American Portfolios Named One of 2018 Broker-Dealers of the YearNews & Press
The 2018 Broker Dealer of the Year winners represent the best of the industry when it comes to serving their advisors. Since 1995, independent advisors have given us their views on the support, services and payouts they receive from their respective BDs, and we have tallied the results (which include 1,400-plus advisor votes).
This year’s winners include: • Division IV (more than 1,000 representatives): Cambridge Investment Research, which is led by CEO Amy Webber and based in Fairfield, Iowa; it has won the award 11 times. • Division III (500 to 999 reps): American Portfolios Financial Services, of Holbrook, New York, led by CEO, President and CIO Lon Dolber; it has won the award four times. • Division II (200 to 499 reps): Geneos Wealth Management of Centennial, Colorado, represented by President Ryan Diachok; it has received the award six times. • Division I (up to 199 representatives): Prospera Financial Services of Dallas, led by David Stringer, principal and president; this is its sixth year as a winner.
Each year, we ask the top executives of the winning BDs to meet with us in Chicago to discuss the latest competitive, regulatory and other issues. This year, for instance, the BD leaders shared their views on mergers & acquisitions, the Securities and Exchange Commission’s proposed Regulation Best Interest, technological innovation, the future of the advisory business and more. Their frank and detailed remarks follow (and are posted online at ThinkAdvisor.com).
Janet Levaux, IA: The number of broker-dealers continues to drop, with it falling by about 100 last year to roughly 3,725. Meanwhile, private-equity firms have been stepping in with financing for firms as large as Cetera Financial Group, which recently sold a large stake to Genstar Capital, and consolidators are uniting registered investment advisors. What do these trends mean for the future of privately held BDs, like those that you lead?
Ryan Diachok, Geneos Wealth: There’s a myth being perpetuated by the private equity groups and the large consolidators that … the only future in this industry is large consortiums of broker-dealers or private equity firms with BDs underneath them. Those of us in this room show this is not the case.
You can be a privately held, privately run broker-dealer/RIA in the space and still generate scale and profitability, and you can provide that much higher-level service and personal attention in relationships to advisors that you just can’t do under those [other] circumstances. Probably the biggest things that drives us are the fiercely independent, private nature of our companies and the desire to stay that way.
Levaux: What’s your view of private equity and consolidating firms? Diachok: Private equity is the new flavor, right? We’ve gone through different iterations of acquirers in this business. For a while, it was insurance companies thinking they could get distribution. That didn’t work.
We’ve had a couple of industry consolidators … with some of the bigger firms consolidating and just growing internally, and now private equity has come along. What can these firms buy, and what arbitrage can they get to squeeze additional revenues out to make that investment worth it?
That is fine from a dollars-and-cents perspective for them. But for the advisors and, ultimately, management teams and everyone else in this business, that’s not a very healthy environment.
David Stringer, Prospera Financial: Being private allows us to be singularly focused on serving our customers. That’s the unique piece and why the Broker-Dealer of the Year winners almost every year are primarily private companies, because we get to stay focused on serving our customers. If I don’t make my margins or profits, I am not getting fired. I just try harder next year. But my primary driver is loyalty to my customers.
How much knocking do we get on our doors? It comes in waves, but we get approached on a regular basis. It’s just one of those things. The firm is a legacy asset in our minds.
The firm’s leaders are practicing advisors. This means we want to be very careful about anything we do that affects our reps, since those changes will affect us, too.
Lon Dolber, American Portfolios: I understand what the business of private equity is about. It’s not bad. It’s just not what I want. I want to build a great company, one that’s built to last. Also, the company affords me a platform to do the things I do in the community.
I’ve been taking steps, to [work with] the next group of executives that are going to move up and take the company forward. The advisors that are joining us are concerned about having enough runway, because what they buy is what they should get for some time. If they come here and then I sell the company, they may not be getting what they bought.
What have we done for succession as a private company? I’ve taken steps to ensure that our company stays private going forward.
There’s nothing wrong with private equity, but it’s just not the model that I’m interested in. I get called by consolidators, and they want me to be one of their five broker-dealers. I have no desire to be one of five broker-dealers. If they are willing to streamline the back office for five broker-dealers, to streamline your systems and technology, you might as well be one broker-dealer.
As for consolidation, it expands and contracts, and that’s just the way it goes. And then the companies that consolidate, they start diversifying and moving pieces out. It’s just like “Game of Thrones” … this is “Game of BDs.”
I’m afraid to be part of “Game of BDs,” because you’ve probably noticed in “Game of Thrones,” the people that live in those lands get the worst of it, and those are advisors. The advisors are not getting the best of it.
