For the firms in the employee-advisor channel, the stakes couldn't be higher.

A recent report from Cerulli Associates criticized the wirehouses for focusing on higher net worth clients. The result was that these firms were giving away the middle market (investors with $100,000 to $500,000 of assets to invest) to competitors. While their clients are richer they are also older and could be losing out on the next generation. That, in turn, has created a threat to their prospects for future growth, Boston-based Cerulli stated in the report.

Couple that with a still recovering U.S. economy and rivals in the independent/registered investment advisor space clamoring for their best talent, and the wirehouses have much to fear. But they continue to hold onto the bulk of client assets. And while that market share has dropped some, don't count these firms out. And don't count out their regional colleagues. "

After all, the employee-advisor channel is more than just Bank of America Merrill Lynch, Morgan Stanley Smith Barney, Wells Fargo and UBS. The so-called regional firms (some actually have a national reach) are benefiting from the missteps of their bigger brethren.

Overall, the employee-advisor channel is not a bad place to be. In fact, according to On Wall Street's 2012 survey of broker-dealers, 2011 turned out to be a pretty good year for these firms; perhaps surprisingly so, considering the worldwide concerns that generated so much market volatility last year. On average most broker-dealers reported year-over-year gains in total revenue.

What's more, the broker-dealers responding to the survey generally reported reduced or only slightly larger rep counts from 2010 to 2011. Broker-dealers are making an effort to operate more effectively. "We've made several changes to help us better serve clients," Jim Weddle, managing partner of Edward Jones, told On Wall Street. "Those changes also have boosted our performance."

Of the 16 firms whose total revenue from 2010 to 2011 were reported here, either from the companies themselves or their public filings, nine reported gains last year, including the six largest. (See chart) While four of the six smaller firms posted revenue declines in 2011, Wunderlich Securities reported the largest gains in the survey: more than 58%.

Among the larger firms, Raymond James & Associates had the largest percentage increase-more than 18%-bringing that firm to a near dead heat with RBC Wealth Management for seventh place on our list.

Commission Revenues: Ups and Downs
As might be expected in a year where investors were wary of stocks, commission-based results varied widely from firm to firm. Seven broker-dealers reported commission revenue from 2010 and 2011; three firms were up last year while four were down. Scott & Stringfellow posted a large gain here, up over 100% from year to year, while Southwest Securities' drop of more than 14% was the largest reported decline.

When asked how Scott & Stringfellow managed to post such a strong increase in commission revenue, Lynne Baldacci, first vice president and sales development manager, says: "We have experienced positive organic growth performance by continuing to focus on developing deeper and better relationships with our clients, while trying to extend the overall value we bring to the client experience."

Scott & Stringfellow recently named Bryan Cram president of its Private Client Group. Formerly the group's chief operating officer, Cram plans both internal and external expansion of the retail business. "We will leverage our relationship with our parent company, BB&T [Branch Banking and Trust]," Cram says.

While Richmond-based Scott & Stringfellow focuses on key markets in its Virginia-Carolinas main area, it's also setting its sights on other states. "We have some offices in Georgia and West Virginia," Cram says. "Now we're planning to enter Florida, Alabama, Kentucky, and Maryland as well." He adds that the parent company is deeply rooted in those states, which will help his firm expand in key markets there.

"BB&T has a growing wealth division," Cram points out, adding that Scott & Stringfellow plans to coordinate with BB&T in order to expand overall business with key clients who need sophisticated financial planning.

Fee Revenues: Surprisingly Stellar
In a flat year for investment performance, asset management fees might be expected to show lackluster results. However, all the broker-dealers responding to this question reported large gains in fee revenues, led by Alamo Capital's gain of over 78%, from a small base. Among the other firms, all posted gains of 15% to 30% in fee income from 2010 to 2011.

"Our 24% year-over-year increase in recurring revenue springs from several initiatives," Jerry Lombard, president of Janney Montgomery Scott's Private Client Group, says. "At Janney, we believe that pricing on a recurring revenue basis is a key component for financial advisors who want to scale and grow their practice. A continued emphasis on and education about this area at Janney has resulted in consistent 20% year-over-year gains in recurring revenue for several years running."

