Facing Off: The 2016 Broker-Dealers of the Year

August 22, 2016 at 08:00 PM

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For the 26th year, the editors of Investment Advisor met with the leaders of the Broker-Dealers of the Year, as identified by their own reps, to discuss the trends and issues the broker-dealer industry will face in 2016 and in the future, with one major change. After six long years, the specter of the Department of Labor's fiduciary rule has finally taken shape, although as one BD leader put it, the industry is still in a "state of flux" as it determines how to comply with all aspects of the rule.

(See additional coverage on the 2016 Broker-Dealers of the Year home page.)

That includes looking at the products they offer clients through their reps. In fact, as the industry unloads some product lines that are too tricky to navigate under the new rule, some product manufacturers may "be wiped out much faster than broker-dealers will," as another BD leader put it.

Technology is one tool firms are using to drive growth while managing the compliance burden, and it's working: One firm's digital platform is growing like "gangbusters." However, there's some disagreement about what — and how much — technology should do for your firm.

The leaders were optimistic about the future of the industry. The DOL rule has increased opportunities to retain reps who don't want to manage the extensive compliance burden on their own, they said, while one firm has even had former reps leave their own RIAs to return to the corporate business.

Among the winners is Lion Street Financial, which was founded in 2010, the same year the DOL first proposed its rule redefining who is a fiduciary on retirement accounts. Visit ThinkAdvisor.com for more from John Burmeister, president and COO of Lion Street, on how that has shaped the firm.

We asked reps at the firms listed in the 2016 Broker-Dealer Reference Guide to rate their BD in 15 categories. Votes were counted in July, and the winners met in early August in Chicago. What follows is an edited transcript of the discussion in the form of responses to four proposed scenarios. You can find longer versions online at ThinkAdvisor.com, as well as video interviews with the winners.

Click here to learn more about how we choose the winners, and to be notified when we begin work identifying the 2017 Broker-Dealers of the Year.

The DOL Fiduciary Rule

Scenario 1: The various lawsuits against the DOL's rule have been thrown out and revenues are falling as firms work to meet the rule's compliance dates. What are your reactions to the final rule? Is it less or more cumbersome than you expected?

Brian Murphy, Lion Street Financial: I thought [the rule] was inevitable with all of the chatter coming out of Washington from various regulators.

That said, there certainly are complexities and surprises to the rule. The private right of action [the ability of clients to sue instead of using arbitration] certainly was a surprise.

Our industry is overall very adaptive. While we're going to have to play catch-up in the early days, this will help the industry evolve to catch up to the consumer.

After almost 40 years in the business, I've seen regulations, some as big as this, and the industry goes through five stages. It retrenches, pulls in the oars. It resets, and I think that's where we are right now; for manufacturers and us, we're resetting. We reposition for future opportunities, and I believe there will be future opportunities for good companies. It retools — a lot of product manufacturers are going to have to do that, even if it's because I don't think the BICE is a long-term solution for advisors. How do you ask your client to sign something that says 'Best Interest Contact Exemption'? It flies in the face of logic. Then the final thing is you rebuild.

I'm very bullish about this industry, extremely bullish about how advisors are going to be able to help consumers. Consumers need advisors and product manufacturers more than ever. Ultimately this will be something that we comply with, but I don't believe it's going to be the death knell, if you will, of broker-dealers or advisors.

Lon Dolber, American Portfolios: If you want to get a feel for what could happen, you should look at the British system. Commissions are not permitted in Great Britain any longer. Forty percent of the advisors left the business, but for the advisors that stayed, they're actually doing very well.

This is the classic innovator's dilemma, which is when you're stuck to a certain model of revenue and you're used to that model and you're making most of your money that way, how do you change, and when do you change?

You can look at examples of the innovator's dilemma. Look at AOL: They stuck to their subscription model. They saw what was happening, they knew that was going to change; why didn't they change?

The question is, are firms prepared to change? Are they prepared to walk away from an existing revenue model? Are they prepared to accept DOL?

Ralph DeVito, The Investment Center: Years back, when 'RIA' became the buzzword, we went out and said, 'Everybody needs to get on this bandwagon.' A number of the reps who resisted, who wanted to remain the old transactional guy, they're all gone now.

