahead. Before Gorman came on in late February, Morgan advisors lagged way behind their peers in terms of productivity and average client assets, morale was in the gutter and reps big and small were heading out the door.

In the past four months, Gorman has brightened the mood of top producers by opening communication lines, axing weak regional management, handpicking new leadership and scaling back what many saw as bloated trainee ranks. The result: Productivity has vastly improved — average annual revenue and client-assets-per-advisor rose to $653,000 and $78 million, respectively, in the second quarter versus $472,121 and $59 million in the first half of last year. That gives Morgan a lead over Smith Barney and puts it in third place among wirehouses, behind Merrill Lynch and UBS.

Problem is, much of that improvement in productivity, even Gorman admits, is due to layoffs of 1,000 lower-end brokers ordered by CEO John Mack last year, a reduction of the trainee force by 500, as well as continued defections by nervous, lower-end producers in recent months. At a time when the equity market is struggling to eke out gains and competition for high-net-worth clients is growing more fierce, further gains will not come so easily. Gorman has been down this road before: As head of retail at Merrill Lynch, he doubled profit margins and raised broker productivity by a third. But Gorman has promised not to “Merrillize” Morgan Stanley. So he must have some new tricks up his sleeve.
Kristen French

The Chaperone

Catherine Gordon

Age: 51

Position: Principal, Vanguard Advice Services Group

Locations: Valley Forge, Pa.

Education: Smith College

Vanguard is broadening its advice offering and giving traditional advisors — some of whom sell its funds today — unexpected competition. The low-cost mutual fund giant is building out its call center-based advisor force, which currently numbers roughly 200 certified financial planners. And in April it launched a new call center financial-advice program called “Financial Planning Service” aimed at mid-tier investors. The firm had offered limited retirement, college savings, asset-allocation and investment recommendation advice through its call centers since 1998, but now it's offering comprehensive financial plans, too.

A 12-year veteran at Vanguard, Catherine Gordon is heading up the effort to expand Vanguard's call center offering. Firms like Merrill Lynch, Morgan Stanley and Charles Schwab are already using call centers to cater to smaller accounts as part of a client segmentation strategy.

The unusual part is that Vanguard CFPs offer only Vanguard products. That flies in the face of the industrywide trend towards open architecture. With so many wealthy investors seeking “independent” advice these days, some wonder how successful Vanguard will be in attracting investors to its financial-planning and advice services if only Vanguard products are available. Vanguard defends the practice, saying that its products are best in class.

Vanguard's new low-touch service is aimed at clients who are seeking some help developing a financial plan that they will implement themselves. It's free for existing clients with at least $250,000 in assets and for new clients with $100,000 in investable assets. There is a flat fee of $1,000 for those who don't fall into those two groups, and the fund family's average offering sports a total expense ratio of a mere 0.21 percent.
HT

The Deputy Sheriff

Andrew “Buddy” Donohue

Age: 55

Position: Director, SEC Division of Investment Management

Location: Washington, D.C.

Education: Hofstra, NYU Law

Buddy Donohue didn't miss much joining the SEC nine months after his new boss Christopher Cox signed on as chairman in August 2005. He inherited several ongoing battles. They include the future of the “Merrill Lynch” exemption to the Investment Adviser Act, the independence of mutual fund directors and the use of soft dollars.

With Donohue manning the investment front lines, there is reason to believe these matters may get resolved soon. Donohue represents a departure from previous investment-management chiefs. The post, which he assumed in May, has traditionally been filled in-house or by lawyers without Donohue's direct experience in the business. He was previously the general counsel of Merrill Lynch Investment Managers, where he was responsible for legal and compliance issues.

This industry know-how may help him work faster than a bureaucrat might. On the other hand, as an industry veteran, Donohue may not be the most aggressive deputy sheriff. Perhaps with that in mind, he made a point of saying in a June speech — the only one given thus far — that “regulation and competition at their best both have the same goal: serving the needs of investors.”

Still, there are skeptics: “Based on his background, he looks like he might be more industry friendly,” says David Tittsworth, executive director of the Investment Adviser Association.
BR

The Proxy

Man Investments, U.S. asset-management arm of Man Group plc

AUM: $54 billion

Location: Chicago

Few would argue that most retail investors should not have some exposure to alternative investments. So why has it been so hard getting wealthy retail investors to invest in hedge funds? The U.K.'s Man Group, the world's largest provider of alternative investments, is something of a proxy for the retail market's ardor for alternatives.

