The Race for Top Talent II

Transcription

1 The Race for Top Talent II Ideas Without Limits TM Our partner in developing this independent study:

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3 Contents Executive Summary...4 Failure to Keep Pace... 4 Challenges Intensify... 4 Achieving Success... 5 Six Factors of Greatest Influence... 5 New Approach Required... 5 Introduction...6 Methodology... 7 The Investment Professional Marketplace...8 Growing Demand, Stagnating Supply... 8 Migration Creating Winners and Losers Retention Challenges Continue...12 Recruiting Can t Keep Up...14 Understanding Affiliation Preferences Reasons to Join...16 Reasons to Stay...17 Reasons to Leave...18 Summarizing Affiliation Influences...19 Implications for Broker-Dealers A New Approach Is Required...21 Structure Around the Value Promise...23 Value Propositions Are Based on Outcomes...23 Clearly Specify the Target...24 Benefits, Not Features...25 Focus on Outcomes that Matter Most...25 Retention Part of a Three-Legged Stool...26 Start with Smart Recruiting...26 Service and Support Commits Professionals to Stay...27 Constructive Enforcement...28 Getting Cultured...28 Empowerment and Independence...29 Development Completes the Picture...30 Conclusion Acknowledgements...32 Ideas Without Limits 3

4 Executive Summary Failure to Keep Pace In contrast to steady growth for RIAs, broker-dealers have begun to experience an outflow of investment professionals in recent years. After barely breaking even in 2008, the average independent broker-dealer lost 1.2 investment professionals for every new professional recruited in Given that the average investment professional tenure is 6.4 years with the same broker-dealer, many firms may never fully recover the costs of acquiring and assimilating today s new recruits. Growing investment professionals, both in number and in quality, is critical to the success of any brokerdealer. Despite the urgency, firms have made little progress in addressing the talent-related issues first identified in the initial Race for Top Talent report three years ago. Race for Top Talent II aims to update and expand on findings introduced in the inaugural 2007 report. Similar to the first report, Race for Top Talent II strives to provide broker-dealer executives with a better understanding of the environment for recruiting, developing and retaining investment professionals. Additionally, recommendations are provided for broker-dealers to improve recruiting and retention results based on the key challenges identified. Included in the analysis of current conditions is original research commissioned specifically for this study which explores the talent race from the perspective of investment professionals and their motivations for affiliating with a particular firm. Challenges Intensify Although the industry has certainly experienced changes in the last three years, broker-dealers, by and large, continue to confront the same challenges when it comes to cultivating investment professionals. These challenges, however, have increased in intensity. Some key observations from the research are summarized below: > Supply of investment professionals is unable to meet demand. Broker-dealers struggle to develop new investment professionals, while their experienced professionals trend toward more independent business models or leave the industry altogether due to retirement. > Reliance on recruiting competitors investment professionals is unsustainable. Rather than develop talent new to the industry, broker-dealers have created an unhealthy dependency on recruiting away experienced professionals from competitors. > Recruiting costs increase as effectiveness wanes. In just two years, external costs per recruit have more than tripled for the typical independent broker-dealer. Many firms will never recover these costs. > Retention needs attention. Just a one-percentage-point improvement in retention would extend investment professional tenure by five months and significantly improve recruiting return on investment. 4 The Race for Top Talent II

5 Achieving Success Broker-dealers inability to achieve greater success in effectively attracting and developing investment professionals is sobering. This report offers many potential avenues for brokerage executives to improve. A distinct value proposition that stands apart from competitors and speaks to a well-defined target market is the starting point for competing successfully. Additionally, winning brokerage firms will recognize that while recruiting is a necessary emphasis, developing investment professionals, advancing their skills and supporting the growth of their businesses are just as important. Six Factors of Greatest Influence Regardless of what type of investment professional the firm chooses to target, successful broker-dealers will demonstrate a keen understanding of what influences professionals most in choosing to affiliate and stay with a broker-dealer and then structure their recruiting and retention tactics accordingly. Race for Top Talent II survey research identifies these six critical factors of greatest importance to investment professionals: > Services and support. Nearly every firm touts its outstanding service but few truly deliver. Quality service and support requires that firms anticipate needs and deliver on the outcomes that investment professionals value most. This includes the firm playing a central role in facilitating a professional s career and business development. > Independence. The investment professional s concept of independence has broadened beyond the brokerdealer s traditional perception. For investment professionals, independence has evolved to include control over branding, flexibility in determining pricing and services and the ability to create equity as well as build and realize value from ownership shares in their business. > Ability to better meet clients needs and interests. Investment professionals are most likely to change firms in order to better meet client needs. Giving professionals the sufficient freedom to provide products and services that are in the best interests of their clients can be a broker-dealer s most important retention tactic. > Brand. A strong brand not only eases recruiting by providing investment professionals with the confidence that the broker-dealer will deliver on its value promise, but improves retention of professionals as well. This enables investment professionals to more easily market to clients. > Culture. Shared culture across the broker-dealer s organization creates a sense of ownership, belonging, family and community. A strong culture is a powerful retention tool that also inspires the firm s investment professionals to recruit others to the firm. > Income. Although income is not a key factor when an investment professional joins a firm, changes in practice economics will prompt a professional to consider a move to another broker-dealer. New Approach Required Recruiting and maintaining top talent is essential for broker-dealer growth and profitability. Every broker-dealer has an opportunity to win the race for top talent, but a new approach will be needed. The right formula will be a comprehensive one, recognizing that the race for top talent can t be won on recruiting alone and that investment professionals affiliation decisions are based on a range of factors that extend beyond bonus packages and levels of payout. Ideas Without Limits 5

