Analysis of income, age and length of service in the brokerage industry
How are stockbrokers really doing? Most articles about the financial industry usually start with â€œThe last three years have been badâ€¦â€ You read about brokerages laying off thousands and lots of reps leaving the business. Yet, most stockbrokers and their employers are still making money and paying the bills. According to the following study, the average income of registered representatives is $125,112 per year. Their average age is 43 and they have spent on average 11 years in the business.
There has been tremendous change in the brokerage industry and the country. Predictions of on-line brokerages putting full service firms out of business seemed to fizzle with the slowing of the Internet boom. Many firms merged or evolved to survive and take advantage of changing demographics and economies.
Read on to find out who is making the big bucks, and learn what the breakdown of the brokerage industry really is.
How did we do it? The information was provided by Select Information Exchange, a company which has maintained a database of registered representatives throughout the United States. The information was based initially on State registration information and then had estimated income information appended to the file. The number of reps at individual companies is overstated by an estimated 10 to 20 percent. The geographical report is based on home addresses rather than work addresses. Therefore a broker living in northern New Jersey but working in New York would be counted in northern New Jersey, not New York. For the purposes of this report, incomes above $250,000 were considered to be $250,000 and incomes under $50,000 were omitted. The income averages thus derived are closer to a median than a mean. Furthermore, the incomes are based on estimated household income as opposed to individual income. Hence a firm where the brokers are primarily spouses of neurosurgeons will come out looking much better than a firm where the brokersâ€™ spouses are unemployed. The averages created for age and years in business are mean averages of the ages/years in business of the reps in a category. There is less scope for controversy in these numbers. Keep in mind that since it is possible that a broker may have run off and joined the circus for five years and still kept his/her license. Inevitably they will still be counted as having worked in the brokerage industry for those years. Averages were only created where 20 or more data points were available.
Beauty fades with age. Income, thankfully, does not.
The following chart and accompanying table shows how the average income of a rep grows over time. There are several factors, which would lead to this. Those being: 1. The worst performing brokers often leave the business. 2. The number of accounts managed by a broker will tend to increase, and 3. The individual wealth represented by each of those accounts increase in value over the years.
What is startling is not that income grows, but that the rate of growth tends to slow. The greatest growth occurs in the first decade; the next decade brings moderate growth, and over the remaining decades a plateau seems to occur where growth is minimal on a percentage basis.
Remember that we count all registered reps. What this means is that the numbers here are larger than the actual number of producers. These figures include sales assistants and other support people who happen to be registered for one reason or another. Exactly how much larger these numbers are is hard to say, but most would agree Merrill is bigger than Ed Jones. What might be surprising is how big Ed Jones has gotten.
If you take a trip down memory lane, youâ€™ll remember when names like Kidder and Shearson and Alex Brown were all strong and proud, and when E.F. Hutton spoke it wasnâ€™t about flying kites. This was a time when the top brokerage firm â€”Merrill â€” had about 12,000 reps, George Bush was president, we were in a recession, and real estate was fragile. We have come a long way. For one, Merrill is no longer the largest employer of registered reps in the country. That position is now occupied by PFS Investments.
PFS, also known as Primerica Financial Services â€” which, as part of Citigroup includes other notables like Smith Barney and Citi Investment Services â€” was started in 1977 focusing on the middle-income-families market, selling term life insurance.
Today Primerica serves more than six million clients in North America. In addition to life insurance, it offers debt consolidation loans, first mortgages, variable annuities, long term care, retirement savings vehicles, and programs to fund education expenses.
