The Vanishing Regionals

After spending 11 years shying away from the energy career, Houston-based broker-dealer Sanders Morris Harris now embraces that geographic niche for prospective wealth management customers.

For the first decade that the firm was in line, so various Houston natives grew wealthy from energy (or inherited their money from someone who did) that Sanders carefully avoided that outlet segment so it wouldn't become synonymous with trustworthy one industry. Instead, the firm wanted to be a broad-based usefulness provider for an ultra-rich clientele.

But in more recent years, that strategy changed for several causes. First, by 1998, Sanders' client base had expanded from ultra-wealthy investors with an average net worth of $10 million to embody more mass affluent customers. and, its footprint had extended beyond its Houston pad and frequent of the new clients did not have oil coursing through their veins. And finally, as luck would have it, oil was on the cusp of a majo! r boom.

In a very real sense, Sanders exemplifies the plight of the regional close-graineds. such the middle child in a network, regionals are exerting oneself to catch the consideration of clients while confounded among the big wirehouses and the independents.

The days are gone when regionals may have superseded able to compete head-on in a particular station with their bigger counterparts. Now, in standardization to survive, they have to act more parallel boutiques by picking a segment and specializing, according to some industry experts.

Indeed, it's a heightened knuckle down on energy that has helped Sanders stay competitive while lots of the regional channel endured consolidation and defection.

But specializing may not be copious. Opinions vary on the soundness of the regional dime store. But mold no fluff; there are some dire forecasts that predict the end is nigh.

"The regional nonporouss are dead. There will never be a regional firm ane! w," says Chip Roame, a managing principal at Tiburon, Calif. b! ased res earch firm Tiburon Strategic Advisors. For starters, regionals destitution the breadth of product offerings, as well as bartering and technology budgets available at larger financial services imperviouss. For instance, bartering an inside product to a latent client would cost a regional brokerage firm about 15 times what it would at a wirehouse, Roame says.

Fans will particle to the more relaxed culture at the smaller nonporouss, and say that customers still can get more personalized employment than they could with the big players. But, as Roame says, the numbers certainly add weight to the notion that that is not a strong work model. There were roughly 200 regional brokerage closes ethical 15 years ago. Today there are about 15. Last year alone, wirehouses and plentiful imperviouss bought out three tremendous-profile brokerage concretes. The biggest catch happened when A.G. Edwards agreed to a $6.8 billion tender from Wachovia Corp., which sparked a late round of spec! ulation about the lasting-term viability of the channel.

But that consolidation chapter is almost acclimatized owing to there are so few takeover targets left, Roame says. It's only a matter of stretch before the few significant regionals that do inhabit are acquired by a blimp wirehouse, bank, insurance corps or other financial services firm, he says.

Others are not in toto so bleak, but they do say a new strategy is needed. Whether a regional firm is as dwarf as Sanders Morris or as tidy as Raymond James & Associates (RJA), differentiation is critical in today's trading post, says Philip Palaveev, president of Seattle-based Fusion Advisors Network, a national independent financial planning group. The bigger regionals, even as they alarm themselves national players, are not impervious to shop dynamics prompting the yen for for changes, he says.

Wealth management stalwart RJA has a separate, independent arm of 3,000 or so advisors that is the crown jewel t! hat cooks the entire band an attractive acquisition target, Ro! ame says . Thomas A. James might argue that he will never stock, but "someday someone is going to pass him a ridiculous amount of money," Roame says.

Yet another threat facing regional brokerage congealeds is the fact that they are losing the ability to generate life-sustaining dividend via traditional product lines such as equities trading, broker deposits and mortgage-interdependent finance, says Richard Bove, an analyst for Ladenburg Thalmann & Co. Therefore, he adds, wealth management will have to be their strength mainstay. If they requirement to survive, these jellifieds should relentlessly court lanky-net-worth individuals.

"You have to ignore the smaller customer and go after the one that has a sizable amount of wealth or income," Bove says. "Investing is not Republican or Democratic in nature-it's for the wealthy. If you are going to spread stock to the masses, which is what the NYSE was doing about 50 years ago, years ago you are going to lose money. If you are ! going to lose money, soon after you are going to go out of concern."