6 Introduction A broker-dealer will ultimately only be as successful as its affiliated investment professionals. Growth for a broker-dealer largely is predicated on acquiring more investment professionals or growing the practices of its existing base of professionals. Both approaches have proved challenging given the current market for investment professionals. Marketing and recruiting budgets continue to grow, yet few broker-dealer firms are successfully increasing the number and quality of their professionals. Broker-dealers struggle to develop new investment professionals, while their experienced professionals trend toward more independent business models or leave the industry altogether due to retirement. Pershing s original Race for Top Talent report, released in 2007, provided the starting point for examining and addressing broker-dealer attraction, development and retention of talent. The report represented the industry s first in-depth guide with regard to how firms can better assure a steady supply of talented and successful investment professionals, the single most critical ingredient for broker-dealer success. To update and enhance the 2007 findings, Pershing partnered with the research and consulting firm, FA Insight, to prepare Race for Top Talent II. With its second report on the topic, Pershing aims to provide broker-dealers with additional fresh insight. Since the release of the initial 2007 report, much has changed. However, in many respects nothing has changed. The primary industry issues first identified in 2007 have not been resolved; they have only become more challenging. Key observations of the 2007 report included the following: > Broker-dealer demand for investment professionals was outstripping supply, a situation exacerbated by aging professionals. > Despite an increasingly pressing need to develop and retain talent, broker-dealers focused on recruiting experienced investment professionals from competitors. > With just an estimated 6.9% of broker-dealer-affiliated professionals considering a change of firms, the targeted pool of recruits was not enough to meet demand. > Recruiting and marketing costs continued to rise as a result. > Broker-dealers struggled to differentiate from their competitors, despite the fact that investment professionals were motivated by more than just compensation when determining whether or where to move. All of these issues remain relevant in 2010 and are now even more pressing. As this current report details, investment professionals are older still, experienced practitioners remain in short supply, and broker-dealers have made limited progress in developing a new generation of talent. Recruiting and marketing costs are pushing higher. Achieving more effective differentiation could go a long way toward increasing returns on broker-dealer recruiting and servicing costs, yet firms still struggle to do so. Entirely new developments have surfaced as well over the last three years. Most noteworthy are the following: > Although the total number of investment professionals has stagnated, the propensity for professionals to switch firms appears to be on the increase. > Profit pressures have caused broker-dealers to become less tolerant of weaker producing investment professionals. > The ability to best serve clients has emerged as the factor most likely to cause a professional to switch firms. 6 The Race for Top Talent II

7 These trends and others are detailed ahead. In addition to this industry review as it relates to talent, report coverage most importantly includes implications in light of the current environment and resulting lessons for broker-dealers as a result of these trends. On a positive note, a host of opportunities exist for firms to get back into the running in the race for top talent. Methodology To produce Race for Top Talent II, FA Insight drew from a variety of quantitative and qualitative sources. To better understand the loyalties and motivations of broker-dealer-affiliated investment professionals, a telephone survey was specifically commissioned for this initiative. All participating professionals had to be registered representatives for at least three years and produce at least $50,000 in gross revenue in To better control the selection of the participating investment professionals and to ensure an adequate participant response, the survey was administered exclusively over the phone. A total of 51 investment professionals participated in the survey. The participants reflected a cross-section of broker-dealer affiliation types. At least 10% of professionals represented each of the five broker-dealer affiliation models eligible for the survey. These included: full-service wirehouse, regional broker-dealer, independent broker-dealer, insurance-affiliated broker-dealer or bank-affiliated broker-dealer. Investment professionals ranged in industry experience from three years to more than 25 years. Professionals represented a variety of production levels, from $50,000 to more than $1,000,000 generated in gross revenue in Thirty-nine percent of the investment professionals generated $250,000 or more in gross revenue. The majority of professionals had been affiliated with their current broker-dealer for at least four years. Home-office views were represented by a series of interviews conducted with six broker-dealer executives (see Acknowledgements). The executives, representing a variety of firm types, shared their first-hand insight with regards to industry challenges and best practices. Other secondary research was important in producing this report. Key among these sources was the Broker- Dealer Financial Performance Studies published annually by the Financial Services Institute. 1 The experience of FA Insight in consulting with and assisting broker-dealer executives as well as their investment professionals provided additional perspective. 1 The authors are grateful to the Financial Services Institute (FSI) for granting us the authorization to repurpose excerpts from their study. The complete annual FSI reports are only available to member broker-dealer firms. For information about joining FSI and obtaining these reports, see Ideas Without Limits 7