But I think the DOL rule is going to be very confusing for the investor. It's obviously had all of us scrambling to figure out what it actually means. I think we're all waiting for the DOL's frequently asked questions to get some sort of interpretation.

We're all a little bit in a state of flux, but we will get through it. It's not going to be the end of the world for anybody.

Though on the other hand, maybe it will. I've always felt that product manufacturers have come out with stuff that is, for lack of a better term, too exotic, too complicated. Maybe this will rein some of that in.

Jamie Green, Investment Advisor: Who has more of the burden here? Is it you or is it the reps who bear the burden of complying with the DOL rule?

DeVito: It's definitely our burden. It's creating and fixing or maneuvering or manipulating or changing our product message — how we do it and how the programs work and how we present it to the clients and the reps. As you said, Brian, the Best Interest Contract Exemption — how do you explain that to somebody? 'I'm doing the best thing for you but here are all the disclosures that go with it.' It flies in the face of reasonableness.

Eric Schwartz, Cambridge Investment Research: It's certainly the job of a good broker-dealer to carry the load on this. Certainly, cost wise. Our current estimate's about $10 million over a two-year period. The cost for advisors will be relearning something new and having a little more paperwork to do but your goal is, obviously, to make all this as automated as possible, just like when any other new regulation comes in.

The really good broker-dealer is going to use this to their advantage by solving the problems better than their competitors. If a bunch of competitors say they're not going to do X, Y and Z, then those advisors may leave [their current broker-dealer] and find us, which will be partly the way many of us in this room will offset the loss of revenues.

The tricky part, and one of the issues is, "Is there enough time to actually get this done by April?" If the rule was clear and said what you actually had to do, then we probably could have gotten it all done by April.

The problem is most broker-dealers are only still thinking about what they're actually going to do. [The DOL has] rules like that section about compensation, where it has to be 'reasonable.' Is 1.5% a year reasonable? Is 1% reasonable? Is 20 basis points too high because reasonable is zero? What's the definition of reasonable?

My view is that what we come out with as of April will not be the same as what we have two years later, because we'll learn along the way what's reasonable and how it all works.

Dolber: There's a natural conflict of interest between the buyers and sellers in the capitalistic system. I don't think it's a fiduciary issue. The fact is that the buyer always wants to have a lower price if they can get it, and the seller always wants a higher price for their services.

Disclosure, transparency, yes, but why don't we let the market dictate price? The end result is, this is the business we're in. I can't focus on the things that I don't control. I don't control what the government is going to do.

Schwartz: I don't think there is anybody in the industry sitting around saying, "Well, we'll wait and see how it goes." There's just not time to wait and see at this stage.

Also, knowing that the SEC is now going to put together similar rules for the entire industry, [...] it just seems to be a little burdensome without real rationale. I would look at it favorably if this got pushed back a bit, and the SEC came in, and took over, and made one set of rules that apply to everything.

Products and the Regulatory Burden

Scenario 2: You sell a lot of untraded REITs through your rep force, but with the DOL fiduciary rule, it turns out you can't continue to sell them without incurring a BICE. Are you spending more to meet these requirements? Where are you making up the lost revenue?

Murphy: The big risk is being defined by legal action. The risk of 'reasonable': If we were all told to drive a reasonable speed limit that will be judged by a police officer on each highway, [...] tickets are going to tell you whether it's reasonable or not. Not you.

BICE is going to be something that's ripe for Monday morning quarterbacking. Was [the contract] extensive enough? When was it signed? Who signed off on it? Being a former product manufacturer, I wouldn't take that risk.

DeVito: The manufacturers are dusting off their fee-based products on the annuities side. A big question for me is if company A says one is 'reasonable,' is company B going to fall in line with that? Is there going to be an industry standard?

What if you have an IRA, and you do the BICE, and you can buy one VA that's at X percent, and another one at Y percent, how do you do that? It's going to be up to [the product manufacturer], I believe, to deal with their interpretation of the rule.

Schwartz: A true fee-based variable annuity, where there is no trail and then you're charging a fee, now you've separated the manufacturer from this, and it's what you decide to charge on the fee. If the internal cost of one is higher than the other, you have to justify why you're paying more.

DeVito: How do you justify that?

