Mastering Your Business Game

In spring 2008, adviser Steve Wilt started thinking about a possible affiliation switch, ultimately looking at 16 broker/dealers and considering three possible business models: wirehouse; completely independent—a registered investment adviser (RIA); and the hybrid model, “where you are independent but part of a bigger firm,” says Wilt, formerly at Merrill Lynch.

Each approach had pros and cons. “With the wirehouse model, there are some that are pretty well built up in the space. However, they are still getting to a completely agnostic product,” Wilt says. “On the ‘pro’ side, they had some pretty massive checks they were willing to write to get a team like ours to come there.” However, he could not foresee enough of a distinct advantage in services for his clients if he moved from one wirehouse to another. “To be a comprehensive, holistic, co-fiduciary partner for our clients, we needed the full range of services,” he says. If he decided to found “the Steve Wilt 401(k) Shop,” as he calls it, “we could have a lot of different firms as our back office but then we really would have to build the tools” for provider searches, investment monitoring, participant education, and other areas. “I did not have that appetite,” Wilt says. “We wanted a solution that would allow us to spend more time with clients.”

“You need to decide what kind of business you want,” Wilt says. His desire for an affiliation switch stemmed from “the trend toward being able to act as an independent and co-fiduciary,” which he could not do in his former affiliation, he says. “It was also what I was seeing in terms of the tools being made available in the industry.” He sought “something that was already built, and better than what I already had—and immediately better for my clients,” says Wilt, who does 90% of his business with retirement plans. “I tried to prioritize it by client first, self second, and team third.”

He ended up joining CAPTRUST Financial Advisors as an employee partner. There, “the main event is retirement plans,” says Wilt, now an Akron, Ohio-based Senior Vice President and financial adviser. “The goal is to centralize the servicing so we have more time with clients.” He trades a bit of payout to get those services, a worthwhile swap, he thinks, given his goals. “The payout is almost identical. However, I am a partner in the firm, and receive much more support,” he says.

Focus first on what type of advisory work you want to do moving forward, sources say, then evaluate the services of potential new broker/dealer partners.

“The fees from a broker/dealer are based on the services received,” says Michael DiCenso, National Practice Leader at Gallagher Retirement Services and President of GBS Investment Consulting, LLC, in Itasca, Illinois. “You may need a broker/dealer that will let you be a fiduciary, and provide you with services to support that. Or you may need a broker/dealer that is nothing more than a back office.”

Adviser Al Hammond also went through the broker/dealer evaluation process this spring, deciding to move from one wirehouse to another, UBS to Morgan Stanley Smith Barney (MSSB). “We considered going independent,” he says of his seven-person team, but decided that, in these uncertain times, clients want an adviser affiliated with a large, deep organization.

“We really try to leverage the resources that a large firm can offer,” says Hammond, First Vice President­–Investments and Institutional Consulting Director at MSSB’s MHC Group in Danvers, Massachusetts. “As a national entity, if you take over a national 401(k), you can tap into the network of advisers to help you with enrollment meetings, for example.” In addition, it helps that highly trained and experienced advisers can do those sessions, he says, versus a totally independent adviser who sometimes may rely on provider staff to do remote education, and find that they perhaps can only answer basic questions.

Scrutinizing a broker/dealer’s services carefully is not just a good idea for advisers’ sake, says Jim McCarthy, a Managing Director and Head of the Retirement Services & Client Advisory Center at Morgan Stanley Smith Barney. Savvy clients increasingly demand it, he says. “The client has a say in this equation, and people need to give a justification to the client: [The B/D relationship] needs to be a win-win situation; there has to be something in it for the client as well,” he adds. “The clients are asking more actively what that is, and saying, ‘Prove it.’”

Sources mention these five services most often as key things to look for in a broker/dealer:

1. Does it provide a desired business model? “In the qualified-plan space, the traditional brokerage model is dead,” believes adviser Mark Davis, who had his own independent RIA firm for 10 years before joining CAPTRUST in February 2009. “Find a broker/dealer that will let you serve as a fiduciary, as an RIA,” he recommends. “[It] forces you to be independent,” says Davis, a Westlake Village, California-based Vice President and financial adviser at CAPTRUST. “It keeps you honest.” In addition, employers increasingly demand that independence of their advisers, he says.

However, plenty of wirehouse-based advisers who do some retirement-plan work do not have a business model that requires being a fiduciary, as they say they stick to general education and advice, points out Bo Bohanan, Director of Retirement Plan Consulting at Raymond James Financial in St. Petersburg, Florida. Still, the trend is in that direction, and advisers who want to take on the consultant role need to think about their business model for doing it. While some start their own company, others such as Hammond—who can serve as a fiduciary on plan investments now—believe they and their clients fare better if they do that work at a large, solid broker/dealer.

