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Being primarily a practice management and technology writer, it's always of interest to me when a small, independent broker-dealer distinguishes itself from the competitive pack by helping its reps build more-successful businesses. As broker/dealers recruit aggressively from the same labor pool--a zero-sum game, according to most observers--it must do more and more to lure reps to its playing field.
Which is why VSR Financial Services is getting noticed these days. This Overland Park, Kan., broker/dealer with all of 258 reps took one trade magazine's number one spot in 2006 for average production, consistently ranking with or above the big boys when it comes to productivity measures. The question is... how do they do it, and what's possibly in it for you?
Let's look at the numbers first. In 2007, VSR ranked as follows among some of its bigger brethren (all stats from Investment News' Spring 2008 independent broker/dealer survey:
Firm Avg Payout Per Rep Avg Fee-Based Assets
Per Fee-Based Advisor
LPL Financial $186,900 $9.2 million
Cambridge Inv. Research $187,000 $5.7 million
Securities America $252,000 $9.7 million
Commonwealth Fin. Net. $319,000 $18.5 million
VSR Financial Services $354,000 $10.3 million
Some broker/dealers start to show better numbers when their reps move increasingly toward doing more fee-based business, including money management. But that's not VSR's sole source of strength. Although its reps who qualify as "fee-based" manage, on average, $10.3 million, Cambridge Investment Research and Commonwealth Financial Network reps far exceed that number, with $15.7 million and $18.5 million, each.
I probed Mike Stanfield, VSR's CEO, and Don Beary, its chairman, for some answers. Both having wirehouse backgrounds, Stanfield and Beary met in 1980 and, all told, have 35 years apiece in the financial services business.
Having both earned CFP designations in the 1980s, "We embraced the popularity associated with being a financial planner instead of a broker," Stanfield said. So he and Beary, plus two others, left the broker/dealer they were all with in Kansas City and started VSR in 1985.
"We've really been a financial planning broker-dealer throughout our history," Stanfield said, "stressing with reps the importance of the longer-term client relationship."
Stanfield's other plan for VSR was to keep it small enough so that he and Beary would continue to know all of the broker/dealer's reps as it grew. They've obviously adhered to this plan, because most broker/dealers in business for 23 years would have more than just a few hundred representatives, as does VSR.
"If we'd kept all our [lower-producing] reps over the years, we'd have more than 1,000 producers now," he said.
Instead, VSR established a policy of not renewing the licenses of 5%-10% of its reps each year so, throughout the years, its number of reps has been stable while its volume has grown dramatically. With virtually the same number of reps in 2000 and 2007, the broker/dealer's gross revenues and average payout per rep climbed from $26.5 million and $141,000 to $85.6 million and $367,000, respectively, Stanfield said.
Also helpful to this numbers game is the fact that VSR has maintained one of the lowest rep turnover rates in the industry.
"We have about 95% retention [not counting intentional separations] and, in some years, 100%," Stanfield said. "We think it's all part of the culture we've attracted people to--where we help reps grow their production. A broker/dealer can achieve this one of two ways: hire bigger producers or help its existing reps grow their businesses; much of our growth has been the latter."
"In 2007, 18 producers exceeded $1 million, and of those, 16 were homegrown doing less than $500,000 when we got them," he said. "So a lot of our high average production per rep has come through taking producers in the $200,000 to $500,000 range and helping them double or triple production over just a few years."
Wait a minute... we're talking about production levels and mandatory annual cuts. Inasmuch as VSR is so attentive to production, and lower-producing reps get cut regularly, don't these practices create a culture of fear?
"We've been pretty up-front with reps explaining to them that [we will enforce a] production minimum of $150,000," Stanfield said. "In June of every year, we write a letter to certain reps saying, 'Your production is not meeting our minimums, so you will have to find a new broker-dealer if your production doesn't rise."
There are exceptions to the rule, he says, such as a death in the family or an illness that might have impacted a rep's production ability. "But, as a general rule, we think if you're going to build a broker-dealer that caters to high producers, you must shed reps below your minimums because, once you get up around 500-600 reps, it's hard to maintain personal relationships with all of them." A rep force of 200-300 is ideal, Stanfield added.
But we digress... the point most readers will take away from the above chart is VSR's superior production per rep of $354,000. If it's not entirely due to judicious pruning, then what is the reason for it?
"The fastest-growing part of our business is the advisory side--same as for many BDs--but we've always felt that it would be difficult to set ourselves apart if the primary products our reps have available to offer to clients are variable annuities and mutual funds," Stanfield said.
What Stanfield and Beary have done is to capitalize on their own alternative investment expertise in REITs and oil-and-gas drilling programs.
"Don and I have been investing in those areas since the early 80s and we've cultivated a unique lineup of high-quality sponsors. So we teach our reps how to use these vehicles," Standfield said.
During the 2000-2002 period, Stanfield said that their reps' clients maintained sizable positions in REITs, energy, and oil and gas that helped them and their advisors survive the bear market.
"We were still growing during those years when a lot of other firms were caught up in regulatory inquiries and arbitrations," he said. "Client portfolios holding these types of investments declined less and recovered faster, so their use has been a major factor in our growth since 2000."
Is this a case of leading a horse to water?
"We get our reps using these vehicles by personally informing them of these opportunities via conference calls, at our regional meetings, etc.," Beary said. "I believe real estate is an asset class that got thrown out of many portfolios after 1986 tax reform, but we've made sure every client gets between a five and 20% real estate allocation."
"We believe in education, so if we come across a rep who hasn't worked with REITs before, we first educate him or her as to why real estate belongs in portfolios," added Stanfield. "Sponsors have helped by holding meetings at their offices so reps could learn from the ground up."
But Stanfield and Beary say they've never demanded that reps use any particular product.
"We try to have a wide variety of products available so, if a rep doesn't like oil and gas for a client, that's his decision," Beary said.
Although it may sound like VSR's high-GDC numbers per rep are based primarily on product selection, financial planning plays a big role, as well.
"We educate reps [on practice management] through workshops that we've done for 10-15 years, at our national sales conference, and through coaching," Beary said. "Starting in the late 90s, we told reps the best money they could spend would be on a [business management] coaching program." And, Stanfield said, "We've never had a rep who went into coaching and said he regretted it." By consulting a program they use to match reps with the proper coaches (since not all coaching nor coaching needs are the same), VSR reps have sought out coaching services from the likes of Dan Sullivan, Ron Carson, Peter Montoya, and Tom Gau.
If education and coaching are important to success, so is one's network, and VSR must be even more cognizant of this than a larger broker-dealer with more reps and, therefore, more geographic coverage and proximity among reps.
"Part of our job is to help our reps understand that they're part of a group," Stanfield said. "If you're alone in your home town running a one-man operation, it's important to feel that you belong to a group and have colleagues around the country. I've seen an ad that says 'Independent But Not Alone.' That's not our ad, but it's our philosophy."