The great divide: To get licensed or not

By Andy Stonehouse

March 31, 2011 at 08:00 PM

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In last month's Advisor Survey, we found evidence of a large and fairly obvious split in our business: the decision every advisor makes between taking the steps and licenses required to sell securities or not. Out of nearly 900 respondents, an even 50 percent said they have securities licensing; 78 percent of those who do not stated that they also do not plan on becoming licensed in the future. It's an issue which came to prominence during the height of the SEC 151A debate and is still a challenging personal and professional choice.

To illustrate the divide, we interviewed two top advisors who are the polar opposite of each other. On the West Coast, Sacramento, Calif.-based advisor Jerry Tokunaga has created a thriving, profitable business based entirely on indexed annuities and says he has little interest in securities licensing. On the East Coast, Paramus, N.J.'s Richard Dragotta holds more than a half-dozen licenses and says his comprehensive credentials allow him to offer a much wider swath of financial planning products to his clients. Let the debate begin.

Senior Market Advisor: Tell us about yourself.

Jerry Tokunaga: I'm a California native, a graduate of UCLA in business. I started as a banker with Security Pacific National in Los Angeles, which was eventually bought up by Bank of America.

I got the golden parachute after 18 years in the banking industry, and I was interested in doing something different. I had very good knowledge about how money works. But I learned that the hard way. My mom got a lot of money from my dad's insurance settlement when he passed away in 1986, and I acted as her informal stockbroker at the time, right as the market crashed in the late '80s. I lost a portion of the investment … and even she told me to get out of that business.

It was a real turning point for me. So I established myself as an independent advisor seven years ago, working mostly in indexed annuites. My motto still is "I don't believe that anyone has the right to lose anyone else's money." Several years ago, I started getting a lot of business from a regional law firm with offices in California, Arizona and Texas. Since I had no connections in Texas, I teamed up with Ryan Wheless, who's based in Houston, and is securities licensed. He can handle that end of the business when clients have investment needs, though I haven't chosen to take that path.

SMA: Why have you made the decision not to pursue your securities licenses?

JT: I don't want the risk and I don't want the headache. As it is now, I never have to apologize to my clients. The only way an indexed annuity loses money is if the client withdraws money.

If your lifestyle changes, you know you're covered. Is the alternative worth the risk? Or would you like to have an investment with 100 percent security? These are the propositions I can make to my clients. What's intriguing is that … well, some people say that these products are boring, yes, but if safe is boring, then boring is the new sexy.

What we practice is safe money. Ninety-five percent of my clients have no intention of ever taking more than the RMD out of their annuities, they cannot outlive the money and they'll never run out of income.

SMA: What was your average client's reaction to the recent financial meltdown?

JT: After the market crashed, people are much more skeptical and everyone's become much more risk averse. But they're still confused. They don't know that there are four types of annuities, so they've just heard about the bad ones. My job is education. A lot of my clients are in the 70- to 80-year-old range, and many of them have been hoodwinked in the past; they want to invest in something with no downside. When it comes to playing the market, you have to consider your threshold of pain.

One of my new clients had a million dollars in the market, and he only had $650,000 left–before I could help him. People are frozen by so much conflicting information. My job is to try to resolve those issues and bring clarity.

SMA: Would you consider obtaining your securites license at some point?

JT: If new legislation like 151A were to pass, then I'd have to change the way I do business, but in the meantime, I haven't taken that step, for a variety of reasons. I'm mostly not interested in all the compliance components of the securities licenses, which mean I'd have to have all of the items in my seminars or my communications with my clients screened by someone else. My business partner Ryan
Wheless spends $8,000 a year on compliance oversight alone. But I can see that there will probably be another issue like 151A and that will force us to get our Series 65 licensing.

Up in Sacramento, I can feel some of that pressure and I think I know where it's coming from: the stockbrokers, who don't like guys like me taking $10 million a year in investable assets from their clients.

SMA: What approach do you use with your prospects?

JT: My technique is pretty simple. I tell them, "I don't want you to just believe anything I tell you. You have to see it for yourself." They're coming to us for unbiased advice and I want to give that to them. Nearly all of my referrals come from CPAs and attorneys, and that's where most of my business takes place, right there in the CPAs' own offices.

First, if the prospect has market investments, I show them some clippings from The Wall Street Journal, and then we look at Investor's Business Daily and I show them how their mutual funds are doing and how they're rated. I've been given the blessing to show the prospect the CPA's actual statements and see what kind of return they're getting on their annuities. Finally, I show them the $400,000 of indexed annuities I own and how they've made slow but steady money over the years. Actually, I recently made 16 percent, and some of my clients have had returns in the range of 27 percent.

I even show them my wife's annuities. And that's about it. I just use a pad of paper to show them the math. People say, "I've been referred to you by my own attorney, and I want what he and you have. Let's do this right now." My closing ratio is nearly 100 percent a year, with two out of four appointments closing on that first appointment.

SMA: How do you make sure that what you're doing is always in the best interest of the client, without suitability oversight from an outside source?

