Running With the Bulls

Newborns need protection; it's an adage that applies as much to the business world as it does to the nursery.

As it relates to the brokerage industry, this means newbie reps usually need a little help in establishing a healthy practice, and it turns out that few things give reps a better head start than a bull market.

“New producers are quite vulnerable,” says André Cappon, president of CBM Group, a Manhattan-based consulting firm that has monitored the progress of thousands of rookie reps — both here and in Europe — for several years. “Roughly half of a new class will drop out in the first year, and four-year survival rates of 10 percent to 25 percent are fairly common.”

However, he adds, bull-market rookies almost always make more money than bear-market rookies in their early years. This is true for several reasons. First, rookies who began working in bull markets “tend to build client bases more easily — finding people who want to invest is just simpler,” Cappon says.

Second, good market conditions mean the new reps are more likely to make money for their clients, which strengthens the client-advisor bond by breeding confidence on both sides of the relationship.

Healthy Environment, Healthy Rep

Statistics from the SIA seem to bear this out. In 2002, the height of the most recent bear market, the group says the turnover rate for new brokers (those in business for two years) reached an all-time high of 38.3 percent. In 2003, the number dropped slightly to 35.9 percent. As the market bounced back in 2004, the dropout rate fell to 23.5 percent.

In the prior boom/bust cycle, the results were similar. The SIA reported rookie dropout rates averaged 22 percent from 1997 to 1999, and “bottomed out” at 20 percent in 1998.

“Our studies indicate that investors who have a positive experience early on with an advisor tend to be more loyal,” Cappon continues. “They're likely to bring more assets to the advisor, and will usually tolerate a period of poor performance. Conversely, a broker who loses money for a client early on is highly likely to lose his business.”

Jason Lord, a rep at Piper Jaffray in Denver, is one of the lucky newbies. Lord started producing at age 26, amid the bull market of October 1998. Today, at 33, he says his business has grown steadily through the Sept. 11 tragedy and the market's subsequent downward spiral. The rep, who focuses on retirement planning, has 120 client relationships and an asset base that has grown 320 percent over the last four years.

His training class consisted of 23 people. After seven years — and through one of the most tumultuous markets in U.S. history — nine of them (nearly 40%) remain in business.

Still, even reps who start in bull markets face challenges, says Joseph Letts, a vice president at Smith Barney and manager of financial consultant associate training. “A bull market has that ‘party atmosphere.’ It can be a great time to jump in,” he says. “But, when in the course of that cycle you start also makes a difference. You're inevitably going have to deal with the hangover after the party, and you have to be prepared for that, too.”

Good Advice

One of the advantages of starting in good times is that a rep has the freedom to start slowly, says Lord.

“A 32-year rep who became my mentor told me municipal bonds were the best way to build a business,” he says. “He said, ‘You never want to lose clients’ money when you're just starting a relationship. Lay the groundwork conservatively and build outward.’” The experienced rep suggested Lord start recommending munis to prospective clients.

“I was put in a bullpen with three other rooks who gave me a hard time about cold calling on bonds in a bull market,” Lord recalls. “They were calling with equity ideas. But, none of them are still in business today.”

His youth proved advantageous, he reckons, because, without a family to support, his living expenses were minimal, and he had time and energy to devote to building his business.

Debuting in a strong market also helped him gain momentum quickly, though he says the good-times market was a double-edged sword at times. “When things are going well, you'll find some prospects want to do business at the discount firms because they feel they could do it themselves,” Lord says. “I had to seek out people who really wanted advice.”

Lord considers networking the greatest key to his success — “Cold-calling no longer works,” he insists. “You must meet people face to face” — and never saw his youth as a hindrance. The key to good prospecting is finding the right places to make connections that will stick.

“I've been very involved with my alma mater — the University of North Dakota — and its alumni association, planning football, hockey, golf tournaments and various other events for alumni who live in Colorado,” Lord says. “I've also been president of a ‘leads’ group called Colorado Business Connections, and an active member for several years. It's helped me forge some deep relationships with professionals and business owners in the area and has enabled me to build my business.”

Most of Lord's clients are high-net-worth people between the ages 45 and 55.

