So far in this young century, the brokerage industry seems to have successfully endured its run down the gauntlet. Let's see, there was that embarrassing tech collapse, in which securities firms and asset managers sure did look, well, greedy and self-serving in giving the investing public exactly what they “wanted” (rather resembling a giant “greater fool” scheme); then there was that humiliating bit about cozy market-timing arrangements with favored hedge funds in 2003; and, who can forget New York State Governor Eliot Spitzer's punitive crackdown as attorney general? (Sure made a lot of fuss, but one wonders how much money was actually received by retail shareholders.)
But those conflicts of interest are, for the most part, a thing of the past (hope we're not jinxing it). Really, it does seem as if the industry finally shed that conflict-of-interest skin it wore during the Great Buying Panic of the 1990s. Securities firms and their advisors seem to have emerged from the ordeal as more honest institutions and professionals, purveyors of actual financial advice — instead of just product pushers. (Schwab's “lipstick on the pig” commercials wouldn't have the bite these days.)
In fact, open architecture and full disclosure are more than buzzwords post-crash and post-Spitzer; they're the reality (okay, disclosure would be more useful if it were in plain English). The scores from our 17th Annual Broker Report Card Survey indicate that FAs at the major national firms (formerly known as wirehouses) are getting the high-quality products that they want, and the product research and support they need to understand those offerings. Citigroup's swap of asset management for Legg Mason's retail advisors, and Merrill Lynch's crafty deal with BlackRock, are case in point of the new reality. Financial products should be available to all — no matter where they sit; it's the solution, the plan that matters most. (Oh, and do not be put off by our calling this our Annual Broker Report Card; we're keeping the name out of respect for our 17-year tradition.)
But with incentives to sell certain products out of the way, reps are left with a bewildering number of product choices for clients. According to the Investment Company Institute, there are almost 9,000 U.S. mutual funds, and Cerulli & Associates estimates there are about 500 ETFs, with new ones entering the market every day. Separately managed accounts, managed futures, inverse and double-beta ETFs and funds of funds are aplenty. The list is mind-boggling. Insurance products are widely available to all: including variable annuities, which now number about 1,500 different contracts, with a combination of 63,000 different sub-account choices. If a client has a financial dilemma, you probably have a solution … or three.
And that's the problem: It's information overload. You need a little help. That's where your firm's propeller heads come in. We're talking about the guys and gals sitting in the home office whose job it is to screen and research managers to analyze performance; ultimately they decide which asset managers and products are allowed onto the platform. In essence, these guys are in charge of narrowing the list of products that get through the door and are available to the advisor. Reps love this type of support: This year, the “product” category got the highest average score for all firms (8.7). That category includes quality of research (which received a score of 8.3), fixed-income desk service (scoring 8.4) and quality of products (which inched up to 8.8 this year from 8.6 last year). Only one category got a higher average score than product quality. Perhaps it won't come as much of a surprise: It was freedom from pressure to sell certain products, which falls under work environment, and scored a 9.2.
As one Edward Jones broker put it, “Products are easier to understand these days. There's more transparency. I guess you'd call it 100-percent confidence that whatever the home office recommends and provides us to help clients fulfill their needs is going to be okay; it's going to be vetted.”
Keeping It Real
Chip Roame, managing principal of Tiburon Strategic Advisors, says the role of these “gatekeepers” is becoming more important not only because there are so many products out there, but also because advisors are trying to expand the kinds of services they offer clients. “The big buzz word is ‘wealth manager,’ but you can't be a wealth manager and also be the great product picker. At some point you have to rely on others to help you with things.”
That said, Roame argues, as do others, that because everyone has access to the same products these days, it's gotten more difficult for an advisor to differentiate himself based on the product he (or his firm) offers. “I would bet that 85 percent of product offerings are the same everywhere, and I think we need to fess up, say that, and stop dreaming about some product offering that one firm has over the next firm.”
The important thing, though, is that the gatekeepers protect advisors — and the firms they work for — from dodgy retail offerings. They allow national b/ds to devise tighter screens, and improve their due diligence processes so that advisors don't have any bad investments to take risks on, says Don Philips, managing director of Morningstar. (Too bad this doesn't happen on the mortgage-loan side of the business.)
