Beneath the Surface
George Fraser hardly relished the idea of changing his affiliation as an adviser. “The worst thing to do in the world is to move,” he says. “It is not something that I wanted to do.”
However, when the firm where he worked was acquired, he talked with the new owner over the course of four months, and had real doubts about whether he would mesh well there.
That is because his business model focuses on spending a lot of one-on-one time educating participants at his approximately 40 sponsor clients, and he questioned whether that matched up with the company’s model.
So, he also talked to about a dozen potential partners during those four months. Some companies told him what he wanted to hear about their support of his business model, but did not back it up with tangible resources. Others offered him a tantalizing deal, then inexplicably changed the terms as decision time neared.
What did Fraser want? A partner confident that investing resources in personalized participant education leads to greater long-run profits, as more clients stick around. An established major player that offered financial support for him to grow his business, and the assistance of a top-notch legal department. “I wanted the backing of a larger firm,” he says. “The resources are stronger, and the support is greater. If they like your business, they will do whatever they can to grow it.”
Fraser also sought a company that already had a thriving retirement-plan business and a strong brand name. “Branding is important,” he says. “Your clients—not only the plan sponsors, but also the employees—want you to be with a company that they have heard of, and a good, solid company that they feel comfortable having their money managed by.”
In December 2006, Fraser landed at Smith Barney, where he is a Phoenix-based Senior Vice President, Wealth Management. “What it came down to for me,” he says now of his decision, “was a personality fit.”
Why do some advisers switch affiliations, while others consider it but decide to stay put? What motivates them, and what main questions do advisers need to answer for themselves as they pursue a new affiliation?
Change Is Good—Sometimes
“Lots of folks have a love-hate relationship with their affiliation,” says Ward Harris, founder and CEO of The McHenry Group, which offers tools for advisers. For one thing, acquisitions sometimes lead to changing ground rules and corporate cultures that frustrate advisers.
In addition, these days, retirement plan advisers may have to deal with a mountain of compliance-related forms that seemingly relate more to the retail side, says William Chetney, President and CEO of National Retirement Partners, LLC (NRP), a consortium of retirement plan advisers. Adds Fielding Miller, CEO of CAPTRUST Financial Advisors, a group of advisory firms who specialize in retirement plans, “Some advisers are saying, “I can hardly breathe, because I have to fill out all these forms and jump through these hoops that do not really apply to me.””
Yet, many advisers share Fraser’s reluctance to make the move. “A lot of it is paperwork,’ says Timothy Nihill, Director of Retirement Products and Services at broker/dealer Commonwealth Financial Network. “For the adviser, it is very time-consuming.”
Unfortunately, Nihill says, some firms may promise things they cannot deliver once an adviser comes on board. “If I have one recommendation for advisers, it is to take your time to make sure that you find the right partner, and “look behind the curtain,”” he says. “I have seen cases where someone said, “I was looking at a firm, and what they showed me upfront was fantastic, but there was nothing to back it up.” You have to make sure that they bring something tangible to the table.”
With the logistical challenges of transitioning clients to a new home comes the daunting potential for lost revenue, but advisers more often see a temporary revenue drop during the transition than to lose clients altogether, Chetney says. “There is the potential for a couple-of-weeks gap in revenue,” he says. Commissions may be paid to the rep’s former broker/dealer that are not recoverable, says Robert Francis, NRP Chief Operating Officer. “Usually, this is very limited and affects only one month’s commission,” he adds.
The main reservation likely boils down to the gamble that comes with change, says Bill Van Law, Senior Vice President and National Director of Business Development at broker/dealer Raymond James Financial Services, Inc. “[Advisers] always [have] the risk that they will not bring 100% of their clients with them,” he says. Says Miller, “Whenever you are at a firm where you are a W-2 employee, the firm can fight you on whose clients they are. This can be a daunting obstacle for many advisers, and I believe it is one of the primary reasons you see so little movement with the larger wirehouse brokers.”