8 The Investment Professional Marketplace Growing Demand, Stagnating Supply Approximately 310,000 investment professionals practice across the various distribution channels for financial advice (Figure 1). By distribution channel, most professionals are affiliated with an independent broker-dealer. Insurance, wirehouse and bank broker-dealers follow respectively. Investment professionals affiliated with an RIA, either exclusively or dually registered as both broker and independent RIA, currently have just an 11% market share but are growing rapidly. 2 Figure 1: Independent Broker-Dealers Biggest Channel by Number of Investment Professionals Number of Investment Professionals by Channel, 2008 Independent (98,707) Dually Registered (14,769) RIA (18,582) Wirehouse (54,865) Regional (35,960) Bank (16,406) Insurance (70,405) Source: Cerulli Associates, Cerulli Quantitative Update: Advisor Metrics 2009, December The total number of investment professionals has remained largely unchanged over the last few years, although significant changes are occurring within this pool. Clear trends are underway in terms of the movement of professionals across channels as well as improvements in the overall quality of professionals. Few signs, however, indicate the industry is sufficiently prepared to grow its base of investment professionals in line with growing consumer demand for financial advice. Consumers are poised to continue to increase in number as well as needs. Over the next 20 years, the country s primary consumers of advice, those 45 years of age and older, are forecast to grow 26%. This increase compares to 11% growth for younger adults, aged The swelling ranks of aging consumers will drive growing demand for goal-based financial planning and risk management that protects against outliving assets. More than just demographics are fueling market growth, however. Exacerbating demand for advice is the general trend of individuals shouldering greater responsibility to provide for their own financial futures in light of the demise of the defined benefit retirement plan and uncertainty regarding the future of social security. Additionally, security market volatility has dampened investor enthusiasm for going it alone in managing their financial futures. 2 Cerulli Associates, Cerulli Quantitative Update: Advisor Metrics 2009, December FA Insight and U.S. Bureau of the Census, The Race for Top Talent II

9 In light of these trends, market forecasters predict retirement and estate planning to be among the country s 10 fastest growing industries over the coming decade. 4 Demand for advice shows no signs of abatement, yet the industry is largely failing to grow its base of investment professionals. Demand for advice shows no signs of abatement, yet the industry is largely failing to grow its base of investment professionals. Like their clients, investment professionals are aging too with no clear source of replenishment emerging to counter the pending retirement wave of investment professionals. Industry estimates vary, but most sources put current professional age at around 50 years and getting older each year. The problem seems especially acute with broker-dealer-affiliated professionals. Figure 2 illustrates the pattern exhibited in recent years among independent broker-dealers. The percentage of investment professionals over 55 years of age has consistently increased, up from 32% in 2007 to 36% by Figure 2: Retirement Wave Threatens Growth Average Composition of Investment Professionals by Age % 9% 10% 10% 80% 23% 24% 26% 60% 40% 32% 33% 30% 20% 23% 22% 21% 0% 13% 11% 13% Greater than Less than 35 Source: FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. Growth of investment professionals was also restrained in recent years as firms moved to prune weaker performing professionals from their ranks in order to shore up profits. Faltering financial markets and rising cost pressures have tested the patience level for firms to carry less profitable professionals. Although the pruning trend has helped struggling firms maintain profitability, there are potential long-term and negative repercussions. By eliminating a role for entry-level investment professionals and small producers in general in their organizations, broker-dealers create a heavy and unhealthy dependency on recruiting away a dwindling pool of experienced investment professionals from competitors in order to foster growth. 4 IBISWorld, December 2009 Ideas Without Limits 9

10 Figure 3 shows the decline in the smallest grossing professionals affiliated with independent broker-dealers. Investment professionals with less than $50,000 in production dropped from 55% of affiliated professionals in 2005 to just 42% in At a higher level of production a similar story is playing out amidst wirehouse brokerages, which independents are reacting quickly to take advantage of. In recent years, wirehouse firms have reduced the levels of incentive and reward for investment professionals with less than $300,000 in gross revenue. The implementation of penalty boxes in particular has greatly reduced payouts for these smaller producers and encouraged them to either affiliate with another firm type or leave the industry entirely. Figure 3: Broker-Dealers Lose Patience with Low Producers Independent Broker-Dealer Professionals by Production, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 56% 19% 17% 6% 2% 46% 19% 20% 10% 5% 42% 24% 22% 8% 4% <$50,000 $50,000 - $100,000 $100,000 - $250,000 $250,000 - $500,000 >$500,000 Source: FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. Migration Creating Winners and Losers Challenges for brokerage executives to attract and retain top talent compound further in light of shifting investment professional preferences with regard to channel affiliation. Depending on the firm type, migration is shrinking the opportunity set for some while expanding it for others. To those who follow the industry, the general trend of investment professionals seeking increasingly independent affiliation models is no secret. In recent years, W-2 brokerage professionals typically transitioned to independent broker-dealer as investment professionals affiliated with independent broker-dealers tended to move to independent RIAs. According to a 2008 Cerulli Associates survey, the independent broker-dealer was the most preferred destination for investment professionals departing the wirehouse, bank and insurance channels. Among professionals affiliated with an independent broker-dealer, 50% indicated a preference to join an RIA. Of those tending toward an RIA, half planned to retain broker-dealer affiliation and maintain dual registration. Across all broker-dealer-affiliated professionals, the RIA channel is the most preferred destination. When counting dual registration, 38% would prefer some sort of RIA affiliation. 10 The Race for Top Talent II