Bears Not Dangerous to All

For Gary Lewis, 55, who started producing at a Raymond James branch in Indianapolis during the bear market of 2001, following a 26-year career in real estate, things are going well. He manages $35 million in assets for about 120 households and says business is growing steadily. He views entering the industry in a bear market — two months shy of Sept. 11 — as having been less of a hindrance than an opportunity.

“People at my previous job thought I was crazy to get into this right after the tech bubble,” he admits. “But, I'd been asking virtually everyone I could what they thought about their broker. Most told me they were unhappy.”

Specifically, he says, many advisors were sticking their heads in the sand when clients needed them most.

“One broker's underserved client is definitely another's opportunity,” he says.

“In many ways, the bear market leveled the playing field,” adds Letts. “You have rookies who don't know better doing everything they possibly can to build a business.”

Lewis says his nearly three decades of real estate sales experience also helped. “I came into this business with a similar skill set and a lot of contacts,” he notes. “I think it would be tougher for someone much younger.” Of the eight members (30 percent) of Lewis' training class who are still in business, only two are under age 30.

Still, as with any newbie, he had challenges to overcome. “The toughest thing for me was thinking I needed to be a ‘generalist’ broker — to be all things to all people,” he says. “I was on information overload. And, I was driving myself crazy.”

After a while, he says he realized the need for a niche, so he chose to focus on retirement assets and 401(k) rollovers. “That really helped me get on course,” Lewis says.

The Tweener

As a two-year rookie, Mary Gonter, a rep at Raymond James' Venice, Fla. branch, is something of a cross between Lord and Lewis. Like Lord, being an advisor is essentially her first career. But, this 42-year-old divorcée, who spent 16 years as a stay-at-home mom, feels her age may give her an advantage over younger newbies. With $16 million in assets under management and some 80 clients, she ranks No. 1 in her training class for both production and assets.

Though she had plenty of contacts from living in the high-net-worth community of Venice for two decades, Gonter spent her first six months in production cold calling strangers. “I didn't want to start out prospecting people I knew,” she says.

Using a Hill-Donnelly report provided by her firm, Gonter called people in her area with incomes of over $70,000 or homes worth $300,000 or more and asked if they wanted a second opinion on what their brokers were doing.

“I focus on retirement, estate and educational planning, as well as income generation — issues that face the baby boom generation, of which I'm part," she says. “I think my age helped the people I was prospecting take me more seriously.”

A divorce settlement enabled her to meet her living expenses from the start, Gonter admits, though she says business grew quickly as she landed some large accounts early on.

“Cold calling is a numbers game, but I got a $1.5 million account — and several $500,000 accounts — that way,” she says. “It requires patience. That first big account took nearly a year to close. But, for folks starting out, I don't know of any way to make more contacts in a short period of time.”

Now, her prospecting efforts entail advertising, giving seminars and writing articles for local newspapers. She's built a strong referral base and notes that a sizable number of her clients are divorced women.

“They know I've been where they are, and understand the financial and emotional issues they face,” she explains.

Approximately one-third of her 18-member training class is still in business after 24 months, she says. (She began production in September 2003.) Of the four female class members, she is the only one remaining.

Gonter doesn't see her debut in a bear market as a major detriment. “It would have been great to start out in a roaring bull market and make lots of money for clients,” she says. “But, my business is more about the long-term picture. No matter what market cycle we're in, people need help and advice.”

There are many challenges facing new advisors, Gonter concludes, regardless of their age, experience or the market they're born into. “You can always find someone to tell you what you're trying to accomplish will fail,” she says. “I decided early on to avoid the negative — the water-cooler talk — and focus on activities that will help me help existing clients — and find new ones, like prospecting via seminars, advertising and writing financial articles for local papers; and trying to learn all there is about this business.

“I also knew going in — as any rookie must — that certain things would have to give for awhile,” she says. “Building a business can be a tremendous drain on your personal time. But, I know, in the long run, it will pay off for my clients — and for me.”

The keys to being a successful rookie in a bull or bear market are a strong work ethic, an efficient business plan and great time-management skills, says Lett. “Don't underestimate the role of a good branch manager, either,” he adds. “Working with mentor reps is invaluable — these folks have seen the history of the market's fluctuations.”

Finally, he says, “We encourage our FCAs to earn ongoing designations. We know that competence breeds confidence.”