“[The transition] is not quite as easy as it is made out to be,” says Stig Nybo, Senior Vice President and National Sales Director at Transamerica Retirement Services, a retirement plan provider that works with financial advisers. “I often hear that an adviser did not bring as much business along as he or she anticipated. Since an adviser’s compensation ultimately is tied to the amount of business they are able to bring to their new firms, this is an important consideration.”
How is switching retirement plan clients to a new affiliation different for advisers than private clients? Changing a retirement plan broker-of-record is much easier, because the client generally keeps the same recordkeeper and so does not have to experience any disruptions, Miller says. “Moving private clients is much more cumbersome,” he says. “The clients must sign considerably more paperwork and endure the transfer issues of moving their assets between custodians.” Those issues include termination fees, and duplicate statements and year-end 1099s.
Advisers thinking about changing affiliations must do enough due diligence to truly grasp the differences among potential partners, Van Law says. “Understanding upfront what the company can and cannot do, so that there are no surprises, is very, very important.”
“[Certain players out there] are selling some snake oil,” Harris believes. “If it turns out that a good rep has affiliated with a firm that has overpromised and underdelivered, the clients will figure that out and, at the end of the day, all we have is our reputation.”
To preserve your reputation (and your sanity) when evaluating a change, ask yourself these questions:
How Much Control Do You Want To Have?
Aligning with a larger organization can mean being acquired or forming a looser affiliation. Control “to really run the business the way they see fit’ looms large as an issue for some advisers, Van Law says.
Own your own shop, and you call all the shots, but may scramble for resources. At a Wall Street titan, you’ll be an employee—with a huge support network, but the tradeoff of limited control. An independent player like CAPTRUST also acquires advisory firms, but arguably offers both more autonomy and fewer resources than the behemoths. “When you come here, the adviser is a shareholder in the larger firm, but not in his or her own little business,” Miller says. “That is going to attract certain types of advisers, but there are a lot of independent advisers who want to own their own firm, and enjoy managing that business.”
National Retirement Partners both acquires advisory firms and affiliates with them. “We see ourselves, going forward, to be one-third acquired firms and two-thirds affiliated firms,” Chetney says. Advisers who want to affiliate with NRP have two choices: They can do their broker/dealer business at its NRP Financial Services, or they can keep their existing broker/dealer setup and pay a quarterly fee.
Think about whether a potential acquirer matches up well with your business model, Miller recommends. “It depends on how the advisers view their own value proposition. For example, if an adviser is motivated by doing his own investment analytics or RFPs, he would not be a strong match for us, because we have specialists who focus on investments, RFPs, etc.,” he says. “Our model is to leverage the adviser’s time by handling these functions. Thus, that kind of adviser is not going to get the benefit of our support.” Yet, for others whose business strategy calls for maximizing face-to-face time with existing clients, he says, CAPTRUST has teams to take care of everyday details from developing leads to creating quarterly client-review books within 10 days.
Is It a Good Cultural Fit?
Advisers and firms thinking about teaming up often spend 10% of their time talking about the cultural fit and 90% focused on the financial deal, Miller says. Those percentages should be reversed, he suggests.
“The math is going to be market-driven: You are not going to get any more or less than what the market is paying,” Miller says. “The deals might have different formulas, such as a multiple of revenue or EBITDA, but the dollars will be about the same. Typical deals are one-times revenue, six-times EBITDA, or up to two-times revenue if the adviser is selling his book and will not be receiving any income from the practice going forward.”
“There have been lots of firms that eventually fold because they focused too acutely on the math,’ Miller continues. “In our recruiting efforts, our first question is always, “Is this adviser selling to get a check, or does he really buy into our value proposition?””
Advisers with an entrepreneurial mindset mesh best with NRP, Chetney says. “We have a very attractive plug-in infrastructure, but they still need that entrepreneurial gene. My personal feeling is that the highest-quality advisers are very capable of doing it on their own. Our approach is to provide them with as many tools as possible.”