11 The net result is that while the number of investment professionals has remained largely unchanged in recent years, market share has shifted toward RIA affiliation at the expense of wirehouses in particular. The net result is that while the number of investment professionals has remained largely unchanged in recent years, market share has shifted toward RIA affiliation at the expense of wirehouses in particular (Figure 4). In the fouryear period from , wirehouse professionals fell by 1.7 percentage points. During the same period, the number of professionals affiliated only with an RIA increased 1.1 points while dually registered professionals, the fastest growing of all categories, increased 2.5 points from a 2.3% share in 2004 to 4.8% in Figure 4: Dually Registered Investment Professionals Fastest Growing Share of Professionals by Broker-Dealer Channel, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% RIA (20%) Dually Registered (107%) Independent (-4%) Insurance (-3%) Bank (8%) Regional (-10%) Wirehouse (-10%) Note: Four year cumulative rates of growth in parentheses. Source: Cerulli Associates as reported by Lauren Barcack in Beating Back the Independents, onwallstreet, July Research specifically commissioned for Race for Top Talent suggests the trends that Cerulli quantified through 2008 will largely continue. In the spring of 2010, Pershing and FA Insight directed a telephone survey of 51 brokerage-affiliated investment professionals with $50,000 or more in GDC. Participants represented a variety of broker-dealer and practice types. 5 When asked about their preferred destination if they were to change firms, few (2%) would target a wirehouse. Nearly half (47%) preferred an independent broker-dealer, with another 22% considering either joining or starting an RIA (Figure 5). 5 See Methodology for additional detail. Ideas Without Limits 11

12 Figure 5: More Than One in Five Brokerage Professionals Would Join an RIA Broker-Dealer Investment Professionals Most Likely Affiliation Change Join RIA (11%) Start-up RIA (11%) Other Change (7%) Wirehouse (2%) Independent (47%) Insurance (9%) Bank (13%) Source: Pershing-FA Insight, Retention Challenges Continue The current market environment has challenged broker-dealer executives to develop and retain investment professionals, placing an excessive burden on recruiting prowess in order to grow their firms. Investment professional retention among independent brokers, for example, was 84% in 2009 (Figure 6). Retention is significantly higher for professionals with GDC above $100,000, however, than those below. Lower producing professionals are more apt to be let go or quit the business entirely than their higher producing and more established peers. Figure 6: Retention Rates Vary Markedly According to Production Independent Broker-Dealer Professionals by GDC, % 92% 93% 91% 90% 85% 80% 82% 79% 84% 81% 84% 82% 75% 70% All <$100,000 $100,000+ Source: FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. 12 The Race for Top Talent II

13 Retention rates for low and high producers are also distinct in terms of their trending in opposite directions. Retention for low producers rose steadily since Not as rapidly, however, as the declining rate in which producers under $100,000 were added. This suggests that independent broker-dealers, in order to protect profitability, are becoming more selective about adding low producers and improving rates of retention in this range as a result. In contrast, retention for high producers affiliated with independent broker-dealers showed signs of deterioration in 2009 after improvement in Keeping good investment professionals will continue to preoccupy broker-dealers. In addition to the threat of losing professionals due to retirement, several key developments have intersected in recent years that are weakening the loyalties and ties that investment professionals have with their broker-dealers. The following factors are driving the probability for a professional to consider a different firm: > Affiliation with many of the major brokerage firms has become a liability. Investment professionals have lost patience for having to cover over the misdeeds of their parent firms with clients. The organizational instability of these firms has further tested the patience of professionals as well as their clients. > Related, firm brands no longer serve as an anchor for client households. What matters most for clients today is not the brand of the firm they do business with but the quality of the relationship they have with their investment professional. Clients believe in their investment professional but have doubts about the firms they affiliate with. A recent survey found that while 73% of clients are increasingly cynical of financial services providers, 87% claim their financial advisor always acts with my best interest at heart. 6 > The Protocol for Broker Recruitment has served to smooth the way and limit legal liability for transitioning professionals. Originally created in 2004 by Smith Barney, UBS and Merrill Lynch, the Protocol limits potential legal action if both the firm the investment professional is leaving and the firm the professional is joining are members. In recent court decisions, the limiting conditions of the protocol have even extended to cases where an investment professional moves from a protocol firm to a non-protocol firm. More than 500 firms were part of the Protocol as of July > For every broker-dealer type, growth of fee-based business has lessened the culture shock for a brokerdealer-affiliated professional to move to a strictly independent RIA. In the independent broker-dealer channel, for example, fees as a share of revenue have increased from an average of 17% of revenues in 2004 to 25% in Additionally, an increasing number of broker-dealer-affiliated investment professionals already have RIAs. An estimated 14,769 professionals were dually registered as of 2008, more than double in number since > As broker-dealers have increasingly embraced a more open architecture for product selection, few products are available on one broker-dealer s platform that cannot be accessed elsewhere. This widespread availability and access to products has also served to facilitate an investment professional s ability to transition from one firm to another. 6 Envestnet press release, Nationwide Survey Finds: Despite Market s Recent Volatility, Investors Express Confidence, High Level of Satisfaction in their Advisory Relationships, June 28, FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. 8 Cerulli Associates as reported by Lauren Barcack in Beating Back the Independents, onwallstreet, July Ideas Without Limits 13