Lombard cites numbers from Cerulli Associates, saying that the research firm puts Janney's ETF Advantage program among the top-five largest ETF programs on the street. "It's been a go-to program," Lombard says, "with low costs to clients and strong investment results. In addition, our home office support staff plays a big part in helping our financial advisors achieve success in this area. Our analysts, product managers and field support staff all do a great job for our FAs."

As Chip Roame, managing partner at consulting firm Tiburon Strategic Advisors, points out, stocks may have been flat in 2011 but the market level throughout the year was higher than in 2010. That is, stocks rose sharply from early 2009 through the first half of 2011, so clients' assets generally were higher, for the full year of 2011, than they were for the full year of 2010. "When the market is up as it was from 2009 to 2011," says Roame, "asset levels are up, and fees are up."

Nevertheless, Roame believes that an increased emphasis on fees will help broker-dealers maintain and increase revenue. "Fees can be explained as good for clients, good for financial advisors, and good for brokerage firms," he says. "Who would not want an annuitized revenue stream? More often than not, stock markets are up, so more often than not fee revenues will increase, even if nothing else happens."

Cerulli's report shows that while the financial advisory industry has continued to grow, wirehouse assets have declined. In 2010, the overall industry grew to $11.2 trillion from less than $11 trillion in 2007. During that same period, assets at the wirehouse firms dropped to $4.8 trillion from $5.5 trillion. For 2013, Cerulli projects that the decline in assets held by the wirehouses will continue, to 35% in 2013 from 43% in 2010. But, the wirehouses will still rank as the largest distribution channel next year.

The firms can get "other" revenues, not from fees or commissions. Among the firms reporting these numbers for 2010 and 2011, Raymond James was the leader in terms of gains last year. However, all of the other firms posted double-digit declines in this category.

Total Representatives: Flat or Fewer
Of the 16 firms providing year-over-year numbers, six reported declines in their rep count, from 2010 to 2011. Moreover, of those reporting increases, three firms boosted their total reps by less than 3%. As a result, last year didn't produce a hiring binge for advisors. Only Merrill Lynch reported substantial rep increases by percentage (up over 10%) and in absolute numbers, with a net gain of nearly 1,700.

Many of the responding firms, though, showed a decline in total reps or a modest increase, yet also reported a substantial increase in total revenue during the year. Therefore, some firms seem to be using their rep forces more efficiently. "Cutting the least productive reps has been an ongoing trend, especially among the wirehouses," Roame says. "They have streamlined their rep forces. Other broker-dealer channels have had the benefit of these reps sometimes flowing into their firms."

Among the firms responding to these questions in the survey, Scott & Stringfellow was most active in new hiring, adding over 300 reps altogether in 2010 and 2011, with the recruiting fairly evenly divided between the two years. RBC dropped nearly that many: 164 in 2010 and 119 in 2011. With a smaller rep force, RBC was the only reporting firm with a double-digit payout increase, with average payout of $264,341 in 2011, up nearly 16% from 2010.

The firms reporting revenue growth in 2011 attribute success to keener management, internal expansion, and savvy use of technology. "Our increase in revenue growth came from two main sources," Philip Zanone, Wunderlich's president says. "First, through concentrated professional development and organic growth, our advisors showed an increase in their production. Second, we continued to build out our Equity Capital Markets business, which contributed greatly to our top line."

Meanwhile Jim Weddle of Edward Jones says his firm has "rolled out updated training; not only for our newer financial advisors, but also for our veterans." The firm's practice management model and related training "helps them build and sustain a business that is based upon exceptional client service," he adds. Weddle also points to significant investments in technology and enhanced desktop functionality for each branch team. "Our financial advisors now can analyze their businesses using monthly reports tracking their net new assets and net new households served," he says. "They are also able to see how deeply they are serving their clients. Our entire vision for growth is based upon our ability to offer clients exceptional personal service. That's our value proposition to the client; deeper relationships and greater client satisfaction increase client loyalty—which improves business results."


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