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Target Recruiting: Who Do You Want and Who Do They Want

Target Recruiting: Who Do You Want and Who Do They Want

00:00 01 November in Articles Written by Jon Henschen

by Jonathan Henschen, CFS and featured in Broker Dealer Journal
November, 2007:

During a recent conversation with a client of mine, a broker/dealer president, the issue of the firm’s recruiting market came up. On the one hand, the firm was frustrated by a lack of recruiting success. On the other hand, the client was generally comfortable with his firm’s recruiting market because they were top producers with little if any compliance issues. Specifically, the firm’s reps are institutional traders specializing in stock-and-bond trading for clients who are money managers, insurance companies and municipalities – a market for which there are decided pros and cons.

I explained to my client that he’d been receiving so few recruiting leads from us because few reps target the “Institutional” market. As a result, I said, I could produce only a handful of leads for them each year, adding: “Have you ever considered branching out and targeting reps that do retail business?” His reply did not surprise me: “Sure, we’ve had retail reps in the past, but they came with mountains of customer complaints, and we were stuck dealing with each and every one of those issues.”

There are Pros and Cons to any recruiting market. More and more firms these days are going after the same type of Advisor. That is, they’re seeking Advisors producing $500,000 or more in gross dealer concessions annually. The problem is that of the 250,000-plus advisors in our industry, only about 30,000 generate more than $500,000 in revenues each year. That is a small, small marketplace!

As a recruiting firm, we’ve always found reps doing $100,000-$300,000 of production to be a sweet spot for broker/dealers to target. The fact that they make up the lion’s share of our recruiting marketplace is one major factor, but also on a compliance level, those reps make enough to have less temptations to compromise their standards for the sake of generating commissions.

As one branch manager told me, when production exceeds $300,000, rep egos can get out of hand, which means more work for him. “Those reps inevitably begin lobbying for greater payouts. That means more work, less money, more attitude. I don’t need all that,” he said, sharply. We’ve learned that branch managers have traditionally been drawn to reps that produce at the $100,000 to $299,999 level because, while the firm can make decent spreads, it does not have to deal with excessively large rep egos, with all the extra work that entails.

Recruiting Market Pros & Cons Charts One thing I’ve never seen are charts for broker/dealers detailing the pros and cons of different target recruiting markets. Because of my belief that a chart like that would be instructive, I decided to develop one on my own (see below).

The first side refers to Production Levels, the other addresses Advisor Styles. The pros and cons listed on these charts are based not just on my perspective as a recruiter, but also on the many years of feedback I’ve received from broker/dealer managers and compliance officers.

Target Recruiting Marketing – Pros & Cons

Production Levels

ProductionProsConsFirm Needs
$30,000-$49,000Large spreads for broker/dealer. Lower compliance risk if they have outside business activity that earns them substantially more, such as CPA or P&C Agent. Semi-retired reps with scaled down books are also low risk.Low earnings can cause advisors to compromise ethical standards. Smaller producers can tie up the back-office where service level for better producers is diminished.Low minimum production requirements. Marketing help.
$50,000-$99,000Substantial spreads for broker/dealers. Making enough production that compliance risk is further reduced. Reps in this range tend to be less needy than lower level producers and are the seed corn for future higher producers.Still at a production level where compromise of ethical standards is a concern, but less so than lower-level producers.Need marketing support and often seek out name branding to help attract clients.
$100,000-$299,000Making enough where compliance risk is lower. Much of our industry falls into this range. This provides a large pool of advisors to recruit. Many producer groups are made up of advisors in this range.Not enough production for firms targeting high-end reps.Need many technology tools to manage their books and grow. Broad product choices with fee-based platforms a strong focus.
$300,000-$749,000Low compliance risk with consistent production. Everyone wants these reps.More demanding and lower spreads for the broker/dealer. You’re in high competition for a smaller pool of reps.Broad selection in fee platforms, alternative investments, quick response in service with high sophistication in back-office people.
$750,000+Great producers that often have client bases of numerous accredited investors.Very small pool of advisors so competition for them is fierce.Require firms that are active in alternative investments and possibly private equity. Service and technology must be high-end.

Advisor Styles

ProductionProsConsFirm Needs
Stock & BondPropensity to be large producers with advisors doing stocks and bonds in an advisory structure being lower risk for compliance problems.Transactional reps are higher compliance risks for churning and customer complaints re. inappropriate investments.High-quality trade execution, trade desk and ability to negotiate on ticket charges. Principle Trades capability, ability to work with Structured Products and Cash Alternatives also high on their list.
InstitutionalVery high producers with very low risk of customer complaints.Few advisors to recruit in this marketing niche.High-quality trade execution, ability to have DVP accounts, prefers flat ticket charges.
Financial PlannerHaving financial plan to back investment choices makes advisors somewhat bullet-proof from customer complaints. Customer base usually more loyal than other styles.Substantial competition for these advisors.Planners do a bit of everything, so need broad quality choices in advisory, alternative investments, practice management and marketing support.
AdvisoryProduction much less cyclical in down markets and value of business gets top dollar.May experience outflow of clients during down markets due to accounts being down and getting billed at the same time, offending clients. Having a mix of “C” share MF can be a hedge. Recurring revenue is highly sought out, so expect heavy recruiting competition.Broad choices in 3rd-party managers and separate account managers. Ever-increasing numbers of advisors are looking for low costs on wrap platform administrative fees. Quality reporting, ability to have one’s own RIA, allowed to custody at Schwab, like firms and flexibility in adding managers.
CPA’sEthical, detail-oriented, which helps with paperwork with a few successfully clicking with securities market and generating significant production. Large broker/dealer spreads for lower-level producers.My father was a CPA and my father-in law is an EA so my opinion is subjective in this area. You can fill in your own views.Programs tailored to how CPA’s do business. Low minimum production requirements.
Insurance FocusSimilar to Financial Planning pros, but more focused on Estate Planning segment. Many high-end advisors to recruit in this arena.Customer complaint problems with VUL in the early 90’s. Now EIA and VA are under the compliance microscope with some firms shying away from advisors doing substantial amounts with either of these products.No proprietary pressures to use certain vendors. Advance Estate Planning department with help on case design and setup. Firms that are pro VA with as little bureaucracy in 1035 paperwork and approval as possible.
Alternative Investment/Private EquityLarge ticket business with accredited investors. Growing rep market focused on this market is an assist in recruiting.Moderate risk level for customer complaints. Reps may not have a full understanding of what they are selling.Need to be active in 1031 programs, broad choices in all aspects of alternative investments (LP’s, REIT’s, DPP, 1031 TIC’s, Managed Futures, Equipment Leasing and Medical Receivables). Private Equity is used as a tool to get their foot in the door with ultra-wealthy investors.