14 Slightly less than one in eight brokers are at least somewhat likely to move to a different firm within the next three years according to the Pershing-FA Insight survey. As a result, slightly less than one in eight brokers are at least somewhat likely to move to a different firm within the next three years according to the Pershing-FA Insight survey (Figure 7). Assuming 290,000 brokerdealer-affiliated professionals are practicing today (310,000 less an estimated 20,000 RIA-only professionals), this finding translates to 11,600 broker professionals who will be seeking to join a new firm each year. Of these, about 9,500 (82%) will be looking to join another brokerage firm with the remainder targeting an RIA. Figure 7: About One in Eight May Join Another Firm Within Three Years Likelihood of Investment Professional to Leave Broker-Dealer Very unlikely (64%) Somewhat unlikely (24%) Somewhat likely (8%) Very likely (4%) Source: Pershing-FA Insight, Recruiting Can t Keep Up Even the slightest changes in retention rates can make a significant difference in how frequently a brokerdealer must win a new recruit in order to just stay even. The average retention rate of 84% for independent broker-dealers leads to an average tenure per investment professional of 6.4 years. The current retention rate of 91% for professionals with more than $100,000 GDC yields an estimated tenure of 10.9 years. Just one year ago, however, with a retention rate of 93%, high-producing professionals had an average tenure of 14.0 years. The two-percentage-point decline in retention shortened the time in which the broker-dealer must land a replacement recruit by more than three years. Most independent broker-dealers are not breaking even when it comes to recruiting. A similar situation is not unlikely with other brokerage types. In 2009, 1.2 investment professionals left the average independent broker-dealer for every new investment professional recruited (Figure 8). The gap between investment professionals won and investment professionals lost turned negative in 2009, was flat in 2008 and slightly positive in The Race for Top Talent II

15 Figure 8: Investment Professionals Lost Outweighs Those Won Independent Broker-Dealer Professionals Flow, 2009 Average Advisors Per Firm ,362 1, (214) 12/31/2008 Total Advisors Won Advisors Lost 12/31/2009 Total Source: FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. The imbalance between investment professionals won and lost will continue without a shift in broker-dealers people strategies. Rather than develop talent that is new to the industry, brokerage executives place a heavy emphasis on recruiting experienced professionals from competing firms. As displayed in Figure 9, the average independent broker-dealer expected more than two-thirds (68%) of its recruits to come from other independent broker-dealers in 2010, with another 8% expected to come from wirehouse or full-service brokerages. Figure 9: Independent Broker-Dealers Focus on Recruiting From Other Independent Broker-Dealers Average Recruits Expected by Source, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 73% 67% 68% 9% 6% 12% 12% 6% 15% 8% 4% 20% Other Independent Broker-Dealers Wirehouse Bank Other Sources Excluding Brokerages and Banks Source: FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. Few broker-dealers can succeed with this strategy. As previously estimated, each year just 9,500 investment professionals will leave their firm to seek another broker-dealer. Assuming the estimated investment professional retention rate of 84% for independent broker-dealers applies to the presumed 290,000 investment professionals across all brokerage types, firms will need to add 46,000 investment professionals each year to just stay even. Clearly something has to give, either in the form of improvements in retention or broadening the recruiting playing field. Ideas Without Limits 15

16 On a more encouraging note, Figure 9 additionally suggests that executives are gradually recognizing the critical need to change tactics. In 2007, independent broker-dealers expected just 12% of recruits to come from Other or non-traditional sources. In 2009, about 60% of Other was expected to be individuals new to the industry. Firms will need to add 46,000 investment professionals each year to just stay even. Clearly something has to give, either in the form of improvements in retention or broadening the recruiting playing field. Understanding Affiliation Preferences To help broker-dealers better prioritize their retention and recruiting efforts, the Pershing-FA Insight survey focused its questions on why registered representatives initially join a particular broker-dealer, why they choose to stay and why they might ultimately leave in order to affiliate with another firm. The results provide critical support for executives tasked with the challenge of improving retention and taking advantage of migratory patterns in an environment of increasingly restricted supply. Figures 10, 11 and 12 illustrate the major factors behind why investment professionals join, stay or leave a broker-dealer respectively. In addition to providing results for all professionals in the survey, participants were further segmented by the following: > Level of production (less than $250,000 and $250,000 or more) > Years to retirement (less than 11 years and 11 years or more) > Share of their revenues attributable to fee business (less than 5% and 5 100% These three factors, more than the other basic characteristics gathered, accounted for the most variation in attitudes among investment professionals. In rank order, independence, firm brand, and services and support were the most frequently mentioned primary reasons that drive an investment professional to join a particular broker-dealer. Reasons to Join In rank order, independence, firm brand, and services and support were the most frequently mentioned primary reasons that drive an investment professional to join a particular broker-dealer (Figure 10). All of these suggest that it is the general reputation of the firm in terms of what it stands for and provides that initially attracts the investment professional. Professionals farther out from retirement as well as those doing more fee business appear to be especially attracted by the notion of independence. Service and support is particularly important for lower producers as well as those less close to retirement. 16 The Race for Top Talent II

