Introduction Profile Focus on Fees Life Insurance Niche Retirees Client Referrals Coaching...

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2 Table of Contents Introduction... 1 Profile Recurring Revenue... 2 Focus on Fees Financial Planning Life Insurance... 4 Variable Annuities Focus on the Mass Affluent... 5 Niche Retirees... 5 Client Referrals... 6 Coaching More than Investment Performance Moving to the Next Level... 8 Conclusion... 9 If you have any questions regarding this paper, please contact Paul Lofties, CFP, ChFC, First Vice President of Acquisitions and Wealth Management, Securities America, at , Ext or at plofties@saionline.com. For broker/dealer use only. Statistics and analysis in this paper were derived from Securities America s $1 Million Advisor Survey and data mining within Securities America s advisor support systems. The 50-question survey was distributed in April 2008 to 70 Securities America advisors who each gross more than $1 million in annual revenue. Copyright July 2008, Securities America Financial 2 Corporation, all rights reserved. Updated 01/13/09. SAI#41344.

3 Introduction For independent financial advisors wanting to take their businesses to the next level, there is no better strategy than studying advisors who have already reached the pinnacle of success. Advisor studies and surveys are the basis for many of the recommendations given by industry coaches and consultants. Many articles in the investment media routinely refer to advisor studies to encourage best practices. These studies provide great value to advisors. However, one significant shortfall is the fact that the studies generally have not differentiated between advisors from different channels. Wirehouses, independents, banks, insurance and advisors from all other channels are often grouped together, resulting in recommendations of best practices collected from a multitude of business models. This can result in advice that may be generally accurate throughout the broader industry, but not necessarily applicable to advisors in the independent channel. To specifically help independent advisors reach the next level of success, Securities America conducted an in-depth study of its top advisors. Based on the assumption that Securities America advisors grossing more than $1 million a year in production are representative of highly successful independent advisors in the industry, the business strategies uncovered in this study are directly applicable to all advisors in the independent broker/dealer channel. The study involved 70 advisors, each grossing more than $1 million in annual revenue. Information for the survey was collected via a combination of data mining and a 50-question survey given to the advisors in April As expected, some of the business practices of the group are commonly recommended as best practices throughout the industry. However, not surprisingly, the study also found behaviors practiced by the group that run contrary to some recommendations frequently heard in the financial services industry s coaching programs and best practices. Profile Looking at the profile of a $1 million advisor, we can immediately see a deviation from some of the common recommendations by the press. Though much has been written about the benefits of having a team approach or an ensemble practice, by far the majority of $1 million advisors in the independent channel are sole practitioners. Additionally, though it s often thought that having fewer clients is better, advisors in our study still served a relatively high number of client households on average 373. Advisors were able to support this high number of relationships via a sole practitioner business model because of their reliance on staff. Seventy-seven percent of the advisors reported having three or more support staff. Not only did they have staff, they tended to have highly experienced staff. Sixty-eight percent of the advisors reported that their staff average more than six years of experience within the financial services industry. PROFILE OF A $1 MILLION ADVISOR $1.55 million in annual gross dealer concession (GDC) 373 client relationships Sole practitioner supported by non-licensed staff and/or junior representative(s) (71%) $132.4 million in assets under administration $46.7 million in fee-based assets under management 1.13% average net fee on fee-based assets 78% of fee-based assets were advisor directed 3-year GDC growth rate of 21.64% 3-year fee growth rate of 32.91% 11+ years industry experience (100%) CFP designation (62%) 1