Some advisors say they can live with that. But you’ve got enough to worry about, and you’re going to worry about all those changes? Consistency of management, there is value in that.
Amy Webber, Cambridge: The trend of consolidation will continue. There are a significant number of small and midsize privately-owned firms that have not been innovating, transforming [or] changing and are still in the old revenue model. They can’t figure out how to scale. They don’t have the investments and the resources they need to put into technology and compliance. That’s not going to go away.
There will be niche players and more innovative [players]. It’s not going to go to five, like the auto industry, but more than likely [consolidation] is going to continue.
Being on the other side of the size spectrum than my colleagues in this room, we are often on the other side of the equation. We get many phone calls from those [small to midsize] firms who want to talk to us as an alternative to having other organizations buy them or [having to sell to] private equity or to the consolidators.
This isn’t our priority as a growth mechanism for many reasons. However, we get somewhere in the realm of a dozen phone calls a year, which may end up in one to two transactions per year — primarily where the seller is an individual that is looking to stay in the business and be active, but just doesn’t want the challenge of running a broker-dealer.
In all cases that we’ve completed, the organization has remained with us as an enterprise (or what the market refers to as a Super OSJ). And in all cases, the most important thing for us is core value and cultural alignment.
“Is [Cambridge Executive Chairman Eric Schwartz] committed to his majority ownership stake and keeping the firm privately held?” That is the number one question every single recruit asks when they call us. “Tell us how you’re going to remain a private business,” they ask, and as the size grows, that becomes more complicated.
He is committed to our advisors and staff to retaining control during his lifetime. And he’s had to reinvent the succession plan multiple times with the overarching intent of Cambridge being able to control its own destiny without a need for private equity or institutional ownership.
There are two sides to a succession plan — leadership and ownership. On leadership, we’ve really worked hard over the last 20 years to find talent to carry on the legacy of Cambridge as it was intended. We have a fantastic team in place.
As for the stock-ownership plan, Eric has had to engage several strategies, the most recent being an Executive Equity Ownership Plan. To avoid things like “death by estate tax,” you have to constantly watch things such as tax laws. We converted from an S Corp to a C Corp to perhaps open up some opportunities in the future.
As we went from a $100 million in revenue to $200 million to just under $1 billion, the problems become different when you are committed to protecting private control and therefore the strategies become different. It requires intentional, thoughtful focus. We are committed to supporting quality advisors dedicated to serving their clients’ best interests.
Dolber: We have had some small firms fold into us. There probably is a good number of small firms we could acquire, and there would be an arbitrage because our economics are not their economics.
The problem I have is ethical. You have to lay off people, because quite frankly, even with some larger firms that we could acquire, I would not need their employees. And I have an issue with that from the perspective of the community. It just doesn’t feel right.
Also, if you acquire a firm that is a little bit too large, you really don’t know what you’re getting 100%.
Webber: That’s a great point. You could just recruit the [advisors] who are the best fit for you one by one, rather than acquire a firm with about half of the advisors not wanting to be with you or … you just not wanting all of them. … When you get into the due diligence phase, the world may not look like you thought it would.
Dolber: It is interesting, there are so many mom-and-pop shops … where almost all the revenue is just going to the founder. [These small BDs are] not putting any systems in place or technology, right?
Webber: The number of firms with, like, 10 advisors is crazy.
Stringer: We’ve bought a couple small firms, but we’ve probably turned away more than 10 times as many. … The very reason is that you probably want the top 10% or 20% or so of advisors; the other 80% just are not a great fit.
We have three primary shareholders. Most executives have some exposure to equity.
Of the advisors we have, we probably have a dozen who used to be broker-dealer owners. The burden of running the broker-dealer had become onerous for them. But they fit our model, because they’re a big enough practice to fit somebody we would want to recruit.
Levaux: What has been your firm’s strategy concerning the Department of Labor fiduciary rule and the proposed SEC Best Interest standard?
Webber: By the time the [fiduciary] rule was officially vacated … most of our assets had transferred into an environment that covered a lot of the high-level requirements of the rule. And we’ve always been supportive of a uniform standard of care.
We were very much against carving out one type of account, but our perspective really was that a lot of what came out of the exercise was positive. … Most advisors were not going to move just retirement assets of a particular investor and not all assets.
A significant amount of our discretionary assets already were moved into a level-fee environment by the time that rule was vacated. And it turns out, while change is difficult and transformation into that environment perhaps wasn’t welcomed at the beginning by many, driven primarily by the regulation, it’s turned out to be a very good thing for advisors and investors.