Ask yourself: Does your potential partner share your values? “It starts with the basic tenet of the business model and the mission of the organization,” says Matthew Mintzer, Managing Director, Retirement Plans at AllianceBernstein Investments, Inc., a global money manager with a concentration in mutual fund and institutional investment services delivered to retirement plans through advisers. “You need to go back to the basics, if you are in the retirement plan space: Why are you doing it, and how are you doing it?” For the firm you are talking to, he says, “Is it always about putting the client’s interests first, or is it just about making the next commission?”
Picking a partner that promises to maximize your freedom and minimize your paperwork may sound tempting, but beware of firms that do not focus intensely on compliance issues, Harris advises. “The rules are the same for everybody, but there is a big difference in how these rules are implemented,” he says. “If I had a role as CFO or CEO of a corporate retirement plan client, I would be very interested in the compliance oversight of the organization that is seeking to assist me with that business.” So, if he were an adviser talking to companies about affiliating, Harris says, “If you cannot show me that you have a culture committed to compliance, I do not want to do business with you. That should be as important as control or compensation.”
Where Do You Stand on the Payout-Versus-Support Tradeoff?
A large national firm has a fairly intricate support structure for advisers, Nybo says. It may provide everything from administrative and compliance support to employee benefits, he says, “leaving little to do but prospect, sell, and service.” An independent, however, may have little of that structure in place, he says, but offer higher compensation to make up for it. “Most people find it to be a tradeoff: Typically, there is an inverse relationship between the level of support and the compensation. It is just a question of how you want to approach the business.”
Harris agrees about the tradeoff. “Absolutely, there is a question of payout,” he says. “Some shops do not give much support, but there is a huge payout. Some shops provide lots of support, but you pay for it. [A classic Wall Street wirehouse] may not pay you a lot, but there are lots of long-term incentives,” he says, “because they do not want you to leave.” Stock options, executive deferred compensation arrangements, paid-in profit sharing, and retirement contributions from the mature financial firms “may matter more to some advisers than future, undefined benefits of ownership in a roll-up or start-up,” he adds. “’Different strokes for different folks,” as the song goes.”
Who Can Best Help You Win New Clients?
An adviser should say: “If you cannot tell me in a short period of time how the firm will help me find new business, close that business, and then cross-sell those revenues, I do not have time for you,” Harris suggests. Tangible tools play a role here. For example, he says that an adviser pitching for a sponsor’s business needs technology that allows him or her to quickly gather, process, and collate information for a proposal to solve the employer’s issues.
A big intangible factor comes into play, too: brand name. Many would agree with Chetney when he stresses how crucial it is for advisers to affiliate with a powerful brand name that can put them in front of potential new clients. “That is the number one, most important thing,” he says.
The debate comes in whether that brand name needs to be one of the big Wall Street players. Smith Barney’s Fraser, for instance, wanted an affiliation with a major, established company.
“Brand is always important” in attracting clients, AllianceBernstein’s Mintzer says. “When you are affiliated with that brand, it should provide “sleep at night” comfort for clients—and advisers. This is one reason the industry is seeing adviser-consultants—whose sole focus is to provide great outcomes for their sponsor and participant clients—band together under their own retirement-oriented brand.”
Ten years ago, CAPTRUST’s Miller says, affiliating with a wirehouse probably helped advisers a lot to get in the door with sponsors. “However, with the mutual fund scandal and all the shenanigans that have gone on, there is much greater awareness of the need for independent firms,” he believes. “In the past five years, [being at a wirehouse] has been a disadvantage.”
Commonwealth’s Nihill probably gets it right when he suggests that it depends on the adviser’s business niche. “When you are swimming upscale in the large-plan market, you need the tools and support that large providers can bring to the table. You need a big name behind you: CEOs of big companies only know big names,” he says. “However, in the mid-, small, and micro-markets, that is not necessarily the case.” Smaller players may appeal more to those plans because they often can be more flexible and willing to customize products and services for them.
Who Can Do the Most To Help You Keep Clients?
You also need help with service for existing clients, and the nitty-gritty of back-office support. “Advisers want their partner to be someone who can bring in a team that will help them be more efficient, eliminating a lot of the day-to-day paperwork and giving them more time to work with clients,” Nihill says.
