Chosen: 2009 Broker/Dealers of the Year

The Overview: How has business changed?

David Stringer, Prospera Financial: We're advisors who have built our firm for advisors, and the people in our home office have been with us for a long time. We focus on three core values: character, competence, and caring. We're looking for honest, high-integrity people who want a long-term relationship; we want our advisors to be the last stop in their career. If they want to sell their business or bring their families into the business, they can do so without changing broker/dealers. We have a high average production for our 94 reps–over $300,000. These reps want a flexible platform, closeness to senior management, people who have been in their spot. We ask our advisors to put their clients first, and we put our clients, the advisors, first.

That's been pretty consistent even over the past 18 months. We look at them as business owners. Having been an independent advisor, I know how important ownership, control, and freedom are.

One thing that has been different is our record recruiting. We're having more conversations with wirehouse guys, but also very small broker/dealers [that realize that model is] not making sense anymore. Some of our advisors are looking to put junior reps in their offices to help with their succession planning and to share expenses. We have a recruiting campaign we've put in place to help fill those spots in their offices.

Ralph DeVito, The Investment Center: We pride ourselves on our service, but over the last 18 months, we've had even more emphasis on service; it's been a hand-holding experience for us. Last September and October, there were some reps who were very, very tense. We talked to them a lot. It's about much more than just processing a ticket; we help them grow their business, and to stay out of the way when all they want for us to do is process that ticket. But our goal is to provide service that you're not used to from Wall Street.

I've been beating the drum to our office people that now you have to be more patient, you have to be more attentive. I don't want to be the trigger for reps' angst.

We've been taking on projects, tidying up areas we've meant to get to that we thought needed improvement, whether it's operations or compliance, and we're doing a lot of technology work–our internal systems are getting revamped, our disaster recovery system is being updated, we're doing a new document management system–all to make the service model smoother.

We haven't fired anybody. I've been watching my expenses but am not cutting back anywhere if it hurts service.

Jerry Rydell, Sigma Financial: I began the firm 25 years ago, and I think the next couple of years are the greatest opportunity most advisors have had in a long time, simply because people are ready to talk. Our firm is based on being a good joint venture partner–it has to work for the staff, the company, for the reps, and the clients.

We've always had a strong financial planning orientation, following asset allocation–so when stuff hits the fan, it's easy to go back to the asset allocation model and review your goals.

We started a coaching program 18 months ago, before the markets got too bad, working with the Cannon Financial Institute. About a third of the firm's associates have gone through the Cannon program. People have really gravitated toward it, and sometimes it's teaching the old dog old tricks–reminding them of what they know, refocusing.

The last two years we've taken the top 10% of representatives, what we call the Leaders' Circle, to two-day special meetings discussing what's taking place in their practices, and brought in Matt Oeschli for his Rainmaker program; that's been very successful.

In the fall, we stressed to our reps that you've got to be on the phone with your clients; don't hide under your desk. Something we've developed over the last 10-15 years is our case planning department. On a staff of about 95 people we have 14 or 15 of those who just do a full financial plan on behalf of the advisor, work in conjunction with them, or serve as a second opinion–we probably do 150 individual financial plans a month.

Recruiting has been good, and we haven't had to lay anybody off. In the first of the year, we're thinking we should start doing some in-house staff training, because maybe then is when things will turn around.

Probably 85% of new associates come from referrals from existing associates. That's the key to our success.

Brian Murphy, Woodbury Financial: Woodbury was formed in 2001, and through last year we were growing at 16% a year. In the first three months of this year we flattened out on revenue, but we never stopped focusing on the basics–it's all about engaging with the reps on their practices. Their businesses are at ground zero of this crisis–and that can't help but help us grow, and we never stop recruiting. There's been such a seismic hit to our industry that it's a good opportunity to sit back, look at what your core is, and ask how you differentiate yourself.

So our mantra was "collapse to the core" and to simplify what we were going to be doing, and at the same time adopt what [Margaret] Thatcher said: "When times are difficult, raise the bar." We pulled the meat off the bones of our company in the first couple of months of this year, not as an expense exercise. We had a strategic plan that we were executing well, but things changed–certainly the premises changed–and people have a different mindset than what they had going into this. So we came up with a new strategic plan, still centered on our advisor–we believe the lifetime needs of Americans are best served by local, objective, independent representatives. That's our guiding light, and if we focus on that, helping them be successful, we can't help but succeed ourselves.

We broke up everything we do into three buckets: 1) broker/dealering–these are our core functions; 2) our differentiators; 3) and what adds value, but maybe there's a cost benefit analysis that we have to refresh.