JT: If you're truly doing this kind of work as a career, you've already done the suitability work before you talk to the customer. But I still do a full range of inquiries, discussing how many other liquid assets a client has and outlining the surrender charges of any annuity I sell. I want to know their tax history, and I ask questions to make things absolutely clear, so I ask questions like "When do you believe that you'll ever need this money again?" Even before 151A raised a lot of issues about suitability, we always did this.

SMA: How did you get your start in the business?

Richard Dragotta: I think I was born into it. My dad was a senior president at Merrill Lynch and I initially wanted to work in banking with more of a management role; I knew nothing about the financial services world. But I liked working with people and I wanted a way to marry my economics and accounting background but not hide behind books and graphs–and make good money, as well.

I worked as a sales assistant in New York City for a couple of years for a couple of advisors, and I became a Wall Street trainee, still trying to pursue the management track. I eventually became a full-fledged financial advisor and ended up back home in New Jersey; in time I decided to work with LPL Financial, and now we're the second largest LPL office in the state.

SMA: What kind of clients do you work with?

RD: We're a full-service firm offering wealth management solutions that serve most of the public's needs. We also have alternative-type investments available, but I'm not a big hedge fund pusher. We focus on financial planning, and as such, there's not much I can't offer, from estate and retirement planning to net-worth modeling. My clients are mostly aged 55 and over–a lot of baby boomers.

Here in affluent northern New Jersey, you get a lot of the "Millionaire Next Door" types–people who've quietly accumulated a fair amount of wealth. Now, as boomers, they're moving from accumulation to the distribution phase, and it's all about setting up a cash flow. I believe in a consultative, fee-based approach, not necessarily based on reacting to the Dow.

SMA: Tell us about your licensing.

RD: I hold my Series 7, 63, 65, my 9 and my 10, and my 53. I also got my ChFC designation and I'm a CFP, which made sense with financial planning as the basis of my foundation. The other designation means I focus on retirees.

There was certainly some time commitment and energy required to get all the licenses and figure out what I needed–and frankly, many of them were a formality and aren't really applicable to dealing with people–but I don't know any other way to compete in this business without being able to offer a breadth of products and services. I'm a big believer that you should never stop learning, otherwise you get stuck in the mud and it all passes you by.

I don't see non-licensed guys as my competition. The high-net-worth individuals that I deal with as clients are seeking out a well-rounded person to work with them. I come in and give them choices to attack the puzzle and create the equations that are going to work for them, and 90 percent of the time, I win their business after an initial appointment. I sincerely believe that if you're not licensed, you really need to get
re-motivated if you truly want to capture bigger assets.

SMA: We've heard the horror stories about the Sept. 2008 meltdown and the stock market. Did your phone ring off the hook at that point?

RD: When people ask me that question, I always respond, "Did your phone not ring off the hook during the biggest rebound in recent history?" I'd already been through this kind of crisis in the past with my clients, and yes, you panic if you're overweighted in only one category or just bank stocks, so I've always pushed for good asset allocation.

The meltdown has created a fear that financial planners can't handle things; I just believe most still haven't taken the first step in creating plans and models that work in any circumstance. I can't tell you that my clients weren't upset by the meltdown, but it's my job to constantly be going back to them and seeing if their objectives and goals have changed and if we've done enough to diversify. I'm still helping people who come to me with blown-out portfolios, or those who are underwater because of their 401(k).

SMA: What is your approach with your clients?

RD: When I first meet with clients, I wear my financial planner cap, something directly related to my Series 65–I review their plan, offer planning services and charge a fee for that. Free financial planning, to me, means that there's an agenda at work. I do the work, then I come back with a rough draft, with a lot of projections and a lot of "what if" scenarios. I don't make investment recommendations at that point. If they decide to go ahead, I wear the investment advisor/consultant hat, and I can start to formulate investment proposals, again, largely fee-based. I'm also a pretty good advocate of variable annuities as one solution though not the only solution.

They're clearly very helpful in alleviating short-term volatility. But I also think that ETFs provide the best bang for the buck, provided we can manage them with a tactical model. And then there's good old bonds, which are more of a "buy 'em and hold on" solution. I can also handle mutual funds and hybrids of all of the above.

SMA: What changes do you see looming ahead?

RD: The baby boomers are starting to keep us busy. They certainly know what they want, and part of the expectation is that I have to tell them what I'm going to be doing. I'm not just going to pick a hot stock and call them four times a day; I'm going to put a plan in place, monitor it and figure out how my time will best be spent. It's never an all-in deal, it's a tweaking process. They've entrusted me with their wealth, and I'm going to make sure their money is protected. My long-term objective is to have about 25 more advisors working with us in our office.

But I still feel you can't be valuable to other advisors if you're not living the business, so I still like to keep in front of the guys, passing along information to others. Believe it or not, I'm also becoming a FINRA arbitrator. I wanted to be more involved in the business and do something to give back to the individuals working out there, especially after 20 years in the business.

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