COMPANY AVG INCOME # of REPS
PFS INVESTMENTS INC. $102,983.13 29,500
MERRILL LYNCH, PIERCE, FENNER $133,044.38 24,263
MORGAN STANLEY DW INC. $129,711.67 17,807
UBS PAINEWEBBER INC. $137,567.68 13,883
AMERICAN EXPRESS FINANCIAL ADVISORS $116,702.80 12,839
SALOMON SMITH BARNEY INC. $137,036.72 12,140
FIDELITY BROKERAGE SERVICES $109,324.42 11,805
A. G. EDWARDS & SONS, INC. $122,324.74 10,886
EDWARD JONES $105,566.31 10,775
CHARLES SCHWAB & CO., INC. $115,533.51 10,767
*WACHOVIA SECURITIES, INC. $124,445.66 9,531
*PRUDENTIAL SECURITIES INCORPORATED $135,004.85 9,487
COMPANY AVG INCOME # of REPS
PRUCO SECURITIES CORPORATION $117,087.88 9,192
METLIFE SECURITIES INC. $118,009.02 9,161
NYLIFE SECURITIES INC. $120,020.00 7,628
BANC OF AMERICA INVESTMENT SERVICES $125,883.44 5,837
STATE FARM VP MANAGEMENT CORP. $115,373.07 5,806
AXA ADVISORS, LLC $128,079.53 5,474
MML INVESTORS SERVICES, INC. $128,985.57 4,904
LINSCO/PRIVATE LEDGER CORP. $125,580.06 4,712
ALLSTATE FINANCIAL SERVICES $117,865.64 4,295
NORTHWESTERN MUTUAL INVESTMENT $126,241.06 4,052
RAYMOND JAMES FINANCIAL SERVICES $121,960.13 4,004
NEW ENGLAND SECURITIES $125,281.43 3,898
â€¢ We kept Prudential and Wachovia separate to highlight the significant difference in average income between those two groups of registered representatives.
Energy problems, natural disasters and political upheaval are not enough to keep California brokers from ranking high on the money list â€” coming in just behind the brokers of Fairfield, CT. In fact, 3 out of the top 4 cities are on the West Coast, which seems to dominate the upper end of the list. San Francisco is not a big surprise. Those poor dot comers still need someone to handle whatâ€™s left of their vast fortunes. What may come as a big surprise, however, is that New York City brokers earn below the nationâ€™s average.
The statistics cover over half of the reps for which we have income data (approx 57%) and the average income for the metro breakout was several thousand greater than the average throughout the U.S. â€” working in metro areas is still much more profitable than working in rural regions.
We used work scfs (first 3 digits of a zip code) for the selection. Suburbs in Northern NJ, Connecticut and Orange County are included in this list, as there are many jobs located in these areas. Northern NJ would be the third largest (number of jobs) financial market if it were counted on its own.
City/Metro Area Avg. Income
Fairfield, CT $178,067
San Francisco $162,690
Orange County $159,703
Los Angeles $154,941
Northern NJ $145,673
San Diego $137,570
Washington, DC $136,025
West Palm/Boca FL $126,812
Minneapolis/St. Paul $126,006
St. Louis $123,845
New York City $123,238
Charlotte, NC $121,659
Pittsburgh, PA $116,118
Kansas City/Mo.,Ks. $114,199
New Orleans $110,374
Ft. Worth $109,411
San Antonio $103,490
Salt Lake City $99,187
Does It Pay To Commute?
Should you take the plunge and make a move? Or is it better to get a desk in a local office? Using a New York City perspective, you can easily make the case for commuting. A regular 750-square- foot one-bedroom apartment in Manhattan sells for anywhere from $350,000 to $750,000. That same money could purchase a three-bedroom home in several nice areas within an hourâ€™s commute of the city.
If you are looking at commuting from New Jersey, an average of $12,000 per year may come your way. Commute from Connecticut to the Big Apple and you may be looking at an extra $27,000 per year on average. Obviously, there are other factors involved, but there is no denying that the big clients tend to be found â€” either working or livingâ€” in the large metro areas. So hop on that train with a smile in the morning or, better yet, lease a prestigious automobile and park it in the closest expensive lot.
Reps who live in Northern NJ and work in NYC make on average $155,311. Reps who live in Northern NJ and work in Northern NJ make on average $141,690.
Reps who live in CT and work in NYC make on average $181,733. Reps who live in CT and work in CT make on average $138,555.