They’re not going to go backwards. The biggest change for us is that investors and clients are paying a program fee. It’s a wrap account instead of the traditional method where advisors are paying a platform fee. There is a lot of transparency now for advisors, and advisors in general learned a lot about internal expenses and how to explain things like that to investors.
There are a couple things that we were able to table. We’re not going to unwind or make significant changes to certain things, until we know what the SEC Best Interest standard looks like. But in terms of reasonable compensation and picking one percentage of commission that is appropriate for an investment category, it is completed and set, on the shelf.
A lot of the additional onerous [DOL-related] disclosure issues we stopped. Hopefully, we never have to start that again, because our opinion was that was not good for investors. It was too much, and the SEC’s [proposal] is much better.
I was just in D.C. and it feels very much a positive for our industry that the SEC, the Department of Labor now and even some states are working collaboratively, which is good for the industry. The DOL was very clear also that there are certain things it is still interested in that the SEC does not have jurisdiction over.
Once the SEC’s rule does come out, we will then likely be faced … with yet some sort of regulation from the DOL to cover what it sees as gaps in what the SEC doesn’t have jurisdiction over. At that point, we have to deal with something again, and I hope it’s swift. The uncertainty is the biggest problem.
Stringer: We went through an exercise … to get our conflicts worked out, levelizing the compensation and (really on the brokerage side) putting best interest first with quantitative analysis and disclosures. We’ve done a lot of the work that needed to be done. We paused on the disclosures that we thought we’d have to do with the best interest contract, some of the more onerous things that were not right with the DOL fiduciary rule.
In our brokerage business, we hold ourselves to a higher standard of best interest. We have levelized compensation across products. We think the fiduciary era is upon us and are moving towards this greater transparency of fees, higher disclosures. We’re trying not to battle it and just embracing it. That’s the place to go. The sooner we get there, the better.
It has not been easy for the advisors who do a lot of brokerage business, because there is a higher standard to do an exchange to go from a brokerage account to a fee-based account. We do require higher levels of scrutiny … to help protect the advisors’ practices.
From a suitability standard to a best interest standard, we do the quantitative analysis to make sure that the cost structure is appropriate for the client — that it makes sense that we can document and defend that it is in their best interest.
We do that work; it’s slowed down some of our approval processes. These are things that will pick up as we educate and train our advisors, and people understand that best interest is the new standard.
Dolber: Do you think an advisor is in a position to act as a fiduciary on every single product, for instance, insurance products? I have this question about acting as a fiduciary, which implies that you have knowledge on almost every single product.
Is that even possible? How can you sell life insurance on a fiduciary basis? There’s an aspect of this whole fiduciary discussion which kind of doesn’t resonate with me….
The SEC had a suitability standard for decades. We all understand that, and we all understand transparency. But there are just some products that are sold and not handled on a fiduciary basis now. We’ll see where all this goes.
And price — shouldn’t the market dictate that? Who’s to determine what’s fair and reasonable compensation. The regulators? That’s a slippery slope, but it’s here. It’s maybe not totally here, but it’s just never resonated with me.
Webber: This is the next round of significant discussions that our industry can rally around — cheapest is not always best. And it absolutely should not be dictated. The good news is I’ve had conversations with many regulators and individuals on Capitol Hill, and at least for the moment, everyone seems to embrace the idea that cheapest is not always best.
Dolber: It’s encouraging to hear that the states, SEC and DOL are somewhat coming together to create a unified approach to this. Whatever that approach is, as business leaders we’ll follow it; we just need to know what it is.
We took a very measured approach. We were prepared to go with the best interest contract. We figured out how to do it with our systems. We have proprietary technology, so it wasn’t hard for us to figure out how to do it from a technical point.
Since we don’t rely on anybody else’s systems, we can modify our own. We called our shots; we made some changes — transparency changes — so that every account that will be subject to the rule became clear to the advisors.
We didn’t make changes with compensation. We didn’t do things like some firms, which said you couldn’t do a retirement account in a commission-based account and had to use a fee-based account.
I have a book of business, and a client calls me and says, “My son wants to open up an IRA, and he’s going to give you $2,000.” I’m not going to put him into a fee-based account. Maybe I’m going to put him it into a 3 or 4% [commission] mutual fund, a commission-based product. I’m not going to be held to a fiduciary standard with that, where I would have to go see the client every quarter or whenever.