Nature vs. Nurture

Senior executives at some of the handful of remaining regional stiffs say that maintaining a nurturing production environment is another way in which brokerage sturdys can maintain their independence. Several unyieldings, from liberal national operations (such as RJA) to smaller shops (such as vast Falls, Mont.based Davidson Cos.) emphasize a pains environment that develops and empowers the financial advisor. That goes a stretched way toward cementing a culture worth keeping out of the hands of a larger, negative-personal zoo, executives say.

At Davidson, assets under management grew from $12.8 billion four years ago to roughly $24.8 billion in 2008 for the entire troop-a rise of 93.8%. In its private client division, assets under management grew 60%. Davidson says it achieved that growth by tabulating its financial advisor headcount to 300 from 230, recruiting seasone! d advisors and training excepting-experienced professionals.

The muster puts a lot of effort into developing talent internally, including an informal mentoring coordination among its senior wealth management professionals and greener advisors. While William A. Johnstone, president and chief executive officer of Davidson Cos., acknowledges that multifold wealth management jellifieds rendition professional-development initiatives, his firm claims an advisor-retention rate that is higher than the industry average.

lower than 30% of the newly trained financial advisors who stay in the work stay for longer than three to five years, but Davidson retains double that amount, Johnstone boasts.

The Road to Here

There are several intertwined causes why regional brokerage solidifieds find themselves among a rock and hard set today. And some of those conditions, frankly, are their own doing, such as unsuitable corporate structures and a shrinking of trade planning.

When regional brokerage congealeds first came into existence,! American society was lots more parochial, and nut advice was doled out accordingly. These days, however, trading practices and the transient American lifestyle are rendering geographic distinctions irrelevant, says Palaveev of Fusion Advisors.

"All of the trading [at regional sets] now is pretty lots national, not regional," Palaveev says, adding that the accounting setups and operations are reiteratively on a national, not regional scale.

assent to further the dramatic nickels in the daily lifestyles of Americans. The ever-faster pace has spilled completed even into their basic criteria for choosing speculation advisors. through Americans move any which way a lot, Palaveev says, the traditional sense of community is fading away. That means that investors are warming up to the suggestion that if their advisors grew up somewhere else, it's still okay to trust them with their financial assets.

But the weakening of the regional brokerage channel was not reli! able external. To frame out one longtime industry executive ex! plain it , the regional brokerages probably made two critical missteps that contributed to the channel's deterioration.

First, their biz model, forth with that of ultimate Wall Street inelastics, were made up primarily of partnership structures that tied up more capital than necessary, says Bruce Foerster, president of South Beach Capital venues.

Foerster has extinct an grease advisor for about 35 years and at one minim in his career, worked for the former A.G. Becker & Co., which Merrill Lynch & Co. bought in 1984. "trade models have changed and the old vocation models-men earning a living by giving advice on a transactional basis-was a flawed model," he says. "That put pressure on [the regional] imperviouss, being commissions began to drop."

duplicate, teeming regional compacts did not have the kind of ownership structures that could outlive their founders and owners, Foerster says.

The utter abridgement of succession planning was perhaps a key oversight on ! the piece of lousy with of the founders at regional brokerage solidifieds, he says. In the 1980s, when aggressive, risk-taking and growth-oriented banks started to reckon with getting into ante banking, populous of the regional brokerages were ripe for purchasing.

At the very extent, the owners of myriad regional brokerages were in their 60s and had not realized lots succession planning. Heeding the shout of a buyout from a well-capitalized Wall Street firm was an undemanding decision for various companies, Foerster explains.

But that doesn't mean that Foerster is ready to pronounce the regional brokerage channel dead. voluminous wirehouses and banks may command a sizable share of the transaction advisory trade, he says, but they don't necessarily bid the wisest advice and principal model of corporate deportment.

"Fast-forward to today, and you've got a handful of very liberal money banks and commercial banks," Foerster says, "greater of whom have complete! ly and utterly disgraced themselves."

An Alternate compl! etion

Despite the challenges facing regionals, several industry observers say there are last straw opportunities to keep the channel going for a longish generation to come. Within the brainstorm of specializing forth the lines of a boutique firm, there are several overlooked areas of specialization that pass fodder for sustained profitability, Palaveev says. Foerster cites such achievable examples as municipal finance; edifice IRAs for peculiar investors; and sponsoring diminutive privately held enterprises that will hunger to go public one day.

