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These are the Critical Issues Keeping Top Broker-Dealers Up at Night

By Rita Raagas De Ramos February 14, 2019

Broker-dealer firms are facing numerous challenges when it comes to growing their businesses, and among the most pressing is retaining talent.

For Christopher Cooke, Indianapolis-based partner and senior institutional consultant at Cooke Financial Group, the biggest challenge is making sure his team is “functioning as efficiently and as effectively as possible to serve our clients.”

For Louis Cannataro, New York-based founder and partner of Cannataro Park Avenue, the biggest concern he has when strategizing the growth of his business is the “cost of human capital.”

Cooke and Cannataro are among the 2018 Financial Times Top 400 Broker-Dealer Advisors. To qualify for the Financial Times Top 400 Broker-Dealer Advisors list, advisors need a minimum of 10 years of experience and at least $300 million in client assets. Qualified advisors are then scored on six attributes: AUM, AUM growth rate, compliance record, experience, industry certifications and online accessibility.

Cooke says having advisors who function efficiently – and holding on to them – is crucial to the growth of his practice.

Cooke Financial had around $2 billion in assets from around 720 clients as of 2018, and around 97% of the assets are charged on a fee-based basis “so when markets grow, assets grow.”

But “many” of the firm’s clients are “a little bit older, so many are taking distributions,” according to Cooke.

“Within our $2 billion [client asset] base, we probably have to replace between $25 to $50 million a year just to break even on current assets under management,” he adds.

Cooke Financial has thus far attracted new clients “one hundred percent” from client referrals, according to Cooke, who recognizes that the firm shouldn’t depend solely on those client referrals.

“We think we can be so much better on marketing,” he says. “We don’t do any substantial form of marketing and we think that’s a big opportunity for the future.”

Christopher Cooke

Cooke is counting on new developments within its group structure to help boost marketing efforts. Cooke Financial is part of the financial advisory group David A. Noyes & Co., which launched the hybrid RIA and broker-dealer network Sanctuary Wealth Partners in May of last year. Cooke Financial is now also a part of Sanctuary.

Meanwhile, Cooke says fee pressures are among the common grumblings in the financial advisory industry but agrees such pressures can be managed.

“The nature of a great competitive environment is there will always be a pressure to be competitive on fees and deliver greater service. We are delivering a good balance of those two, and I do not feel undue pressure at this time,” Cooke says.

Cooke says that while his firm has never been the lowest on the industry fee scale, “we’ve never been a high-fee group either,” he says.

“I don’t want to be a deep discount retailer like Dollar Tree. I want to deliver Ritz Carlton service levels but at a very median price,” Cooke says.

Louis Cannataro

For Cannataro, the key to building his practice is keeping manpower costs manageable. Cannataro Park Avenue’s strategy is to build advisors from scratch – hire them and then have them undergo a four-year advisor training track. The training involves spending time in the firm’s financial planning, insurance and investment divisions. This helps manage costs while ensuring advisors are well-entrenched within the company’s culture, according to Cannataro.

“As our practice grows, we need to keep providing good advice and service to our growing number of clients, so we simply need more people,” Cannataro says.

The firm prefers homegrown advisor talent “because then they’re steeped in the culture of how we approach the planning,” Cannataro says. “No matter which advisor you speak with,” you’re going to hear the same thing.

Cannataro notes that questions about fees have increased mainly because there’s been a greater awareness of them among clients. Around 70% of the firm’s client assets are charged on a fee basis, he says.

“Clients now will call asking about fees because everybody is paying attention to it,” Cannataro says. “I simply lift the hood for them. We here have been paying attention to fees before it became fashionable.”

Cannataro says as long as advisors can explain and justify their fees to clients, it shouldn’t be a concern.

“When our clients would call [to ask about fees], first we would look and see what we were charging and then we look at what we’re delivering. And I’m not just talking about returns, it’s not just asset allocation, what the robots can do now. It’s all of the aspects of the planning – the defense and the offense,” he says.

Cannataro believes the real competition in the broker industry is delivering investment returns.

“The competition typically comes in on the investment side. Some will say ‘we’re gonna get you better returns, we’re gonna be more tax efficient, we have some super-duper philosophy that’s going to outsmart the market,'” he says.

Firms with a solid and repeatable investment strategy for their clients shouldn’t be afraid of “that kind of competition,” Cannataro says. “That’s all smoke and mirrors anyway. If somebody says they can figure out the market completely, then they would be running the market.”

The latest available data from self-regulator Finra shows that the total income of registered broker-dealer firms has been on the rise even if the number of firms and registered reps have been on the decline.

The combined pre-tax net income of 3,726 registered broker-dealer firms reached $38.2 billion in 2017, up 48% from $25.7 billion reported by 4,146 registered firms in 2013.

The total number of registered reps in 2017 was 630,132 – fairly flat compared with 630,796 in 2013. But a deeper dive into the data shows that the number of registered reps has generally been declining – peaking at 672,688 in 2007 and at its lowest at 629,518 in 2011.