Making sure I don’t get between the advisor and their client is very important. I know we have regulation to deal with. But I look at the system, our approach and our process. I say, “Are we getting between that relationship?” I want the public to have a choice. We didn’t say you couldn’t open up an IRA commission-based account.
Webber: Even if the rule would have continued, you weren’t going to make those decisions until someone told you that you had to?
Dolber: That’s right.
Stringer: Choice is a very important piece of our business. Make sure there are commissions, because commissions are the right thing, and they are in the best interest for certain accounts — small accounts in particular. Fee based is not necessarily in the best interest for all investors.
Diachok: To the point about the firms that just came out and said “no commissions at all in IRAs,” that was jumping the gun. We took a measured approach, which I think worked out well for us given how this has played out.
I don’t think we’re anywhere near the end of this whole discussion and shouldn’t be. I agree that transparency to investors is probably the best thing that’s come out of this entire discussion, along with dissecting compensation. And I agree, there is no one right way.
Dolber: Take the IRA example, … which commissions should I use? I mean I’m not a public utility. If I put him into a 4% commission, is that too high? Should I have found something that was 2%? That’s just a slippery slope.
By the way, the public investor knows what he’s paying, and it’s a suitable investment for him. He’s made the decision and is willing to pay that price. Another advisor comes along and says, “I can do that for 3% or 2%.” That’s the market. Why can’t the market dictate that price, and why does that have to be regulated?
Diachok: Through the process, we felt that [the DOL fiduciary standard] was an unmanageable rule — in the context of how it was written, the disclosures. We weren’t surprised it was vacated. We were all hoping for that, because it wasn’t written properly for our industry.
As for the SEC, I appreciate the comments on where they’re going. But do any of us in this room think they’re going to make progress in any reasonable amount of time? We saw how long the DOL rule took.
Webber: I am very hopeful. The senior leadership at the DOL [today], unlike before, does seems to be in constant communication with the senior leadership of the SEC. Even though we don’t have all the commissioners at the SEC yet, I’ve heard from three of them in a short period of time, and they understand that time is of the essence, which is why they put the rule out the way that they did. It’s not perfect; every one of them will admit that.
They’re being very receptive to comments, but they know that they have a short window.
Levaux: What can you highlight about innovation and change in the face of price compression and other competitive pressures?
Dolber: There’s going to be price compression, no question. Baby boomers may live to 100, so financial planning is going to have to get better. Can you live on 100 basis points all in, which means the advisor might be making 50 or 60?
You’ve got to look at your practice. We made the decision to … not live with anybody else’s technology. We had to develop our own systems and our platform, because of price compression. What happens if you have somebody else’s hand in your pocket? It’s a tough thing.
I wanted us to be in a position where we can control our costs 100%. As we speak with our customer, the advisors, they may not need all the bells and whistles that, if we brought in somebody else’s platform, we’d be paying for. They’ll accept a basic platform in lieu of getting a better price. In the end, they are dealing with price compression and expect us to help them deal with that.
Diachok: In a price-compression environment, the advisors always are going to be the last one to lower their fees. They’re going to look for compression everywhere else. It’s going to be the underlying investment instruments. You’re seeing the use of ETFs over mutual funds becoming much more prevalent; it’s going to be platform fees.
The person closest to the client, they have a relationship, and they’ll be the last one to take a cut — but it’s coming. That’s what we’re trying to build. We’re trying to give them more options for lower-cost models and platforms. Eventually … everything is going to be compressed — even down to the advisor level, but that will be last thing to go.
Webber: We watched our advisors’ organic growth rate … return to double digits, because we have spent a ton of time talking to them about growth opportunities and value proposition realignment.
There’s no doubt that the Vanguards of the world have put a stake in the ground that they’re going to drive the cost of advice down, but our advisors have a lot more to offer; the future of advice is strong in terms of holistic, comprehensive financial planning. The advisor of the future can make more money, not less. They’re just going to be making it differently, more transparently.
The investor of the future is going to demand different services. The younger generations that we talk to don’t have a problem paying for advice. … There’s a dynamic that is going to change. It’s the advisors resistant to the change who may very well experience this — that they have to lower their fees because they can’t compete.
We have to deliver more for less, because they are going to look for that. We’ve led by example by transforming from just a broker-dealer or just an RIA to a full financial solutions firm. The firms that are evolving and moving in that direction are the ones that are going to survive and thrive. Probably our biggest accomplishment, for those in this room, is doing that and being privately controlled.
We just did an executive effort in which we had deep conversations with our 100 fastest-growing advisors, and the common theme was outsourcing.