Get a good sense of your potential partner company’s tangible deliverables such as due-diligence tools, search applications, research, and technical support, Chetney recommends. Rarely do competing broker/dealers deliver these tools to their reps, his NRP colleague Francis says, as a small minority of their reps focus on retirement plans. “Oftentimes, a broker/dealer may provide one tool, like search applications, but not the rest—leaving the reps to fend for themselves,” Francis maintains. “What needs to be examined is the quality of the application, its ability to genuinely automate the process, and whether it is completely nonconflicted with regard to funds, service providers, and distribution model.” Look closely at a firm’s research-and-analysis people, its client-support people, and its client-communications people, Mintzer suggests. As he says, “We are all constrained with respect to time, and the support you get allows you to be with clients more, which is a big deal.”
SIDEBAR
Steve Wilt
The STAR Group
Merrill Lynch
Akron, Ohio
Steve Wilt frequently is asked why he chooses to keep a high-end retirement plan practice at a wirehouse. In his opinion, there are many reasons, one of which is the name recognition that comes with Merrill Lynch. Merrill has a large support staff for its financial advisers through its Advisory Group and, for those in the retirement plan space, he says, The Retirement Group at Merrill Lynch is also a great resource. The wirehouse provides everything from tools for advisers and clients, to educational materials for plan sponsors and participants, to legislative updates aimed at helping advisers stay current in the marketplace.
The STAR Group is one of 365 advisers that the wirehouse has selected to focus on the retirement space. That retirement plan network allows the firms to leverage the expertise of other advisers around the country to help deliver employee education. It also comes with a code of conduct agreement that advisers participating in that education network are not to use the access to plan sponsors or participants for sales purposes, so advisers like Wilt can be confident the other Merrill firms are committed to delivering education. This also has led Wilt to partner with other Merrill advisers around the country, such as those who may specialize in the smaller market who leverage Wilt’s larger-plan knowledge, leading to significant business opportunities, he says.
Further, when examining the possibilities that might exist elsewhere, he must consider his entire practice, Wilt comments. Since half of his practice is family wealth, although the 401(k) practice might be portable, “I would have a hard time justifying to family clients why they should move their money.’
Regarding the movement toward fee-based work in the marketplace, although traditionally wirehouse advisers are commission-based, Wilt believes Merrill will be able to allow him to deliver such services in the future.
Compensation is widely regarded as a primary advantage of going independent and, while Wilt admits that the payouts at independent firms might be higher, after being at Merrill for a long time, employees do rise to a high-end payout, he says. There are considerations beyond compensation, of course. Wilt notes that, unlike someone who owns his own company, he doesn’t have to worry about significant overhead costs such as office space.
“Long term, I’ve made a conscious decision that this is where I want to be,” he says.
SIDEBAR
Larry Deatherage and Tony Franchimone
DFI Advisors, LLC
National Retirement Partners
La Jolla, California
Larry Deatherage and Tony Franchimone began their careers working with employer-sponsored retirement plans nearly 20 years ago in the wirehouse market. However, after being there for 15 years, they knew the retirement plan advisory business was changing and moving toward firm specialization. Therefore, “it was either compete or die,” Deatherage says.
In 2004, they met Bill Chetney of what is now National Retirement Partners (NRP). “Of all the people who had this idea,” Deatherage says, “Bill had the best strategy.” Chetney’s business idea, coupled with the feeling of where the business was going, was Deatherage and Franchimone’s impetus for change. Shortly after meeting Chetney, the men began their plans to move their business from the wirehouse. For the first one and a half years, DFI Advisors was affiliated with NRP, and then they were the first of five firms to be acquired by NRP, with another five slated to be acquired this summer.
Since moving to NRP, Deatherage and Franchimone have seen significant growth and increased their average client size, they say. Although, at first, it was a little trying to explain what the move meant to clients, moving retirement plan clients was easy because they all jumped on the bandwagon once they heard their advisers were moving to a retirement plan specialist. However, Deatherage says, moving their individual clients was a little more complicated because it required more significant work than just a broker-of-record change.