Schwartz: Theoretically, if you have two identical VAs, and one was 2% a year and another was 1%, you'd better be ready before selling it to describe why [it meets the suitability standard]. If you say, 'Well, this one's 20 basis points more, but the company is A-plus rated,' then you have your reasons. The biggest companies — the LPLs, Ameriprise, proprietary wire firms — have already talked to their core product manufacturers.

We have talked with a number of our vendors. They are happy to create products that the industry wants, of course. They are, in some cases, much more scared than we are, especially with variable annuities, where they're seeing massive declines in sales already. They're very anxious to figure out what they want. They just don't want to build a different one for all 100 independent broker-dealers.

Dolber: What also concerns me is the data side of all of this. The data is still not uniform.

They pass these rules, but they don't look at the data. You have one high-definition TV signal in the United States, but you don't have a standard for financial services data in the United States, which makes it hard for even the biggest broker-dealer to manage and audit and surveil what advisors are doing.

We were asked by a regulator, 'Show us every client that has an income rider on a variable annuity that's past age 65.' Now is an income rider a field that we get from our aggregator? No. Yeah, it's in the contract on the paper [and] some insurance companies do have fields that will describe an income rider, but they're all different. There's no standard.

DeVito: Did [the regulator] drive down I-95 from me to you? They asked me that same thing! [American Portfolios is based on Long Island; the Investment Center in New Jersey].

Schwartz: Historically, the regulators don't do much related to product manufacturing. You can create a VA with a 37% commission and it's fine, but the person that sells it is the one that is in trouble.

I don't know whether they don't have the authority, or they just don't consider it their problem. It's our problem because we made the mistake of selling a product that wasn't good. It wasn't the problem of the person that actually manufactured it.

DeVito: I've always had that issue. I've always complained about that. Why are the manufacturers allowed to create that 37% product?

Schwartz: It's based somewhat on the belief in the capitalist system that you were describing earlier, Lon. [Regulators say,] 'We're not going to tell everybody what they can and can't do. They can manufacture any product they want, and you can sell it. Later on we'll come back and bite you on it, but you can manufacture whatever you want. You can manufacture Lamborghinis, but you'll get in trouble if you try to sell it to somebody with an income of $20,000.'

Clearly this is going to affect manufacturers hugely, in some cases more than us. If we can't sell any REITs ever again, we will still have other things we can do for our clients, but if you were solely in the business of manufacturing REITs, this is a scary time, with a 75% decline in sales even before DOL happened.

Green: It sounds like responsibility, meaning both cost and legal liability, is going to be spread around.

Schwartz: The liability is going to mostly stop with us and the advisor, but the need to change and perhaps the margin squeeze is definitely going to impact clearing firms and manufacturers.

Murphy: The near-term risk is that product manufacturers electively overlay this beyond the regulations. I won't use the name of the manufacturer, but their approach on indexed annuities is that they're going to apply this rule to qualified and unqualified plans.

That's going to create confusion and risk, but I think ultimately it is going to accelerate some trends. There has been a trend over the last 10 to 15 years to separate manufacturing and distribution. There are still some [firms] that play on both sides. They're going to have to make a Sophie's choice.

Technology

Scenario 3: Say you launch a digital advice platform, but growth has been stagnant. Who's using — or not using — the platform? What are they using it for? What are the challenges in implementing it?

DeVito: We used to partner with a third party. We looked at a whole bunch of them and picked the one that we thought was the most compliant and had enough infrastructure.

It's not just an algorithm. There's actually people behind the management underneath the digital part of it, and we're growing like gangbusters. It's not stagnant at all.

[Consumers can invest] on their own, but they're working in concert with the advisor. We're taking that smaller account that's going to be affected or dismissed by this DOL rule. They're not serviced, and the reps are using it to augment that process, get prepared, and it's growing leaps and bounds.

I don't have the demographics of it — is it millennials or older people — but it is, in general, the smaller accounts.

[The platform] wasn't just going to be one of the big names that we see on TV. You can open up that account the way we used to open a brokerage account in 1970 — name, address, [Social Security number]. I said, 'There's no way I'm going to allow that kind of product.'

We do a little bit more of an in-depth look at the client for suitability. The reps are embracing it, and they're using that also to transition those accounts that might be just strictly advice accounts to the advisory model.

Dolber: A key decision [of ours] was to acquire an advisory platform company called TrustFort, so I could manage the development schedules. Inevitably the technology is going to give us the leverage that we need to compete no matter what happens. To me, it's not really about DOL as much as it is having that independence to move.