McCarthy says that part of a broker/dealer’s role in working with advisers is to “give them the risk-management allocation. This is a highly regulated business, and there is an active regulatory and legislative agenda. You are allocating risk capital on their behalf. That is why FAs [financial advisers] still come to wirehouses: It might be theoretically attractive to hang out their own shingle, but the client knows there has to be a reputation and organizational strength behind the adviser.” As for payout tradeoffs, he says, “I think the answer is different for every FA. FAs who work at a wirehouse have very good clarity about the level of service and support they receive, and how top-line revenue converts into W-2 income. The services come at a cost but, in return, the FAs receive the branding, risk capital, and infrastructure support they need. The alternative as an independent is to take in top-line revenue and pay for every item à la carte.”

Another business-model issue: Some advisers who go the independent­ route want to work with a broker/dealer that can serve as the RIA. “In the retirement-plan space, being your own RIA is a significant venture,” because of heavy paperwork and US Securities and Exchange Commission oversight, says Bruce Harrington, Senior Vice President at LPL Financial in Boston. However, others do not want to give a broker/dealer the fee “haircut” that the broker/dealer RIA setup entails, says Randy Long, Managing Principal at SageView Advisory Group in Irvine, California. “More and more advisers moving toward the independent side are looking for a broker/dealer that will allow them to have an independent RIA, as opposed to affiliating with the broker/dealer’s RIA,” he says.

2. Does the broker/dealer have deep compliance resources? What sort of steps can advisers take to gauge the organization’s strength, beyond reading its financial statements? Look into its compliance department, Long recommends. For example, find out how many cases it has had go to arbitration, and get information on the professional background of the chief compliance officer. Harrington suggests looking for tools such as a compliance-approved investment policy statement that can be customized for plan clients.

Also consider how much effort a broker/dealer puts into educating advisers about regulatory and legislative changes. It can be tough to interpret developments in Washington on your own, McCarthy says. “If I am an adviser, I need someone to handicap for me, ‘What is the likelihood of XYZ coming to be?’” he says. “It is all about taking raw information and raw materials, and distilling it down to the FAs in a way that is valuable to them and to the end client, whether that is an investment committee or the participant. It is one of the definitive benefits of scale that you can do these things.”

In addition, advisers taking on a consulting role should look for a broker/dealer that regularly does fiduciary training. For example, LPL offers ongoing training, in partnership with organizations such as Fiduciary360, LLC. CAPTRUST has a proprietary Web site for fiduciaries, and it does fiduciary training for employers, both online and in person.

3. How open is the architecture? Many advisers working in a wirehouse setup and talking to Raymond James about a move have dealt with more-restrictive investment platforms, Bohanan says, and want to find out immediately if it handles all of their clients’ existing investments. Many of those advisers “have five or less plans, and they want to know that we have that platform,” he says. “They do not want to have to convert a plan,” he says, because that disrupts employers and participants. “They do not want to have to say to their clients, ‘For you to stay with me, you need to move the plan to another provider.’”

The challenge for advisers in evaluating a broker’s claim of open architecture is that “‘open architecture’ does not mean the same thing to different people,” Long says. “Does it mean as it relates to the investment options? Or from a broker/dealer perspective, does it mean you can work with multiple recordkeepers?”

As DiCenso says, “Everybody has a different opinion of what ‘open architecture’ is…The question is, how do they narrow that?” What degree of open architecture an adviser needs depends on the types of participants he serves, he says.

4. How much help can you get on searches? “If you want to act in a consulting capacity instead of as a broker of record, it comes down to simple things such as a very robust ability to do a search for a provider—to do a broad and deep analysis,” says Edward O’Connor, a Managing Director and Head of Retirement and Fund Services at UBS Financial Services, Inc. UBS has a proprietary tool that has 76 data-information elements about investment providers, he says. Raymond James has a search tool that helps advisers design a search around a sponsor client’s particular needs so it can be customized to suit a group of doctors, for instance, or a company with more than 100 employees. “We help them with the parameters,” Bohanan says.

Wilt gets help from the in-house provider search and selection team at CAPTRUST. He recalls a recent search for a recordkeeper in which the team helped narrow down the initial list of providers based on the client’s criteria (such as open architecture, name brand, client service, advice offering, and price), did an RFP (request for proposal), put together the RFP report, came from the headquarters office to his meeting on-site with the client to discuss the RFP results and narrow the search to three finalists, then scheduled and attended meetings with each of those providers. “The amount of time that [a search] takes me [now], versus the amount of time that would take me if I did it on my own, is not even comparable,” he says.

Morgan Stanley Smith Barney has a large staff delving into the quantitative and qualitative analysis of investment managers, McCarthy says. The research “helps us on platform searches as well as fund lineup development,” Hammond says, and that nuts-and-bolts help gives him more time for other key parts of a provider search. “What is really important is spending time upfront to truly understand what is going to be important to the client with the vendor,” he says. “Often, initially the client does not really know; you have to keep talking to them and prod them.” For instance, a client may start out planning to rely heavily on a provider’s technology to communicate with participants, he says, and, after further discussion, realizes that face-to-face meetings work better with its employees.