What that analysis told us was that in our core broker/dealering functions, we didn't have as elastic and as predictable a delivery system for all of that as we needed to digest growth as well as being resilient to the downside. We now know what long-term periods of double-digit revenue mean, but also what short-term double digit declines mean.

We took it upon ourselves to look at our expense structure, not just how we can use technology–and Ralph, we're doing many of the same things that you're doing–but also to create a greater corridor of variable expenses so that we can have more flexing of our expense base. We have 1,700 reps, a number that's held flat as we've increased our minimums. We've found that too many people hover around the minimums, and you create a ski slope and then you have the bell curve, so we've been trying to substantially increase our average GDC.

We also found that we had way too many differentiators, so we trimmed that down to four: keeping our promises, being a true partner for all seasons for our reps; to build through coaching, to do a lot less of the sales management stuff that was a hangover from years past, and much more business development and practice coaching; and helping our reps build a multi-disciplined business, because I think that consumers are going to be skeptical and cynical about big institutions, and it's going to be their local advisor [who will retain their loyalty]. The fourth is around compliance–it's gotten harder and put us into a potentially difficult position with our reps, as more and more the regulators say, "This is the principle, now you figure out how to comply with it!" We're taking a serve-and-protect approach: if we protect the reps, it can't help but protect us, as opposed to the past where we've fallen short of ensuring that reps understand that [our compliance efforts are] trying to protect them, rather than that we're trying to protect us.

Regulation: What are the big issues?

Murphy: The scariest thing is a well-intentioned desire to do something big–whether it's Congress or the regulators–that the average Joe can look at it and say "Wow, that's different!" But when it's applied it's something almost impossible. The overall reactionary approach is not good for regulation. We need time to analyze, rationalize, institutionalize, and you can't do those when you're being whipsawed politically.

The biggest issue for Woodbury's model is the independent contractor status [potential reclassification by the IRS]. That's the trump card. We'll find our way through the fiduciary issue, though that will take a lot of give and take. But if they all of a sudden reclassify our independent contractors so that they're now employees, it hurts our entire system.

DeVito: Then we're out of business, and we turn into a wirehouse.

Murphy: Not only that, it's a domino effect that goes right through to the middle-class consumer, that Main Street person they all talk about, who will no longer have somebody to talk to, unless it's a career agent or some proprietary person. After that comes fiduciary versus suitability, then 12b-1s, and some other issues

Stringer: It's hard to focus on those pebble issues when you have a boulder like the independent contractor status.

DeVito: What scares me is everything you mentioned. We'll get through the fiduciary issue, and hopefully through the independent contractor issue. What we won't get through is the damage that was done by the banks, where the trust factor is gone and the clients are demolished. We should focus on the bigger picture, which is how to monitor the products that get out, and how FINRA and the SEC approve them. We already do this–none of us had any subprime exposure–but we're getting slapped around again for something someone else did. That's not going to help the client or make them feel good that we can stave off another Bernie Madoff or Allen Stanford.

Rydell: There were already enough rules to stop Bernie Madoff, but they weren't applied. The accountants didn't do it, the SEC didn't do it, FINRA didn't do it. The only good thing about this mess is that they don't blame the local person.

Stringer: I think Ralph said it best: We're not product makers, but we feel the consequences of those product makers. I have a hard time seeing how they can apply some of what they're talking about to our industry, and say these guys aren't independent contractors. But it is a battle that we'll have to fight.

The part that scares me is reactionary regulatory reform, where this need for speed, with a limited amount of time in which to comment. There are some diverse business models out there, and to apply the same regulations to them all without having vetted them well…

FINRA has done a pretty decent job, and to me they're the natural ones to regulate advisory practices. They have feet on the ground. I like [Mary] Schapiro being at the head of the table, because we've sat down with her and she's heard independent firms talk about their issues.

Murphy: FSI has established very palpable credibility in a very short time. But right now, there are regulatory musical chairs going on. If we were in a linear environment I think we could continue to be a constructive voice for some of the evolutionary issues. But with these regulatory musical chairs, and Congress's involvement, the industry is responding with factionalization that is not serving us well.

This is a pretty seminal time for the entire industry. We've got some internal disagreements that are not to our benefit to air right now. We have to go after the context issues–like consumers needing advisors–we have to do things that fuel our industry while at the same time walking within the guardrails of regulation.

Our stewardship could be better. I think the fiduciary issue is a perfect example. It's being looked at as some sort of pill that will cure all the ills, and I'm not sure the disease is fiduciary versus suitability; I think it's a symptom. In practice rather than principle is where it matters.

Rydell: In arbitration you're really held as a fiduciary no matter what.

DeVito: We get held to a fiduciary standard all the time.

Murphy: Suitability is a very high standard. In practice, suitability is a higher standard–you've always got at least a second set of eyes, often three. You're constantly getting examined.