Schwartz: Clearly, technology is the backbone of the information business, which is what we're in. We are not interested in having a robo platform that competes with our advisors.

We have put together a committee of about 20 advisors, most of whom are somewhat younger and are more interested in having this platform available to their clients. We are continuing to figure out exactly how they would use it and what they would want, so we can complete the final pieces of it and make it available for clients.

For example, what many advisors want is [that] the client can go in, look at everything. They could make trades, but before that trade went through, the advisor would look at it and say, 'Yes,' and push a button in order to [complete the trade]. The client will know that the advisor's going to take a look before it happens and the trades might be delayed. It's not designed for someone else who wants to trade actively.

We know that even today, and certainly 10 years from now, the client with $20 million isn't going to do business with you if you don't have a pretty sophisticated interface that looks a little bit more like a Betterment, combined with the stuff we already have. It's really a question of building what the advisors want and that's what we're doing.

Dolber: You sometimes have to step out and say, 'What is the advisor going to need?' You've got to look forward. I do believe I see some changes in there. We built our platforms so that it doesn't make a difference where the asset's held.

[Advisors will] plug into the network, be able to illustrate, propose, model, bill, execute [and] invoice, end to end. 'You want to be in my network? Yeah, you can put your products in my network.'

The challenge, of course, is to calculate where you make your money with that, but first things first. You can't have a network without having a client portal. I don't mean what most broker-dealers have right now where a client can go to the broker-dealer's site, and they can log in to Albridge, log in to Morningstar. I'm talking about a real client portal, which the banks have. The client portal that TD [Ameritrade] has because they deal directly with the public.

The independent broker-dealer has not really built true handshake portals with the client, where the client is logging in the way a broker logs in to a portal, and then being directed to services, and they see things in a unified, secure way.

Schwartz: Historically, it wasn't done because it was the rep's client; [they] didn't want them dealing directly with us. The rep would say, 'Why are you selling him services that I don't even know why you're selling them to them?'

Obviously, with a robo client portal, that's why we're trying to figure out with the advisors how they stay in the loop, so nothing happens without them being aware of it. It's a value-add to them, not a competition.

DeVito: What's going to allow JP [Morgan] or any other firm [to give] you access to their accounts when there's a rep on that side? What about the regulatory side of it where you need to be registered to do it? Unless you're going to go completely RIA, and then they're just a trusted advisor on that side of the business only. Right now there's too many things in your way to do that.

Dolber: It's going to take some regulatory change. I'll give an example: Your medical records. Every time I go to the doctor they make me fill out another bloody thing. I'm saying, 'Don't you have this stuff online?' HIPAA rules have to be changed.

That's why you have Yodlee and CashEdge because the only way you can get that data is by having the institution for the advisor log in as the client and screen scrape the data.

DeVito: Not only will [you need] regulatory change, you're going to need regulatory complete reversal and change.

Green: In what way?

DeVito: They're adding more regulations for our own clients, so they're tightening up all the regulations for what you have control over. Imagine them now saying [I have] to give up control of that asset theoretically to a trusted advisor who's not with you. Why would I take the risk when I have my advisor already in it? Who's going to be the supervisor? Who's going to be the DOL?

Dolber: Where the asset is held is immaterial.

DeVito: Not regulatorily. We won't have one rep sharing with another rep. If your rep does and it's a joint account, you're responsible for what my rep's doing with the account and vice versa. That's risky.

Schwartz: It's certainly complicated, with privacy rules and all that.

Dolber: I met an executive from Morgan Stanley that said to me in some cases, they will allow an outside advisor to get data. It's starting to happen. I wouldn't say it's not going to happen. As far as I'm concerned, whoever the advisor is that's directing their transactions inevitably will be held responsible, but that's down the road. Right now, to make it clear, the network I'm building is for my firm, with an eye toward what may happen.

Murphy: We have a markedly different [philosophy]. We made a choice at the beginning that we're not a technology company. I don't know how you can be the Apple [of the BD industry] when 90 cents of every dollar that you make you're paying out in compensation, whereas Apple spends 90 cents of every dollar on technology.

I liken it to Microsoft Office. I use PowerPoint. I don't try to develop PowerPoint. It's what I do with it that is my differentiator. It's not the tool.