17 Figure 10: Primary Reasons Investment Professionals Decide to Join a Broker-Dealer Reasons to Join All Professionals Production Years to Retirement Fee Revenue Share <$250k $250k+ 11+ <11 <5% 5% 100% Independence 32% 33% 30% 38% 19% 26% 35% Brand 28% 27% 30% 29% 25% 32% 26% Services and Support 24% 33% 10% 29% 13% 26% 23% Passive Recruit 18% 17% 20% 18% 19% 21% 16% Culture 16% 20% 10% 24% 0% 16% 16% Products 16% 23% 5% 9% 31% 26% 10% Career Opportunity 14% 13% 15% 6% 31% 26% 6% Dissatisfied with Prior Firm 12% 7% 20% 12% 13% 5% 16% Economics 10% 10% 10% 12% 6% 11% 10% Other 4% 7% 0% 3% 6% 11% 0% Note: Percentages indicate share of investment professionals citing the factor as a primary reason for joining their broker-dealer. Professionals were allowed multiple answers. Shaded cells represent significant areas of greatest difference. Source: Pershing-FA Insight, Reasons to Stay The rankings change in order and more distance emerges between frequencies of mentions when the question is couched in terms of what makes investment professionals stay with their broker-dealer (Figure 11). Services and support is overwhelmingly most important, cited as a primary reason by more than half of all professionals. Culture, ranked fifth as a reason to join, moves into a solid No. 2 position as a reason to stay, mentioned by more than one-third of all professionals. Independence and brand follow. Figure 11: Primary Reasons Investment Professionals Decide to Stay With a Broker-Dealer Reasons to Stay All Professionals Production Years to Retirement Fee Revenue Share <$250k $250k+ 11+ <11 <5% 5% 100% Services and Support 53% 59% 45% 58% 44% 56% 52% Culture 37% 28% 50% 33% 44% 39% 35% Independence 24% 21% 30% 21% 31% 22% 26% Brand 22% 17% 30% 21% 25% 22% 23% Difficult to Move Elsewhere 16% 21% 10% 21% 6% 22% 13% Economics 14% 21% 5% 18% 6% 17% 13% Products 8% 10% 5% 12% 0% 11% 6% Other 6% 7% 5% 0% 19% 11% 3% Note: Percentages indicate share of investment professionals citing the factor as a primary reason for staying with their broker-dealer. Investment professionals were allowed multiple answers. Shaded cells represent significant areas of greatest difference. Source: Pershing-FA Insight, Ideas Without Limits 17

18 Clearly investment professionals priorities change once they join a broker-dealer. The firm s brand and reputation for independence initially puts the broker-dealer into the professional s consideration set. The quality of service received as well as the strength of the connection the professional feels with the firm s culture is what drives the commitment to stay. Service and support is particularly important for smaller producers and those further out from retirement. In contrast, culture ranks higher among large producers and those closer to retirement. For both of these groups culture was the most frequently mentioned reason for staying. Reasons to Leave Figure 12 examines factors that would have a major impact on the likelihood of an investment professional to switch to a different firm or business model. The findings provide additional useful insight for brokerage executives to refine recruiting as well as retention strategies. The ability to better address client needs and interests was most mentioned by investment professionals as a key factor for pushing them to join another firm. With nearly two-thirds of professionals citing this as potentially having a major impact, no other factor across all of the survey s motivational-related questions garnered a higher consensus. Figure 12: Factors Having a Major Impact on a Professional s Decision to Leave a Broker-Dealer Reasons to Join Another Firm All Professionals Production Years to Retirement Fee Revenue Share <$250k $250k+ 11+ <11 <5% 5% 100% To Better Meet Client Needs 65% 71% 55% 66% 63% 65% 65% Greater Income 49% 58% 35% 51% 44% 60% 42% Dissatisfaction with Current Broker-Dealer Career or Practice Growth Opportunity Dissatisfaction with Business Model Better or Broader Product Choice 49% 48% 50% 49% 50% 60% 42% 37% 48% 20% 37% 38% 50% 29% 31% 29% 35% 37% 19% 35% 29% 31% 42% 15% 29% 38% 55% 16% Better Service 29% 26% 35% 23% 44% 30% 29% Greater Independence 29% 26% 35% 26% 38% 35% 26% Better Practice Management Support 27% 32% 20% 26% 31% 35% 23% Better Cultural Fit 27% 23% 35% 26% 31% 35% 23% Achieve Personal Goals 25% 26% 25% 26% 25% 25% 26% Better Technology 24% 26% 20% 20% 31% 30% 19% Stronger Brand 22% 26% 15% 20% 25% 20% 23% Better Compliance Support 20% 23% 15% 14% 31% 35% 10% Succession Planning Assistance 18% 13% 25% 14% 25% 15% 19% Maintain an RIA 6% 3% 10% 6% 6% 0% 10% Note: Percentages indicate share of investment professionals citing the factor as potentially having a major impact on their decision to change to a different firm or business model. Shaded cells represent significant areas of greatest difference. Source: Pershing-FA Insight, The Race for Top Talent II