“It used to be that anyone who was willing to pay the fees firms ask for could get on their platforms,” says Philips. But today, fees paid don't cut it. “If you just give investors and brokers a smorgasbord of offerings, the ones that will attract the most attention are often the ones that can do the most damage — the very volatile, narrowly focused offerings,” he says. Under the new regime, that is far less likely to happen. (To be fair, few firms would cop to Philips' assertion; indeed, access to a platform always required an asset manager to be good — as well as desired by rank-and-file reps — but the manager still had to agree to “share” some of his fees with the brokerage for the privilege of getting access to the b/d's network of reps.)
In any case, despite Roame's assertion that these days, “a product is a product,” to some reps, product is everything. One Merrill Lynch advisor, for example, says the reason he stays at Merrill (despite outrageous sign-on bonuses for hopping to another firm) is his access to “outstanding products and services and the open architecture to use them.” And the Merrill broker is not the only one who thinks his firm's platform is the absolute best. When asked, most advisors say the same.
Although Edward Jones won the highest overall score in the product category at 9.5, Smith Barney saw the biggest increase (6 percent) with an overall product score of 8.6 this year, up from 8.1 last year. Executives at the firm attribute that to Smith Barney's unified managed account offering, Smith Barney Advisor, which came out two-and-a-half years ago, but has really exploded in the past year, growing to about $36.5 billion in assets under management. The program offers reps research on 1,000 different investment options and products, access to over 2,000 mutual funds, and a wide spectrum of separate-account managers and alternative investments. But it's quality — not quantity — that counts, says Jim Tracy, director of the firm's Consulting Group.
“Having a lot of products is not important,” says Tracy. “Having good products is really important, and being able to research those products, and provide advice to the advisor so they can pass it on to their clients, is the most important thing in the whole product continuum,” he says.
Where quality of research is concerned, no advisors are happier than those at Morgan Stanley. Morgan saw the highest increase of any firm in the quality of research category, as its score jumped half a point from last year's score to 8.5.
Doug Ketterer, Morgan Stanley's managing director of Managed Money and Alternative Investments, says he has been on the product side of the business for over 17 years, and he has never seen such an incredible proliferation of products, and an increase in the complexity of products. Enter the gatekeepers.
“We're very aware that we need to provide our representatives with help to navigate through all of this. We scrub and screen thousands of mutual funds, hundreds of SMA disciplines and alternative investment offerings, something that's done through a separate team of analysts and experts. This frees up the financial advisor's time to work with clients. Part of being a gatekeeper is being able to deliver the intellectual capital at our firm to the retail client,” Ketterer says.
Moody Markets
In the end, perceptions of product “quality” are at least partially dependent on market performance. This year's scores might have been different if we had polled reps after the third-quarter earnings were released. Earnings at firms like Merrill Lynch, Citigroup, which controls Smith Barney, and UBS, bombed due largely to write-downs caused by losses in sub-prime mortgages and collateralized debt obligations (CDOs). Although industry results were strong in the first two quarters, the sub-prime smackdown really challenged investors' fortitude when the Dow began reeling in July. It's been volatile ever since.
Still, securities firms had some wiggle room. Profits for the second quarter of 2007 were the third-best results on record, totaling $8.6 billion, up 11.1 percent from the preceding quarter and 14.2 percent from last year, according to the Securities Industry and Financial Markets Association (SIFMA). And that makes first-half results the best they've been since 2000. Regarding third quarter profits, SIFMA says “the effects of the fallout of the sub-prime market and the broader credit crunch remain uncertain.” Those are ominous words, but it's not all bad news.
Some executives note that volatile markets push investors right into financial advisors' arms. “I think managing and getting a decent rate of return on your savings takes some professional help and some real care, and that creates the kind of demand for the services we provide,” says Jim Weddle, managing partner of Edward Jones. In other words, it's good time to be a broker — and a good time to be a client.
Methodology: How this Survey Was Conducted
Registered Rep. enlisted J.D. Power and Associates to conduct its 17th Annual Broker Report Card Study. Reps were randomly selected from the subscriber list of this magazine. Similar to previous years, advisors were required to have at least one year in production at one of the seven firms evaluated in the study. The research was conducted by Internet and by phone in September and October of 2007. Sample sizes range from 59 to 250 by firm. The total sample size for all firms is 954.
Reps rated their current employer on 27 items related to their satisfaction. Ratings are based on a 1-to-10 scale, with 10 representing the highest satisfaction levels. This year, a new question was added in order to measure A.G. Edwards and Wachovia reps' satisfaction levels with the merger process. In addition, advisors were asked how likely they were to remain or leave their current employer, and to report why they are likely to do so.