We spend our time on breadth of offerings. How can we expand the market opportunities for our advisors in business and in personal planning across the product spectrum?

We spend our time on how [to] grow the commercial value of [reps'] business. If we make their pie bigger, then we have growth for our company.

We spend our time on integration. It has be cloud-based, but we don't develop our own technology, save for one interface that we have on the fixed life insurance side.

We don't have home-grown technology. In our view, it changes too quickly.

Dolber: I could give you the other side of that coin: your distributor. The record companies were distributors of the manufactured products of the studios, and look what happened to them. There's hardly a distributor of records that exists today.

Murphy: Oh, yes, there is: iTunes.

Dolber: That's digital media. The fact is the biggest distributor of records was Tower Records. They were a distributor of the products of the studios, but they did not see the forest for the trees. I do think there has to be an emphasis on technology because it creates the operating leverage in the end that you need.

Murphy: Technology doesn't make the music that's distributed. It's the knowledge of the advisor, their ability to provide solutions and strategies at ground zero; that's what we focus on — the relevancy of the solutions. The medium that it's delivered in is absolutely going to change over time, but we're going to focus on [the solutions] and not the medium.

DeVito: The platform's changed so fast. The industry, the technology, it's going to change. You could build it in whatever language today; tomorrow, there's going to be a new one.

Green: Do you have a robo advisor or digital advice platform?

Murphy: We haven't rolled that out yet, but yes, we will. Like [Cambridge], we're an advisor-only platform. We're not going to use it as a competitive feature.

I'm not concerned about digital at all for the company to be relevant and necessary. I think our industry is wildly behind other segments. You think about back in 1969, we put a man on the moon in, what, six days from start to finish? You can't get a life insurance policy underwritten inside of 60 days.

Our value prop is how to make that advisor a better advisor for consumers, and consumers' needs are changing and evolving.

That's why I'm not bullish on verticals, because I don't think that clients view their needs vertically. Everything is connected with them; you can't be everything, but you've got to be more than just a broker-dealer or more than just an RIA platform.

Schwartz: In the old days, if you could pay people commissions regularly and not lose their applications, you were a successful broker-dealer. A lot more is expected from us these days: technology, robo, insurance, RIA, practice management.

We spend $17 million a year on technology, which is way more than I would like to, but we're not trying to do what [American Portfolios] is doing, where we're building all of it from scratch. We're incorporating stuff that the clearing firm has, other things, and also then building a lot to assemble it together.

That's partly because we also want advisors to be able to choose. If they don't like a CRM that's embedded in our system, they could pick five or 10 others to use, and we can connect them. Then if Redtail is the popular CRM today and 10 years from now it's not, we can unplug it and plug something else in.

Danielle Andrus, Investment Advisor: Where does cybersecurity fit in when you have all these disparate sources of information you're trying to integrate?

Schwartz: It's an ongoing effort, and a bigger percentage of the budget on an ongoing basis. Fortunately, most of our assets, they're not sitting in our broom closet. It's over in National [Financial], or Pershing has a lot of it, or Schwab or American Funds. They have their own guards up, too.

DeVito: We haven't had anybody getting any money stolen yet. We have had a number of reps hacked. Luckily, it was no crazy data breaches, per se. We're spending a ton of money internally on our systems.

You have to monitor who you're using for cloud-based stuff, too, making sure they're prepared. In the event that they get hacked, when it's your data, whose issue is it? We're constantly training and sending out alerts, suggesting, almost demanding, what a rep should have in his office to secure his systems. We're encrypting everything that comes and goes internally.

When you look at the cybersecurity map, all the hacks that are going on at any given time, it looks like air control. There are that many thousands of hacks going on simultaneously worldwide.

Dolber: We create fictitious emails, and we send them to the advisors. If they open those emails, they're sent to [an electronic] training center.

The other thing we're looking at right now is when advisors log on to our website we want to potentially install an agent on their computers that will look at what virus protection they have in their systems, what their operating system is, how much they've updated it.

When we do audits we ask those questions, but how often do you do an audit? Once a year? In some cases you don't have to do it for two years.

That, combined with the two factor [authentication] that every advisor that logs in has to have, that's what I want for the clients, too. I would venture to say that most firms, when their client logs into Albridge or Pershing, are not being given a second level of authentication. In some cases it's not even offered.