Man opened its U.S. retail operation in Chicago in 2000 with the intention of establishing a distribution footprint to mimic its success overseas. “Asset flows have been slower than expected,” concedes John Kelly, president and CEO of Man Investments, the asset-management division of Man Group. While the firm boasts more than 130 broker/dealer selling agreements, only one of them is with a major wirehouse. And although Man is in contact with roughly 14,000 financial advisors, only 600 are selling Man products. That has translated into about $160 million in assets in the U.S. retail market, a tiny slice of its $54 billion in assets worldwide.

But Man's luck may change. Lower minimums, education and training will help. And fees may have to come down, says one expert who used to work in alternative investments for a large wirehouse. Performance is often misunderstood, he adds. “It's about risk mitigation,” he says. These days, investors only hear about “blowups or humongous returns,” he gripes.

Says Tom Whelan, CEO of MARhedge, “As more product becomes available, investment advisors will be increasingly focused on hedge funds over the next two to three years.” The next year may be telling.
KB

WHERE ARE THEY NOW?

An update on last year's Ten To Watch.

American Funds

Second largest fund family in the U.S.

Last year's challenge: Prove its revenue-sharing payments were above board, get California Attorney General Bill Lockyer and the NASD off its back.

How it's doing: Courts have dismissed Lockyer's suits twice, ruling it's the bailiwick of the SEC; an NASD hearing panel is expected to make a decision on the issue in early 2007.

Dale Brown

CEO, Financial Services Institute

Last year's challenge: Make regulators and legislatures understand the business model of independent-contractor broker/dealers.

How he's doing: “Many do understand our business model better, but I know there are key staff people at the SEC who are suspicious of our independence,” he says.

Chris Cox

Chairman, SEC

Last year's challenge: Continue Donaldson-era toughness without an avalanche of new rules and listen to industry complaints.

How he's doing: He's been tough without easing up, to the chagrin of some. The SEC has issued more than 200 litigation releases in his first six months, the same pace as the Donaldson regime. But he does seem to be more conciliatory.

Jim Cracchiolo

Chairman and CEO, Ameriprise Financial

Last year's challenge: Raise brand awareness and advisor productivity.

How he's doing: So far so good: Surveys show brand awareness is better than it ever was when the firm was under the American Express umbrella, and revenue per advisor rose 17 percent in the first quarter of this year versus the first quarter of 2005.

John Mack

Chairman and CEO, Morgan Stanley

Last year's challenge: Restore Morgan Stanley's tarnished image and business groups.

How he's doing: Mack has wooed back some of the top traders and bankers who left the firm post-Purcell and brought in Merrill's James Gorman to revive the retail unit. Morgan's shares are bumping up against their 52-week highs.

Raymond “Chip” Mason

Chairman, President and CEO, Legg Mason

Last year's challenge: Successfully integrate Citigroup Asset Management.

How he's doing: He's still getting started, but Mason says he now believes savings may be higher and asset retention better than anticipated. Legg funds are now the top fund family sold at Smith Barney.

Robert McCann

President, Global Private Client Group, Merrill Lynch

Last year's challenge: Maintain Merrill's retail dominance and continue growth.

How he's doing: Merrill's second-quarter earnings speak volumes: Profits are up by 53 percent year-over-year, pretax profit margins are up by 6 percent, to 27 percent, and Merrill FAs rank first in assets under management and production.

Susan Merrill

Chief of Enforcement, NYSE

Last year's challenge: Mend reputation of NYSE Regulation in wake of the specialist scandal and prove worthiness of self-regulatory model.

How she's doing: Through June 2006 NYSE Regulation has handed down $14 million in fines to firms and individuals, suspended 37 persons and barred 14. At that pace, Merrill will top last year's landmark figures. But if the SEC's proposed “hybrid” regulator becomes reality, her role will be uncertain.

Joe Moglia

CEO, Ameritrade and CEO, TD Ameritrade

Last year's challenge: Integrate Ameritrade's online platform with TD Waterhouse's 100-plus retail branch offices.

How he's doing: Despite some technological snafus, the integration is one-third complete, and analysts are encouraged by the numbers. In the third quarter, revenues — 60 percent of which were asset-based — more than doubled from the same period a year ago, as did profits. Board members are expecting a doubling of profits every three to seven years (a nearly 15 percent annual growth rate), which would certainly make TD Ameritrade a contender.

Chuck Schwab

CEO, Charles Schwab

Last year's challenge: Keep up the brisk pace of growth and straighten out U.S. Trust.

How he's doing: Schwab is still the most powerful asset gatherer out there, bringing in $59 billion in net new client assets in 2005 and another $28.1 billion in the first quarter of 2006. (Merrill Lynch retail netted $46 billion in new assets during 2005 and $16.9 billion in the first quarter.) Meanwhile, a structural overhaul is under way at U.S. Trust, but margins are still about half of what they are in the rest of the industry.