4 Securities America s surveyed advisors matched the industry trends of movement towards fee-based business. However, the average net fee for surveyed advisors (net meaning minus the administrative or third-party management fee) for fee-based assets was only 1.13%, a much more competitive pricing structure than the premium pricing often encouraged by industry experts. It was also surprising to see that 78% of the fee-based assets of the $1 million group were advisor directed. This shows that many of the advisors are making limited use of third-party money managers and still prefer to control the investment decisions. The advisors in this group have achieved what Securities America terms next level success. Although they are at a top production level, they show no signs of slowing down. When asked about further growth of their business, 94% of the group indicated they would continue to grow their practice, with 55% indicating they would pursue aggressive growth strategies. Only 3% of these advisors plan to retire or sell their practice within the next five years. Beyond defining a basic profile, the study uncovered 10 key characteristics of the $1 million advisor: Recurring Revenue, Focus on Fees, Financial Planning, Life Insurance, Variable Annuities, Focus on the Mass Affluent, Niche Retirees, Client Referrals, Coaching and More than Investment Performance. These characteristics are described in the following sections of the paper. Recurring Revenue Million-dollar advisors recognize the value of a recurring income stream and have made a significant transition away from relying on transactional revenue for the bulk of their income Commissions Fees/Trails The study found that 60% of the group s Gross Dealer Concessions (GDC) came from recurring revenue comprised of a combination of fee income and trails. This is a growing trend up from 49% in A smaller subset of the group, 39% of the advisors, have established even stronger recurring revenue streams and receive more than 75% of their revenue from fees and trails. These numbers indicate $1 million advisors strongly 20 value the consistency that revenue trails and fee 10 income provide, and show that this successful group of advisors is committed to continuing the transition 0 away from a transactional business model The investment media and industry consultants routinely describe fee-based business as the preferable business model. Though the $1 million advisors certainly do significant fee-based business, the study indicates they still receive nearly the same economic benefit from commissionable mutual fund and variable annuity trails as they do from fee-based business. Focus on Fees Though fee-based business and commissionable trail revenue are statistically close when studying an advisor s overall recurring revenue, advisors still do a significant amount of fee-based business (31% 2

5 of their revenues), and this trend is on the rise. Since 2004, the amount of fee business for the surveyed group has risen from 20% to 31% and average fee-based assets under management for the group rose from $19.8 million to $46.7 million. As previously mentioned, 78% of the fee-based investment accounts were located in advisordirected accounts accounts where the advisor is $50.00 responsible for making investment decisions. This was an unexpected finding, as industry experts and $40.00 coaches have routinely touted the financial benefits $30.00 of using third-party money managers to create greater business efficiencies and allow advisors to $20.00 concentrate on their typical core competencies of $10.00 client acquisition and relationship management. The $0.00 surprisingly high number of advisor-directed assets, however, suggests that $1 million advisors have struck an efficient balance between managing client relationships and the day-to-day management of investment portfolios. The study suggests that this balance may be due to two primary factors: Fee-based Assets Under Management The preference for more passive money management, thereby requiring less work for the advisor. When asked their preference for money management style and given four choices, 50% of the advisors indicated a preference for a more passive and less active money management style. The scale many $1 million advisors have achieved in staffing their practice. With 77% of the surveyed advisors being supported by three or more support staff and 51% of the advisors being supported by four or more support staff, it is likely that $1 million advisors are better able to dedicate staff to day-to-day money management activities and thus realize efficiency benefits similar to those realized by using third-party money managers. Financial Planning The study indicated that $1 million advisors tend to place a high value on the financial planning process and the production of a financial plan. Seventy-two percent of the advisors indicated they produce written financial plans for their clients. Out of this group, 32% of the advisors described their financial planning activity as being occasional that is, dependent on a client s circumstances and 40% Produce Written Plans of the advisors responded they either always or most of Do Not Produce Written Plans the time produce a written financial plan for clients. 28% 72% In addition to producing financial plans, $1 million advisors are much more likely to bill for their financial planning services. In total, 25% of all advisors affiliated with Securities America billed financial planning fees in However, 45% of the $1 million advisors affiliated with Securities America billed financial planning fees in