That's a problem [because] it's the clients that are getting hacked. It's not so much the reps. We have [over 400,000] customers. I have 120 employees, 800 reps. Where's the risk? The risk is with the customers that I have no governance over.

Schwartz: Like anything else, you have to look at the risk and reward. How much is it happening and what is it costing you?

It's a lot less in our space than in other spaces, but it's certainly something that you're always having to stay one step ahead. Just yesterday a number of people in our company were getting emails from me that I didn't send. Basically [cyberattackers] somehow figure out that I'm the big cheese, and so they send an email to people saying, 'Hey, I just want to connect with you. I want money wired into my account.'

DeVito: Your system was hacked. That's the problem. You don't realize it. Your internal system has been hacked. What they'll do is now they've figured out that you talk to the accounting department and you do it in a certain manner, in your tone. They're sending something from you to Sally or Joe in accounting. 'Hey, send me 10,000 bucks.'

[Editor's Note: Cambridge pointed out in an email message that Schwartz's email account was not "hacked," but rather that he was a victim of an attempted "spear phishing in which cybercriminals use public information to try to impersonate a company executive by, among other things, spoofing the executive's email address."]

Murphy: The real risk to us is that the regulators are going to expect that it's a game of perfect.

Dolber: That's why we have cybersecurity insurance, because that gap that I can't solve for I have to cover. I've decided on a dollar amount that I can absorb, and I've insured.

That's where the operational side comes in. Technology doesn't do everything. We've made some changes; for instance, on third-party wires we call the client. The advisors didn't like it at first, but I explained, 'Look, we're there to protect you.'

Recruiting and the Future of the Industry

Scenario 4: Following the passage of the Department of Labor's fiduciary rule, your top three producers decide to launch their own RIA firms. What are you doing to prevent that from happening? Are those outliers? What are you doing to retain your best reps?

Schwartz: We've been heavily into fees for over 20 years. We've been dealing with the potential for some number of advisors to go fee-only.

I would say, historically, we lose one or two advisors like that every year. In the old days, somebody with $10 million or $20 million might form their own RIA and go fee-only, but nowadays, because of the costs and the fact that you actually get audited, and some of the difficulties of running your own RIA, we see it happening [with firms] in the $250 million to $500 million range.

We actually have some $500 million to $1 billion offices that are still using our RIA. As commissions become the lower percentage of the business done in the industry, you have to find a way to add the same kind of value on fee business.

In good part, the regulators are helping us with that, if you want to call it that, because they're making it more and more challenging to be an RIA.

Long term, it's possible some broker-dealers could be just RIAs with a thousand advisors associated with them. I'm not saying we're trying to go there, but if indeed fee business became 80% or 90% of the industry rather than the current 34%, I think I saw last, there'd be a place, because not every advisor or group wants to be out alone handling that or has the scale [to handle that].

DeVito: I've had a few leave, here and there, for that reason. Like you said, our job now is to create value for them to be with us whether it's on the broker-dealer side or that RIA side, as well as take care of some of the regulatory burden that they're just not used to.

Murphy: There are two misconceptions around myths and math. The myths are that they're going to have more control than what they're actually going to have. The myth is they're going to have fewer regulators in their knickers than what they're actually going to have. The myth is that it's not going to take as much infrastructure.

They're taking a part of our [full-time equivalent employee] to help manage theirs. They're either going to be paying top hourly rate to hire someone who's not going to have the same vested interest [in their firm], or they're going to have an FTE who's underutilized and probably under-skilled from an expertise standpoint.

They always expect they're going to save more money [by going RIA]. It's an educational role with people. If all they want to do is manage money, and they don't want anything from any other shelf, the myth of having control trumps math.

If they want to be a broad-spectrum type advisor, you just look at where regulations are going and you're going to want to maintain your ability to access these other products.

Dolber: Of course, it's about value. What is that value? To me, [it's] the network. You're providing value through something that you integrate or you build.

That's particularly important for an outside RIA who may have his assets at TD or Schwab or Royal Bank of Scotland. The end result is that you have to be able to put them in a position to illustrate, model, execute and build.