5. How solid are the investment and fee analysis tools? Look underneath the hood of a broker/dealer’s tools for investment performance analysis and fee benchmarking. “Some of these tools have become commoditized,” says Gallagher’s DiCenso, “and, sometimes, people do not understand the differences in the output. Some tools only analyze separate accounts and mutual funds, while other tools also include collective funds, ETFs (exchange-traded funds), and specialty funds, and there are differences in what is being analyzed, and how.” Some investment-analysis tools strictly look at a fund’s performance (known as returns-based style analysis), he says, while others look at the funds’ holdings (holdings-based style analysis), and yet others utilize returns-based style analysis overlaid with holdings-based style analysis. “You could see the same fund, across five or six different tools, coming out with different ratings as to whether the fund is ‘satisfactory,’ ‘monitor,’ or ‘watch-listed,’” he says.

Fee-benchmarking tools from other tools providers often do not provide fully accurate conclusions, DiCenso says, largely because of the convoluted nature of trying to gather all the information from retirement-plan providers. “Retirement-plan providers are not trying to hide the fees. It is just very hard for them to communicate internally across the different departments to disclose the fees clearly and completely.” With his company’s tool, he says, “Of the 29 retirement-plan-related fees we have identified, we have to go through different departments within the providers to obtain the full information.”

Some broker/dealers prefer to rely solely on performance-analysis tools provided by outside firms, Bohanan says, considering them more objective. Others develop a proprietary analysis system. “There are a lot of choices out there,” O’Connor says. “If you really want to act in a consulting capacity, you [the adviser] need to customize it” by mapping the performance analysis to each client’s investment policy statement. UBS also utilizes a Morningstar analysis tool, he says, but adds a mutual fund scoring mechanism that it built from its own research.

In addition, some broker/dealers offer advisers analysis manpower. CAPTRUST has three headquarters staffers who do full-time vendor benchmarking and fee analysis, Davis says. Putting together investment reviews used to be a very time-consuming process for Wilt, before his affiliation switch. Now, he says, “All my investment reviews are completed by the third week after the end of the quarter, and they are bound and delivered to me.”

Guide to Broker/Dealers’ Retirement Plan Services

In June 2009, PLANADVISER sent an e-mail to its database of broker/dealers to learn what some are doing to accommodate retirement plan advisers. This is a list of all respondents and a sampling of their answers.

New-business development

Adviser Mark Davis recently shifted from having his own firm to working at CAPTRUST Financial Advisors largely because he decided that, at this stage of his career, he wants to focus on pursuing larger plans, “which is where my passion is, and my skill set is,” he says. “CAPTRUST gives me highly focused resources that are harder to come by at a small firm or to do it yourself,” he explains.

Sources point to three main ways a broker/dealer can help with new-business development. First, some say a well-known name still helps to sway new clients. “We considered going independent,” says Al Hammond, whose team recently switched from UBS to Morgan Stanley Smith Barney, but they decided against it in part due to the lack of “name-brand recognition.” In these times of economic uncertainty, he says, “Clients want a recognizable firm with strength.” That holds particularly true when an adviser takes on fiduciary status, he believes, which many wirehouse advisers have to move to do. “In the independent channel, you can serve as a fiduciary, but there is no balance sheet to back it up,” he says.

Second, look into whether a broker/dealer offers networking opportunities for advisers to share tips on recruiting new clients, and even leads. “At a lot of our adviser-training events, we make sure we have an adviser panel,” LPL Financial’s Bruce Harrington says. “It is an opportunity to network and learn from each other.” Morgan Stanley Smith Barney also regularly hosts meetings where its retirement-plan advisers come together to swap ideas about recruiting new clients, says Managing Director Jim McCarthy. (The number of meetings varies each year, he says, but this year the company will have 16 regional meetings.) The company has designed a program “whereby experienced FAs who focus on this business can earn the designation of Corporate Retirement Director,” he says. The designation, which approximately 120 financial advisers hold, “requires certain levels of experience and a proven track record successfully serving clients,” and also has an external designation requirement.

“We have 18,500 advisers with relationships to key decisionmakers. We require partnerships among advisers to make sure that the business is pursued by FAs with the right qualifications,” McCarthy says. “We have an enormous network of feeder FAs who need to come through that network to get the business.”

Do not just assume that a potential broker/dealer partner offers help with leads, though. “I have not seen too many broker/dealers that help with lead generation,” says Michael DiCenso of Gallagher Retirement Services, “but that is an area where a broker/dealer could be of value.”

A broker/dealer also may provide tangible tools and services that help to recruit new clients. Adviser Steve Wilt primarily sought a new broker/dealer affiliation that would immediately offer stronger service to his existing clients but, secondarily, he says he asked, “Where can I grow my business the fastest?” At CAPTRUST Financial Advisors, he can get help from a marketing team to gain publicity. It also has telemarketing staffers who will call local employers on his behalf to let them know that the company has recently opened an office in Akron, Ohio, and that Wilt and his colleagues there would like to come to their office to introduce their services.