6 Though they value financial planning, the study indicated the group was yet to adopt a retainer financial planning business model. Only 15% of those surveyed indicated they bill financial planning retainers. There was also no clear preference for any specific planning software among the group. Life Insurance Much has been written about the benefits of being able to offer a comprehensive suite of financial services to one s clients. The $1 million advisors validated this notion especially when it comes to the offering of life insurance services. Sixty-five percent of the advisors indicated they offered life insurance services. This was double the number of any other ancillary, non-portfolio-related service. Findings also show that advisors still tend to offer insurance services themselves. Of advisors offering life insurance services, 80% relied on their own expertise or the expertise of an in-house partner or employee to handle the life insurance needs. Only 20% offered life insurance through an outsourced relationship. When asked their preferred life insurance provider, no company stood out as statistically advantageous when compared to others. Responses ranged across the board. Offer Life Insurance Services Do Not Offer Life Ins. Services 35% 65% Variable Annuities Ninety-one percent of the advisors surveyed use variable annuities in their practices. Variable Annuity Commissions The survey revealed that advisors received 20% of their revenue from first-year variable annuity commissions. Though 20% is a significant portion of an advisor s income, this is a decreasing trend and has fallen from 30% of revenue in With recent compliance pressure and repeatedly 20 negative press, why do $1 million advisors continue 15 to make significant use of variable annuities? The 10 use is no doubt indicative of the benefit advisors 5 feel that the annuity guarantees provide their clients. As outlined later in this paper, the survey also found the bulk of the advisors clients, by far, were retirees classified as mass affluent investors. These clients are likely to be especially susceptible to changes in their retirement income stream and, therefore, particularly interested in the income guarantees provided by variable annuity products. With the mass affluent retiree demographic projected to continue to grow because of the retirement of baby boomers, it is probable that variable annuities will continue to be a primary investment tool used by $1 million advisors to help achieve client goals. 4

7 When asked about preferred variable annuity providers, Pacific Life and Jackson National were listed as the top two with a 17% and 11% market share respectively among the advisors surveyed. Focus on the Mass Affluent Many consultants and business coaches in recent years have encouraged advisors to move up-market and redesign their practice to work with affluent clients, focusing on fewer individuals with higher levels of investable assets. While some advisors have found success with this model, the survey indicated that the majority of $1 million advisors tend to focus their business on the mass affluent client demographic. In fact, 72% of new client relationships acquired by $1 million advisors have investable assets in the range of $250,000 to $750,000 placing them directly in the mass affluent client demographic. Only 9% of advisors reported average new client relationships in excess of $1 million in investable assets. Advisors responding to the survey were also more likely to serve a higher number of clients than the optimal number suggested by many industry consultants and coaches. On average, advisors surveyed served 373 client relationships. Niche Retirees According to the survey, many advisors in the industry as a whole have found great success building businesses focused on widows, divorcees, business owners, doctors and any number of other profitable niches. It is no surprise that the broader retiree market would also be a popular niche of sorts. What was surprising, however, is the extent to which advisors are dependent on the retiree market. One might have expected the $1 million advisors to have businesses evenly focused on retirees and perhaps a few other niches. The study found the opposite. While each advisor in the survey did identify a primary niche, 83% of the $1 million advisors listed that niche as retirees. Even more specifically, 47% of the advisors indicated they focused on general retirees, and 36% indicated they focused on retirees of a particular company. No other specific niche received more than a 6% response. While many niches exist and can be focused on in your practice, this makes a clear statement to advisors wanting to reach the $1 million dollar level that retirement planning cannot be neglected with the growing number of Americans who are at or nearing retirement age. NICHE/TARGET MARKET LISTED AS PRIMARY FOCUS OF BUSINESS 9% 6% 2% 36% General Retirees 47% Retirees Specific Industry Business Owners Widows /Divorcees Other 5

8 Client Referrals Time and time again, advisors have been told the fastest and most inexpensive way to build a business is through client referrals. It seems simplistic, yet many advisors in the industry as a whole have moved away from this business-building technique toward attempting to obtain referrals from strategic alliances, such as attorneys and CPAs. Though some advisors find success with this strategic alliance tactic, the $1 million advisors surveyed still strongly rely upon client referrals for their success. They indicated 83% of their new clients come from client referrals. Only 4% of new clients were reported to come from strategic alliances. Referrals from clients Referrals from strategic alliances Seminars or Workshops Direct Mail Advertising Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% In fact, 51% of the advisors reported receiving no clients from CPAs, and 64% reported receiving no clients from attorneys. Only 22% of the advisors indicated they had relationships with two or more CPAs, and only 10% of the advisors indicated they had relationships with two or more attorneys. This poses the question of whether the $1 million advisors could grow even faster if they spent more time developing strategic alliances. Or, does their success level indicate strategic alliances are not worth the effort, and advisors wanting to grow their business should focus their efforts on solidifying a client referral program like the $1 million advisors have done? Another potential way to acquire clients is through the acquisition of another practice. Only a small number of advisors have completed such a transaction, but 55% of the advisors in the study indicated they would like to do so in the future. Coaching Why would advisors who have reached the $1 million production level participate in coaching programs? After all, it would be easy to reason that people in the top echelon of their industry need the least amount of coaching and training. Interestingly, these advisors don t see it that way. Of the advisors surveyed, 57% reported they had participated in industry coaching programs and many of them in multiple programs. Strategic Coach was the most popular of the coaching programs 6

