Tom Rice Rice Capital Management Plus Inc. VIEW Interviews by Geoff Kirbyson Leaders of four dealer firms share their insights about the changing face of the industry. FROM Marty Weinberg Assante Corp. IF THE LATE 1990S WERE THE best of times for dealer firms, the early years of the new millennium are easily the worst of times. Dealers watched sales of mutual funds and other financial products fall precipitously in virtual lock step with financial markets. To make matters worse, investor confidence is at its lowest point in generations. It s all combined to create a thorny situation that few advisors have experienced before in their careers. To discuss this new reality, Advisor s Edge set up interviews with the top executives of four dealer firms in Canada: Chris Reynolds, CEO of Investment Planning Counsel of Canada (IPC); Tom Rice, CEO of Rice Capital Management Plus Inc.; Dan Richards, president and CEO of Cartier Partners Financial Group; and Marty Weinberg, president and CEO of Assante Corp. Here are their insights. ADVISOR S EDGE: What are the biggest issues facing dealers today? CHRIS REYNOLDS: Dealers are still using a model that is 12 to 15 years old. The traditional model has the dealership keeping 15% to 20% of ongoing gross income and from that it has to pay all its bills. We pay compliance, regulatory, technology, processing, training, marketing and overhead fees and hopefully out of that, we make a profit. Ten years ago that would have been fine but today, we have more expenses than we ve had before. We ve seen top line revenue decrease at the same time as we ve seen expenses increase. Tom Rice: photo by Tom Veneklasen; Marty Weinberg: photo by Ruth Bonneville ADVISOR S EDGE 18 www.advisor.ca
Cover Story / Industry THE (left) Chris Reynolds Investment Planning Counsel of Canada (below) Dan Richards Cartier Partners Financial Group TOP Chris Reynolds and Dan Richards: photo by DW Dorken DAN RICHARDS: The number one issue is survival. We re in a business that has relatively high fixed costs and comparatively low variable costs. This structure works very well during good times but it puts your feet to the fire during tough times. The dealer costs of maintaining an advisor, in terms of compliance and registration, are rising dramatically. TOM RICE: The days of high payouts and volumes are long gone. Going forward, dealers must help advisors build their business and stay in business. All of our advisors, for example, have access to our special research, which is available in real-time through technology. MARTY WEINBERG: We don t have that dealer model because we have a vertically integrated model that allows us to reinvest in the distribution side. Our challenge is back-office systems. Because the industry was made up of fragmented dealers, they all had small unscalable systems. Larger companies require a more sophisticated back-office infrastructure. Most systems are inefficient and although they are scalable, they cannot provide the kind of management information needed to effectively run the organization. AE: How can dealer firms help advisors become more profitable? REYNOLDS: We can help them increase wallet share within their client bases. Every client has a chequing account, for example. So we provide our advisors with a full line of banking products such as chequing accounts, lines of credit, credit cards and mortgages. We ve also put a huge emphasis on insurance, estate planning, critical illness, long-term-care and disability insurance. These are emerging as our population ages. RICHARDS: As a dealer firm, we have to be cheerleaders to help maintain the motivation of our advisors. We also have to provide the direction and support advisors need to run their businesses effectively. Cartier Partners recently launched an online tool to help advisors when they re talking with prospects and clients. The tool helps clients understand their current asset allocation and where Continued on page 21 www.advisor.ca MAY 2003 19
It s not that costs are being downloaded to the advisors, it s just that there are costs that never existed before. Continued from page 19 CHRIS REYNOLDS their asset allocation should be by comparison. WEINBERG: We have a training, learning and development centre that helps advisors manage their practice. Our asset management group provides tools to advisors, such as investment policy statements, in a centrally located place. Developing tools in-house takes the work off the advisor s desk, providing them with more time to spend with their clients. AE: Advisors report increasing costs make it harder for them to stay in business. Why are dealers downloading some expenses to the advisor level? RICE:The costs being downloaded are less than 10% of revenue. We all have to suck it up. Advisors need to look at opportunities for increasing their revenues within a changing environment and look beyond the small dollar amount they may be giving up. Advisors today are making more income on smaller percentages and payouts. It s the income that pays the bills, not the percentages. Any advisor who has joined us has taken a lower payout and their income has doubled and tripled. WEINBERG: Costs are rising for everyone because the industry has raised the bar in terms of quality of advice and consumer protection. I m a strong advocate of that. Since the independent dealer typically pays out over 80% to the advisor, and there s only 20% left for the company before expenses, there s little if any room to absorb the costs, so the advisors have to pay them. Over the past decade, advisor payouts in the United States have fallen to about half, while payouts in Canada have remained the same. RICHARDS:You can do lots of things when you have positive revenues. But in this environment, advisors have to look at every aspect of the business, including whether you can carry smaller, unprofitable clients. REYNOLDS: It s not that costs are being downloaded to the advisors, it s just that there are costs that never existed before: regulatory costs, errors and omissions insurance, MFDA costs. Unfortunately, the pay grids don t allow the dealer to absorb them. There are not enough margins to do that and stay in business. AE: How are you retaining your advisors? RICE: We re not having a problem retaining advisors. Some advisors weren t ready for the downturn in income and feel that everything should be provided for them. The reality is there are costs they have to face to stay in business. Those who are leaving would be classified as smaller producers. WHOTHEY ARE Continued on page 22 CHRIS REYNOLDS is the president of Investment Planning Counsel of Canada (IPC) and vice-chair of IPC Financial Network. Since IPC s recent merger with Dundee Wealth