Do Licenses Held Make A Difference? When sorting the data by tests held the average income breaks out strongly in favor of Commodities brokers (S3). You would expect managers (S8) to make a higher average compared to the median income of the producers they manage. Principals of firms (S24) are also expected to outperform the masses. If you are wondering whether that S65 is worth the time the answer is yes. The Uniform Investment Adviser holders have a higher average income then their Series-7-only brethren. Although one must note that S65 holders are a little bit older and have a few more years in the business. S1 Reps, for those who do not know, are grandfathered Reps into the S7. We separated them out to show that, as would be expected, S7s in the business for many years would continue to see an increase in income.
License Avg. Income Avg. Yrs. in Bus. Avg. Age
S3 $148,717 16 45
S8 $141,188 18 47
S24 $140,021 15 46
S1 $139,121 33 62
S55 $136,634 11 37
License Avg. Income Avg. Yrs. in Bus. Avg. Age
S65 $133,306 13 45
S7 $129,251 11 42
S9 $124,642 10 39
S66 $119,051 5 38
S6 $114,842 9 45
S3 National Commodity Futures Exam
S4 Registered Options Principal Exam
S5 Interest Rate Options Exam
S6 Investment Company Products/Variable Contracts Representative Exam
S7 General Securities Representative Exam
S9 General Securities Sales Supervisor - Options Module
S10 General Securities Sales Supervisor - General Module
S11 Assistant Representative - Order Processing Qualification Exam
S12 NYSE Branch Manager Examination
S15 Foreign Currency Options Qualification Exam
S17 Limited Registered Representative Exam
S22 Direct Participation Programs Representative Exam
S24 General Securities Principal Exam
S26 Investment Company Products/Variable Contracts Principal Exam
S27 Financial and Operations Principal Exam
S28 Introducing Broker/Dealer Financial and Operations Principal Exam
S30 Branch Managers Exam - Futures
S31 Futures Managed Funds Exam
S32 Limited Futures Exam - Regulation
S33 Financial Instruments Exam
S37 Canada Module of the General Securities Reg. Rep. Exam (with options questions)
S38 Canada Module of the General Securities Reg. Rep. Exam
S39 Direct Participation Programs Principal Exam
S42 Registered Options Limited Representative Exam
S47 Japan Module of the General Securities Representative Exam
S52 Municipal Securities Representative Exam
S53 Municipal Securities Principal Exam
S55 Limited Representative-Equity Trader Exam
S62 Corporate Securities Limited Representative Exam
S63 Uniform Securities Agent State Law Exam
S64 Uniform Real Estate Securities Exam
S65 Uniform Investment Adviser Law Exam
S66 Uniform Combined State Law Exam
S91 FDIC Examiner Technical Evaluation
Their average age is 47 and they have spent on average 16 years in the business. 79% are males and 23% work for the wire houses. Because our cut-off is at $250,000 in household income, we are mixing some multi million-dollar producers with the plain old, run-of-the-mill, successful brokers. But donâ€™t be mistaken: What we are calling a big producer represents the top 1.87% of all registered representative in the nation. They certainly are a rare breed.
As you can see in the charts (at right), the wire houses shine when it comes to the heavy hitters. Wire houses account for 14% of the total reps in the U.S., but they hold over 23% of the Big Guns. When it comes to attracting the very wealthy, established brands make an impact.
Women in the workplace
There are approximately 110,000 female registered representatives, which represent about 17% of the industry. On average they are slightly older than their male counterparts (about 1.5 years) and have been in the business for slightly less time (approximately one year less). There has been little change in the percentage of women in the business over the last ten years.
Average income for women
Average age for women
Average years in business for women
There are 63,907 female Series 7 reps with an average income of $123,417/year.
The Series 7 male reps average $132,031.
Over time, both men and women in the business generate more income for themselves,
but men seem to disproportionately accelerate their income.
5 years in the business female series 7 average $115,639/year
5 years in the business male series 7 average $119,649/year
15 years in the business female series 7 average $130,788/year
15 years in the business male series 7 average $142,899/year
firms with the highest average income
Will Jefferies & Company please come forward? With an average income per rep of $172,492, Jefferies & Company topped the list. Founded in 1962 and based in New York City, Jefferies pioneered equity trading in the third market â€” the trading of exchange-listed equities for institutional investors on an over-the-counter basis. Today, Jefferies is a top trader of equity, high yield and convertible securities, and is a full-service investment bank serving the middle market. With just shy of 600 registered reps, Jefferies would fall into the boutique category. So, our hats are off to the owners and management of Jefferies & Company. If we gave awards, we would be honored to bestow one upon you.