Saying he should have left the wirehouse to go independent sooner, “It was absolutely the right move,” comments Deatherage, who now is recruiting other people to switch over to NRP. “[Being at NRP,] all we do is focus on retirement plans and helping participants,” Deatherage explains. They are able to acknowledge their status as a fiduciary and have no attachment to investment products, he says. They are first to market with new ideas, such as making the RolloverSystems solution available to advisers and their clients, and NRP also is able to leverage outside sources, such as the FIRM investment monitoring system, something Deatherage says he was unable to use at a wirehouse.
Chetney is very forward-looking, Deatherage says, which shows in his ability to create a firm that builds around the expertise of nearly 100 retirement plan specialist firms around the country. “NRP is a who’s who of the industry,” Deatherage comments, something he is proud to be a part of.
SIDEBAR
Rick Shoff
CAPTRUST Financial Advisors
Doylestown, Pennsylvania
“A lot of people think that owning your own firm is the ultimate goal,” says Rick Shoff. However, he continues, he did that for 14 years, and it wasn’t all it was cracked up to be. Rick Shoff founded Plan Advisory Services, his own independent advisory and consulting shop focused on the mid-level corporate retirement plan market, 14 years ago.
Despite significant business growth over the years, about three to four years ago, he began looking elsewhere, considering moving his business to a firm specializing in the retirement plan space. “I looked at all the big players,” he says but, in making his ultimate decision, “I wasn’t going to do this unless, the day after I do it, my clients are significantly better off.”
That led him to Fielding Miller and CAPTRUST Financial Advisors. “Every time I met someone from CAPTRUST, I was further impressed,” Shoff says. With that, and many other things under consideration, in December 2006, Shoff merged Plan Advisory Services into CAPTRUST.
“[The acquisition by CAPTRUST] has created a new definition of freedom for me,” Shoff says. Many things that used to be done by Shoff and his team now are done by the CAPTRUST team, including such things as managing the RFP process and doing the ongoing investment due diligence using CAPTRUST’s proprietary analytics. Being at a new broker/dealer is not the value proposition CAPTRUST offers, Shoff says; instead, it is the tools and people offered by the firm.
Before, Shoff says, he had to do everything from the IPS, to the ongoing analytics, to delivering the quarterly meetings. With the additional support of CAPTRUST, he is able to focus on his clients and mentor new advisers, something in which he is very interested. Nearly six months in, Shoff says of the move, “It is everything we thought it would be.”
SIDEBAR
Peggy Whitmore
401k Advisors, an NFP-owned firm
Port Washington, New York
Peggy Whitmore joined 401k Advisors, an NFP-owned firm, this spring and says their resources offered her significant flexibility and assistance in growing her business. “They’re my thousand-pound support gorilla, giving me tools I can leverage in a collaborative manner as I build my practice my way,” Whitmore comments.
Further, she says, their dedication to fostering entrepreneurial growth—from a client servicing perspective, from a new business perspective, and for a possible liquidity event down the road—is essential in helping her develop her practice as she wishes.
“I know if I have a selling opportunity, I have the capability to go after it,” she says. “401k Advisors gives me the tools and, more importantly, the inside personnel—if I need them—to support and close any piece of business I am working on,’ she says, whether that opportunity is defined contribution, defined benefit, or nonqualified deferred compensation.
401k Advisors offers her significant support staff she can leverage as needed. For example, she says, if she needs a CFA to attend an adviser finalist meeting in Chicago, 401k Advisors will provide a CFA and put him or her on the spot; likewise, if Whitmore is unable to attend an education meeting at another location, educators can be flown in so that she always is able to fulfill her client commitments. The ability to have access to additional resources to help her succeed was vital in deciding to move, she comments, because it also gives her the flexibility to pursue other industry-related passions, such as the Women’s Pension Exchange, of which she is the Executive Director.
“Each individual within the 401k Advisors team has a passion for the business and an interest in protecting the client,” she says. “For them, performance is about delivering the best results.”