9 with Ron Carson s Peak Productions, CEG s Cultivating the Affluent, and Securities America s Practice Management Consultation all also receiving significant use. This trend seems to indicate an inherit willingness among the $1 million advisors to explore and implement new ideas. No doubt this personality trait has been an important one in helping them reach higher levels of success. More than Investment Performance Another defining trend of $1 million advisors success clearly shown in this study is their recognition of the importance of providing a quality client experience. Advisors have debated among themselves the definition of a quality experience in the eyes of the clients. Is the ultimate measure portfolio performance? Or is it the relationship and service experience? When asked directly which of these are more important, none of the $1million advisors responded that portfolio performance was the most important. Fifty-five percent said relationship / client experience was most important, and 45% said a combination of relationship / client experience and portfolio performance was most important. WHY CLIENTS CHOOSE TO WORK WITH A PARTICULAR ADVISOR Personal integrity and trustworthiness Unbiased advice Experience Performance track record Broad array of services offered Expertise in a particular specialty Recommendation by friends and family Recommendation by other professional Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 7

10 When asked why clients choose to work with them, the top three reasons given were integrity and trustworthiness, experience and recommendation by friends and family. The lowest rated factor was performance track record. This strong recognition of the value of a quality client service experience has led advisors to build robust support systems for the purpose of keeping in regular contact with clients. When advisors were asked how often their firm touches clients, including meetings, phone calls and mailings, 74% of the advisors responded their firm touched clients more than nine times a year, and 32% responded they personally touched clients more than 17 times a year. Although portfolio performance is important, it is clear that $1 million advisors believe client service and relationship management are higher-level client needs and they have built the support systems to meet those needs. Moving to the Next Level Million-dollar advisors in the independent channel have a number of unique business practices in common that are fundamental to their success. Advisors looking to move up-market and reach the next level of success would be prudent to study and duplicate the following business practices: (1) Design one s business to receive the bulk of revenue from recurring revenue streams like trails and fees. (2) Utilize fee-based platforms and commit to growing fee-based business. (3) Incorporate financial planning. (4) Offer life insurance services. (5) Offer variable annuities as an option for providing retirement income. (6) Focus on the mass affluent market place, defined as clients with investable assets between $250,000 and $750,000. (7) Many niches exist. Ultimately, it s important to choose one that you work with best. If you choose to work with the retiree market, keep in mind the key role retirement planning will play in that niche. (8) Make client referrals the foundation of their client acquisition strategies. (9) Participate in coaching programs. (10) Spend time developing quality relationship and customer service support infrastructures, because it is likely to be viewed as more important than portfolio performance. 8

11 Conclusion While many of the industry s best practices for business development apply regardless of the broker/dealer channel in which an advisor works, using too broad a brush across too many dissimilar types of practices when choosing growth strategies may actually be detrimental to an independent advisor s practice. Clearly the strategies and tactics offered in the financial services industry as a whole have merit and value. However, this study of the independent $1 million advisors affiliated with Securities America illustrates the need for channel-specific best practices so that advisors can reach the next level of success. Independent advisors need to be diligent in screening advice and strategic consultation to ensure that what they are hearing or implementing is indeed applicable to their specific practice and channel position. Trying to overlay another channel s best practices onto their independent business structure will be frustrating and likely not fruitful. For broker/dealers supporting independent advisors, it is critical that the broker/dealer s practice management, wealth management, asset management and coaching programs and services take these differences into consideration so that the broker/dealer can best serve the unique needs of their independent advisors. 9