They’re outsourcing everything. If you can figure out what that [advisor] demand is now, you can start to offer a different value proposition, and they are only in front of the client doing what they should be doing. Almost 100% [of these advisors] say the No. 1 reason they are among the fastest growing is because they’re outsourcing.
Some [advisors with directed assets] may be outsourcing to third-party money managers, but that’s not the sole outsourcing I’m talking about. It may be staffing, marketing, coaching, which is the second reason they are growing.
“I have realized that I don’t know it all, and I can’t go it alone,” they’ve said, and so they’re engaging in consulting, which opens the door for coaching and consulting platforms that we have brought on. Even if they don’t have a securities license and they’re only on the investment advisory side, there are solutions that we can bring to the table to help them scale.
There was a knee-jerk reaction to automatically lowering fees when the Department of Labor rule came out, … and while some of them did it, we were really coaching them hard to resist that urge. And they’ve come through that in a great way.
What we’re most proud of is supporting advisors to do the heavy lifting of reinventing themselves and come through that transformation, so organic growth rates are back on track. They’re out finding new clients and building businesses instead of getting too wrapped up on the tactical challenges that they were facing.
Diachok: We see the same with the top producing advisors … We’ve been huge proponents of coaching programs for years at our firm, which we’ve outsourced. We’ve partnered with CEG [Worldwide] and have seen tremendous success.
We have [other] programs in place that we’ll help pay for, based on growth and different metrics. Once an advisor gets into one of those programs, they come to that realization that … there’s a $1 million producer with one staff person. The guy with six says, “How do you do it?” These coaching programs are invaluable for them to learn how to scale properly.
Webber: Our biggest outsourcing programs is Office Assistant, which [advisors] can outsource on an hourly basis, and it’s doubling every year. There probably are about 30 people in the department today, acting as any type of an assistant. We have demand for 50.
Stringer: We have a virtual sales assistant program and a virtual HR department. We focus on helping our advisors be successful future advisors.
I’m in the same game as the rest of you. The compression is going to happen in the absence of value. But you can create a valuable experience, a great client experience [via] scalable processes, leveraged technology and building a practice that’s easy to do business with.
With these programs we’ve been trying to drive that knowledge into our different advisory practices. In that regard, fees will hold if you are creating something that is of value to the end customer.
Dolber: My biggest concern is that … we’re so tied into how we make our money, but are we prepared to challenge the economic engine and ask ourselves, “Will it be valid down the road?”
With our advisors, it’s important that we give them scale. Coaching is good; a virtual assistant is very good. But we have to get the investing public into the process, because that’s the way we’re going to get scale.
I feel there will be price compression. Someone mentioned the fact that the advisors are the last ones to see fees come down. There’s also the problem of them being willing to make a change. I try to help them understand that maybe it’s not happening to you right now, but you’ve got to start thinking about it.
Getting people to change is tough. You can have a lot of programs in place, personal assistants, coaching and all of that. But to get them to change when they’re stuck to the revenue model that they have is very tough, so I put most of my energy into the platform.
Diachok: I’m in the middle. I’m with you from the standpoint that price is a function of value. If you are providing value and providing an experience for the clients, you’ll be able to — for the most part — dictate what you charge.
But I agree that what Vanguard and Schwab are doing, with things like Intelligent Portfolios, is not the same thing [as what we are doing]. You can’t say full advice costs 30 basis points now, just because Schwab says it does. That is not the case; it’s not full, comprehensive wealth management.
But the perception from the investing public is very slow-moving compression. For the price of a full, comprehensive wealth management, will it still be 100 basis points 10 years from now?
There is some traction, and there’s also another factor: age demographics. Younger people will pay for things, but they’re much more inclined to want to know [exactly] what they’re paying for and how you deliver it.
Webber: It starts with digital marketing and goes all the way to how you’re actually serving the client.
Diachok: What robos have done is they’ve commoditized asset allocation, so asset allocation costs 25 basis points. Now you’ve got Vanguard or Schwab saying for 30 basis points you can have a CFP on the phone for an hour. You can charge whatever you want — 100 basis points, but you need to very clearly define what that 70 extra basis pointsis.
As long as you can clearly define it and articulate it to your clients, you’re fine. Again, to get back to the [earlier] discussion, … people should have a choice to decide what they want to pay for and what value they get.
Stringer: There will always be some do-it-yourselfers out there. And we’re nine years into this recovery, and everybody’s smart now. You can get modern portfolio theory for 25 basis points, but people will come running back for advice when we get a correction. When we get some kind of pullback in this market, they’re going to be less confident. They will be looking for who can help guide [them] through it.