Management Inc., Reynolds is also a senior executive at Dundee.The new entity will have more than 1,200 advisors across the country and more than $9 billion in assets under management. TOM RICE is the chair and CEO of Rice Capital Management Plus Inc. Rice Capital became a public company in 1998 on the Alberta Stock Exchange and now trades on the S&P TSX. It has companies from Ontario to British Columbia, about 300 advisors and more than $3.5 billion in assets under management. DAN RICHARDS is CEO of Cartier Partners Financial Group. He was formerly a longtime industry consultant. Cartier Partners has 3,500 advisors across 10 provinces and $15 billion in assets under management. MARTY WEINBERG is the president, CEO and chair of Assante Corp. The seven-yearold company has both a financial planning operation in Canada with 1,250 advisors, as well as a growing practice of more than 400 advisors, business managers and sports agents providing financial advice to high-net-worth individuals in the sports, entertainment and other high-net-worth channels in the U.S. It has more than $7 billion in assets under management. www.advisor.ca MAY 2003 21
Continued from page 21 WEINBERG: There is an outflow of advisors with smaller books but sophisticated, experienced advisors are staying. We retain those experienced advisors and their clients with the reputation of our firm and strong compliance initiatives. Clients want to know they re putting their money in a safe place. Strong compliance raises the bar and helps lift the brand of the company. RICHARDS: There s the odd anecdotal case of advisors leaving but much less than people would expect given the market environment we re in. For many advisors, there aren t a lot of attractive alternatives. This is a business that historically has had some unique rewards, potential for compensation and the ability to make a positive contribution to your clients lives. You also have the freedom to manage your own time. There are not many jobs that offer a comparable environment. REYNOLDS: It s not a cottage industry anymore. Before, you could have been a part-time advisor and survived with very little capital and expenses. It s just not the reality today this is a fulltime professional occupation and, as a result, the industry is going through a period of transition. There are certainly advisors leaving but, to be honest, most of them probably shouldn t have been in the industry in the first place. AE: Do in-house product quotas exist? WEINBERG: I m against quotas. We do not have differential commissions, quotas or financial incentives. An Some advisors weren t ready for the downturn in income and feel that everything should be provided for them. The reality is there are costs they have to face. TOM RICE
advisor should focus on the client s best interests and quotas work contrary to that concept. There s a section in our shareholder advisor agreement that prohibit any type of quota in the company. Our goal is to earn the right to manage the financial affairs of our clients to the fullest extent possible. RICHARDS: Some firms do have incentives in the brokerage channel, for example. If you sell a wrap account, you ll typically get a higher trailer, anywhere from 1.25% to 1.75% more than you would from selling mutual funds. Our own compensation is indifferent regardless of what people sell. Our view is we have to earn the right to our clients business just as any outside provider would. We are successful in persuading advisors to put their clients with us because they believe it s the right thing to do relative to all the alternatives. RICE: I believe an advisor can be biased if he owns stock in his parent company. Owning stock isn t necessarily a bad thing but the client needs to be made aware of it, and then make his own judgment. But there are companies who say they re not paying their advisors a larger percentage on an in-house product than they are on a third-party product. There are also sales rewards and internal contests with in-house funds that third-party funds can t participate in. The industry says a planner (or organization) who is not using in-house product can t survive. Well, they should be able to if everything is on a level playing field. REYNOLDS: It s an urban myth that in-house products were designed to An advisor should focus on the client s best interests and quotas work contrary to that concept. MARTY WEINBERG provide an unfair advantage. Certainly in our firm, it s a level playing field. We don t offer higher commissions on our funds and our product is available to anybody who wishes to use it. We designed our products because we thought they were good products. Being a financial planning firm, we understand the industry and we know what clients want. Ultimately, it s up to the advisor to determine what s best for his or her Continued on page 24
Continued from page 23 clients. Even if one company pays more or gives more financial incentive, in the long run, advisors will lose clients if they sell product based purely on compensation. They won t last in the business. WEINBERG: Our portfolio management services are exclusively distributed and are a completely different offering than what advisors can find from third parties. So it s not like we duplicated what was already out there. There is no requirement to sell anything. AE: Describe the future dealer landscape. WEINBERG: The manufacturers of investment, insurance and other financial products will continue to consolidate as scale is the primary objective. But there will always be room for boutiques and individuals to provide advice to their local markets. REYNOLDS: There will be no more than 10 dealers. The smaller ones will continue to merge and sell out as the cost of business continues to rise and top line revenue continues to falter. There are still 180 different mutual fund dealers in Canada, I believe that will continue to ratchet down. RICHARDS: I think it will be closer to five than 10 in terms of large national firms but there will always be an opportunity for a nimble, well-positioned small firm on a regional basis that s concentrated, in a community or a province, where people value the economy of operating locally where they ve built the local brand. RICE: New forms of dealerships will function in a more accountable world than they have in the past. There will be four, at most, serving the top 10% of the wealth. There may be different variations serving the level of wealth below that. Geoff Kirbyson is a financial writer based in Winnipeg. advisorsedge@rmpublishing.com Would you like some invaluable (and free!) marketing tips from this distinguished panel of dealer executives? Be sure to check out the Practice Zone at www. advisor.ca