19 This is among the survey s most important findings. Counter to the great deal of media skepticism concerning the commitment of broker-dealer-affiliated professionals to put client interests first, these investment professionals are most likely to seek a change based on just that. To act on this finding, brokerdealers must recognize that positioning professionals to best address client needs and interests goes beyond assuring service quality and efficiency. For investment professionals to best meet client needs, the entire organization must adopt a client-first mentality where professionals are given sufficient freedom to provide products and services that are in the best interests of their clients. Such practices embody a fiduciary standard of care and the survey findings strongly suggest that brokerage executives who hesitate to apply a fiduciary duty for their investment professionals risk alienating them. Although clients matter, the broker-dealer-affiliated professional will move for money as well. Desire for greater income, along with dissatisfaction with current firm, tied for the second-most mentioned factor to have a major impact for motivating a switch of firms. Despite economic factors receiving relatively few mentions as a primary reason to join or stay with a broker-dealer, nearly half of investment professionals feel that a chance for greater income would have a major impact on their desire to seek out another firm. Income matters most for commission-oriented professionals and, not surprisingly, low producers. To more specifically understand concerns related to income and practice economics, Figure 13 lists six economic factors that could conceivably affect an investment professional s willingness to affiliate with another firm. By a sizable margin, a more favorable payout is mentioned most often with nearly half of professionals (47%) indicating this would cause them to entertain switching to a new firm. Payout has the strongest influence among commission-based professionals. For investment professionals nearing retirement, paying fewer fees and receiving more equity are mentioned as frequently as payout. Equity is also more likely to strongly influence larger producing professionals. Figure 13: Extent to Which Economic Factors Are a Major Impact on Deciding to Leave Reasons to Join Another Firm All Professionals Production Years to Retirement Fee Revenue Share <$250k $250k+ 11+ <11 <5% 5% 100% More Favorable Payout 47% 48% 45% 49% 44% 60% 39% Bigger Share of Equity 29% 26% 35% 23% 44% 35% 26% Fewer Fees 29% 35% 20% 23% 44% 40% 23% Greater Practice Value 22% 29% 10% 23% 19% 35% 13% Better Employee Benefits 18% 23% 10% 11% 31% 35% 6% Note: Percentages indicate share of investment professionals citing the factor as potentially having a major impact on their decision to change to a different firm or business model. Shaded cells represent significant areas of greatest difference. Source: Pershing-FA Insight, Summarizing Affiliation Influences Six key factors emerged from the Pershing-FA Insight survey as being most influential on investment professional affiliation: > Independence Ideas Without Limits 19

20 > Brand > Services and support > Culture > Income/economics > Ability to best serve clients Among these, it is services and support that is consistently most important regardless of the affiliation decision and regardless of the type of investment professional. More typically, the power of the other key factors tends to vary according to investment professional characteristics and the type of decision the professional faces regarding affiliation. The key factors and their various spheres of influences are summarized in Figure 14. Figure 14: Summarizing Leading Factors that Motivate Investment Professionals Factor Stages of Most Importance Investment Professional Segments Most Influenced Independence Brand Services and Support Culture Income or Economics To Better Meet Client Needs Source: Pershing-FA Insight, 2010 Joining the firm Staying with the firm Deciding to change Joining the firm Staying with the firm Deciding to change Joining the firm Staying with the firm Deciding to change Staying with the firm Deciding to change Deciding to change Deciding to change all investment professionals, but especially important for: Professionals far from retirement Fee-based professionals Large producers Professionals near retirement Large producers Professionals near retirement Commission-based professionals all investment professionals Large producers small producers all investment professionals, but especially important for: Small producers Professionals far from retirement all investment professionals, but especially important for: Small producers Professionals far from retirement all investment professionals, but especially important for: Large producers Professionals close to retirement all investment professionals, but especially important for: Large producers Professionals close to retirement Large producers Commission-based professionals all investment professionals, but especially important for: Small producers Commission-based professionals all investment professionals, but especially important for: Small producers 20 The Race for Top Talent II

21 Implications for Broker-Dealers At this juncture a variety of interesting data has been shared with regard to the investment professional marketplace. The aim now is to identify the key implications of these trends for brokerage executives in terms of recruitment, development and retention as well as provide a course of action for executives to capitalize on these trends. A New Approach Is Required Recruiting and maintaining top talent is essential for broker-dealer growth and profitability, but a new approach is needed. Winning the race for top talent requires a firm to be proficient not just in recruitment, but development and retention of professionals as well. As an industry, broker-dealers have largely failed to grow the talent pool of investment professionals. Instead, each firm focuses on attracting the best professionals of its competitors, a zero-sum game that few can win. A select few large firms are enjoying recruiting success, although their recruiting pace has slowed some recently relative to The size of these firms has helped them establish well-known brands and they have protected these brands from scandal. Their scale provides marketing cost efficiencies. Additionally, having an investment professional base that numbers in the thousands serves as a natural and plentiful source of referrals for these firms to recruit more professionals. Perhaps most important, however, is that large firms can afford to spend significantly more money on recruiting, and do. This is clearly true in terms of absolute dollars but also bears out on a proportional basis. We again turn to independent broker-dealer data. The median annual recruiting expenditure for firms with revenue of $100 million or more is $1.6 million; this compares with $482,000 for all firms. As illustrated in Figure 15, the large firms spend more as a proportion of revenue as well. Figure 15: Large Firms Outspend for Recruiting 2009 Median Recruiting Costs as a Percentage of Revenue Percentage of Revenue 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.9% 0.8% 0.9% 1.2% 0.0% All Firms <$54M Revenue $54M-$100M Revenue >$100M Revenue Source: FA Insight and Financial Services Institute, The 2010 Broker-Dealer Financial Performance Study. Ideas Without Limits 21