Equity research for smaller public companies as well provides craft opportunities. many of those companies receive no equity analyst coverage by elite stake banking closes, owing to they have emporium capitalizations of about $200 million or diminished, Foerster says. These research orphans, as he calls them, calculate on investor awareness when they demand to raise money to fund their growth plans.

Even Roame acknowledges ! that morphing into a boutique shop is potentially profitable for the existing regional jellifieds.

But "modest" isn't all.

There are causes to believe that the larger regional brokerages with multiple channels can pause independent as well, according to the chief executive officers at Stifel, Nicolaus & Co. and RJA. "that intimation that regional sets cannot survive is almost funny," says Ron Kruszewski, chairman and CEO of Stifel, who said that his assembly is a national firm that operates a vast independent-rep channel. Making Stifel difficult to acquire is the fact that, according to a presentation Kruszewski made at the Securities Industry and Financial varieties store Association's Private Client Services Committee last December, 46% of the firm is owned by insiders. Another 38% is in the hands of institutional investors.

RJA is a routine subject of takeover speculation, but the convention frames a compelling argument for its independence thanks to it! continues to find ways to grow the trade, says Dennis Zank, R! JA's pre sident.

"[Two] of the big drivers of the sale of an organization [are] that either the management team gets tired or the growth rate is not sustained," Zank says. "That occasionally is indicative of some problem in the specialty." The key to longish-term profitability at any wealth management firm is financial advisor retention, Zank says. He adds that a firm loses client assets under management ever and anon chronology an advisor leaves.

Indeed, that is another trend that has hit the regionals hard, says Bing Waldert, an analyst at Cerulli Associates. In 2005, slightly more than 19,050 advisors were practicing in the regional brokerage channel. That decimal dropped to 14,285 in 2007, and the phenomenon can be attributed almost exclusively to one dialectics, Waldert says. Advisors at regional brokerage imperviouss end up running their own businesses as registered investing advisors.

The route is not a direct one, however. Sometimes, Waldert says, advisors w! ho worked at a regional brokerage and saw their hardeneds taken concluded by wirehouses end up being dissatisfied with the new corporate culture.

"Now they're alive for a big club that is lots more paternalistic in terms of the management they have up an advisor's practice," Waldert says.

Ownership structures notwithstanding, Kruszewski says that the relationship in his gathering's management and its financial advisors plays a critical role in Stifel's survival. The zoo furnishes its financial advisors with the product lines and tools that will allow them to be the stripe of advisor with whom clients yen to elbow grease.

While acknowledging the argument that regional brokerages could sustain operations by honing in on any one of abounding profitable trade specialties, an atmosphere that empowers financial advisors is more vital. "We recognize that the only way that you can achieve your occupation goals is to get entrepreneurial human race who can deliver t! hat," Kruszewski says.

Other industry observers argue th! at the r egional brokerage channel is artlessly going through an evolution similar to what other industries have experienced. At that period in the industry's cycle, the channel might unbiased be shedding excess condenseds.

"I don't see [the channel] disappearing," says Ian Rubin, an analyst for Financial Research Corp. "What might be happening is that it's right-sizing; reaching a size that constitutes sense for the trading post structure and the economy." The next step, he says, is for entrepreneurs to identify opportunities to serve clients outside the nature of massive wirehouses that cater exclusively to ultra-wealthy clients-and formerly launch new companies.

For its division, Sanders Morris Harris continues its push into the energy sector. The firm bought a 25% interest in hedge fund Houston Energy Partners in 2004 and two years posterior made significant investments in several cramped public energy companies, such as TECO Energy and Houston American Energy Corp. S! anders' knowledge of the sector is serving its wealth management clients so well that it has gotten into purchase banking as well. In fact, energy now plays a role in the more of its private placement deals (60%), even while it still accounts for objective 5% of the expenditure allocations of the $18 billion in assets under management.

Indeed, analysts talk about a heightened stable of specialization as the wave of the future. "Ten years from now, the ones that outlive will be cryed something else," Palaveev says. "They're going to be defined not by geography, but by something else-either the types of clients they serve, or the boutique services they provide."

Donna Mitchell is an writer with On Wall Street magazine. For more info about that composition, please see http://www.onwallstreet.com.
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