I could sit there and try to argue, 'You shouldn't be your own RIA.' I could argue until I'm blue in the face, but they may not listen. If I can show them value [and] if they are their own RIA, then does it make a difference? If they'll pay for that value, I don't care.

Schwartz: We have a guy that's been with us many years. He's doing about $1 million a year. He talked to us a month or two ago, about if he dropped his securities license but stayed with our RIA, could the pricing be different because there's less regulatory burden on us, and so on?

We've been working on a model for that for the last year or two. It can't be 100% payout and no basis points — we haven't figured out that math yet — but there is less burden on us in that scenario. We believe that we'll see more of that going forward, and that it's an opportunity for all broker-dealers to potentially get people that are happy doing their $500,000 or $1 million worth of revenue and don't want the burden of having their own RIA.

It's always easier to do it from a retention point of view. We've averaged about five RIAs a year who have been with us, that have actually closed their RIAs to move their business back to our corporate RIA as the regulation has increased. We are also now getting people that want to give up their securities license but potentially stay with us.

For some broker-dealers, this move toward fees and fee-only will be responsible for their demise, in part. For others, it will be opportunity, if you can put together the right package to make it work.

Andrus: The fiduciary rule has actually made it easier to recruit because people don't want to do it on their own?

Schwartz: I think we're in the early stages of that. I think it's been happening some already because people know that the regulatory environment in the last five to seven years has gotten harder already. DOL will probably push that some more.

A lot of RIAs haven't come to realize that DOL's going to affect them. Depending on how they do business, they say, 'Well, I charge 1%. That's level fee. I'm done.' It isn't that simple, especially if they've got IRA accounts.

In general I don't think DOL has had that much impact on this trend, but I think it will add to the trend that's already been in place. There's no one that says, 'Boy, I wish we could have a double scoop of this DOL thing,' but obviously once you have it, that's the world we live in. Let's make the best of it.

Andrus: Where are your best recruits coming from?

Murphy: We're getting people who [have] already got formidable insurance practices and they want to bring everything under one roof.

Schwartz: This is the advantage of your niche position. The three of us would be in a tougher position to compete for a guy that's doing $1 million in insurance and very little in securities.

DeVito: We're finding that we're getting a lot more play because of the DOL, based on some restrictions or changes some of the firms are making out there, that the reps don't like and that puts them in a position to want to move. The other thing is, probably all of us are seeing play from firms in distress.

Schwartz: Pockets of chaos.

Murphy: There's a lot of disruption.

DeVito: Right, and disruption makes it great for recruiting, for firms that have a service model that's ready to help them grow, treat them with respect, be able to give them a system and all the things that they need to do their business.

Green: What about women? Any more women? People with darker skin colors?

Schwartz: We're up to 16%, 17% women now. I find it interesting that in doctors, lawyers and accountants, women are approaching 50%. In one of those [fields], that's actually over 50% of new graduates. In our space, it just doesn't attract them.

I think you still have the image of [BDs] being the sales, high-pressure sales business, and maybe they just don't know what the opportunity is.

While we have a number of million-dollar producers that are women, the average production of those 17% [of reps] that are women is less, mostly, because they're younger.

DeVito: Lately I've been getting more and more women. It's to the point now where our advisor marketing program has a niche just for women. Our goal is to help them do their business, to get them up to the production levels that their counterparts are doing.

We meet with them quarterly, have retreats, and at conferences we have breakouts geared just to them. It's a growing marketplace, and easy to deal with, and they want it. They're hungry.

Dolber: In our network, women represent a smaller percentage of the advisors, but they represent a disproportionate share of the production, actually. So, my experience with the women that we have is they're bigger producers.

For all the reasons you mentioned, Eric, women are just better listeners and better planners. Part of selling is listening. You've got to just, at some point, be quiet and listen.

For us, the recruiting has been very steady. We've always recruited about $15 million to $25 million a year.

Until last year, we were a secret. We did very little advertising. I put all my resources into the systems, from the very beginning. Right or wrong, it's what I did. Now we're pushing on marketing more than we've ever done before. We've done some things, for instance, [it's a] big blessing winning the Broker-Dealer of the Year this year. Also, we won the best firm in New York state to work for in our size category.

For me, that was important, because [getting positive feedback on] what the advisors feel about you and how your employees feel about you is extremely important as well.

(See additional coverage on the 2016 Broker-Dealers of the Year home page.)

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