22 Among independent broker-dealers that offer a bonus based on the recruited professional s production, the typical bonus as a share of trailing 12 months production is up to 8.2% of the professional s production compared to just 3.0% three years ago. Outside of this handful of large firms, the vast majority of the brokerage industry is hard-pressed to succeed with a growth strategy strictly based on attracting competitors investment professionals, especially smaller firms. Smaller firms typically do not have a wide-scale market presence that naturally generates significant awareness. They also do not have the benefit of sheer size to dedicate additional resources or realize cost efficiencies. Reminiscent of an arms race with a trend that further favors the larger firm, recruiting-related expenditures are rising as recruiting becomes more competitive. Median advertising expenditures for independent brokerdealers have more than doubled in the past two years, increasing from $75,000 per firm in 2007 to $168,000 in Median external recruiting costs per recruit rose even more rapidly during this period, more than tripling from $2,569 to $9,873 per investment professional. 9 Use of recruiting bonuses and the level of bonus payments have also increased. From 2006 to 2009 the share of independent broker-dealers offering recruiting bonuses is up nearly five percentage points. More noteworthy is the amount that firms are paying to lure investment professionals. Among independent broker-dealers that offer a bonus based on the recruited professional s production, the typical bonus as a share of trailing 12 months production is up to 8.2% of the professional s production compared to just 3.0% three years ago. Figure 16: Recruiting Bonuses Rise in Level of Usage and Payment Amounts Use and Payout of Recruiting Bonuses, 2006 vs Percentage of Advisors 60% 50% 40% 30% 20% 10% 46.5% 3.0% 8.2% 51.1% 0% Independent B-Ds Offering Recruiting Bonus Bonus as a Percentage of Recruited Advisor s Production Source: FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. 9 FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. 22 The Race for Top Talent II

23 Despite this growth, the prevalence of recruiting bonuses among independent broker-dealers pales in comparison to common wirehouse practices, where intensity has also stepped up. In recent months, wirehouse packages have grown to historically high numbers that, in some cases, total up to 330% of the recruited professional s trailing 12 months of production. Wirehouses are shifting more of these bonuses to upfront payments as well. As of May 2010, some top wirehouse producers are now reportedly getting up to 150% of production in immediate cash. As recruiting costs rise, the breakeven period for the broker-dealer to generate a positive return on investment extends. In 2009, the cost of recruiting an investment professional, including bonuses, but excluding general advertising and on-boarding costs, ran $8,324 per recruit for the typical independent broker-dealer. 10 Assuming an estimated $3,200 in annual profit per professional, three years will pass before recruiting costs can be recovered. 11 Several years more will be needed to recover the thousands of additional dollars required to transition and onboard the new investment professional. Given average professional tenure of 6.4 years with a given broker-dealer, many firms may never fully recover the costs of acquiring and assimilating today s new recruits. Structure Around the Value Promise Broker-dealers will always need to do a certain amount of recruiting, but the emphasis on recruiting and the process for how it is carried out must change. Recruiting must be coordinated with a broker-dealer program for retention and development. Further, recruiting must be carried out in a more focused and cost-effective fashion. Value Propositions Are Based on Outcomes In order to achieve both, executives would be well-advised to revisit and refine their value proposition to investment professionals. Many firms, including those outside the broker-dealer sphere, are vying to be the professional s key provider and trusted partner. Winners will demonstrate the best understanding, articulation and delivery of outcomes that investment professionals value most. A value proposition that speaks to a brokerdealer s target market is the foundation for effective recruiting and strong retention. A solid value proposition will guide the firm in attracting the best-fitting professionals and engendering their long-term loyalty. At its core, a value proposition is a broker-dealer s promise to deliver outcomes for its investment professionals that meet or exceed what an individual is willing to exchange in the form of either fees, charges or what is retained based on payout schedules. Value is a function of services and products offered as well as the quality of the relationships the broker-dealer maintains with investment professionals and the image the broker-dealer presents to them. The best value proposition will resonate positively in the marketplace and stand apart from competitors. To achieve this, the challenge for the broker-dealer is to determine the most appropriate role it will play for investment professionals and to whom it is best suited to serve in terms of delivering valued outcomes. The opportunity to differentiate is created through the broker-dealer s understanding of where it is best-positioned to deliver value and how the firm can actively and positively influence the way its professionals feel and think about their practices. 10 FA Insight and Financial Services Institute, Broker-Dealer Financial Performance Study, various years. 11 Profit per investment professional estimate was derived by applying the annual average independent broker-dealer profit margin over the last five years to 2009 median revenue per investment professional. Ideas Without Limits 23