It only makes sense that most of the top companies on this list would lean more towards institutional rather than retail brokerage, however it would be unfair to omit the firms that are mostly institutional because it would be difficult to determine where to draw the line.
You wonâ€™t shock anyone with news that a wire house broker makes more on average then the independent broker, however it is interesting to note that the numbers are closer than one would expect. The difference between the average Merrill and the average Linsco is almost $10,000 per year. Considering the amount of good will attributed to the Merrill brand you might expect a wider gap. The successful independents make a point of building brand awareness amongst fellow brokers. However, on the consumer level they spend far less, if anything, on pitching the investing public.
Admittedly, the dynamic is more complicated than that. Independents have on average more years in the business. For example: The average Merrill broker is 43 years old and the average Linsco broker is 47. This is due to several factors, the main one being that wire houses hire and train new brokers as part of their business formula; independents attract veterans who are looking for a bigger payout on their book.
To test that theory, we did the same study omitting new recruits. When we compared the average incomes of Merrill brokers versus Linsco brokers in the business for five years or more, the gap does not widen significantly. A Merrill broker (with five years experience, or more) has an average income of $137,458, versus $127,335 for a Linsco broker with the same experience. As it turns out, the new recruits play a small part in swaying the averages.
Firms like Goldman, Jefferies, Bear Stearns and UBS Warburg, with a higher percentage of institutional clients, will tend to have higher average incomes for the brokers they employ.
COMPANY AVG. INCOME
JEFFERIES & COMPANY, INC. $172,492
UBS WARBURG LLC $168,624
BEAR, STEARNS & CO. INC. $167,781
CREDIT SUISSE FIRST BOSTON CORP. $165,605
LEHMAN BROTHERS INC. $156,643
DEUTSCHE BANK SECURITIES INC. $155,837
LAZARD FRERES & CO. LLC $155,126
MORGAN STANLEY & CO., INCORPORATED $152,830
CIBC WORLD MARKETS CORP. $150,798
GOLDMAN, SACHS & CO. $150,794
BANC OF AMERICA SECURITIES LLC $150,406
FAM DISTRIBUTORS, INC. $148,953
J.P. MORGAN SECURITIES INC. $148,788
DONALDSON, LUFKIN & JENRETTE $146,550
SUNTRUST CAPITAL MARKETS, INC. $144,182
FINANCIAL WEST GROUP $142,995
RYAN BECK & CO. $141,807
WS GRIFFITH SECURITIES, INC. $139,961
RBC DAIN RAUSCHER INC. $139,637
NFP SECURITIES, INC. $139,365
NORTHERN TRUST SECURITIES, INC. $138,973
UBS PAINEWEBBER INC. $137,568
SALOMON SMITH BARNEY INC. $137,037
CAPITAL ANALYSTS, INCORPORATED $136,887
NATHAN & LEWIS SECURITIES, INC $136,151
PRUDENTIAL INVESTMENT MANAGEMENT $135,928
SCHONFELD SECURITIES, LLC $135,602
FAHNESTOCK & CO. INC. $135,570
*PRUDENTIAL SECURITIES INCORPORATED $135,005
SENTRA SECURITIES CORPORATION $134,633
SPEAR, LEEDS & KELLOGG, L.P. $134,577
JANNEY MONTGOMERY SCOTT LLC $134,562
ADVEST, INC. $133,973
FIRST ALLIED SECURITIES, INC. $133,607
THE ADVISORS GROUP, INC. $133,244
MERRILL LYNCH, PIERCE, FENNER $133,044
PARK AVENUE SECURITIES LLC $132,585
U.S. BANCORP PIPER JAFFRAY INC $132,479
LEGG MASON WOOD WALKER, INCORP $131,951
BROOKSTREET SECURITIES $131,889
NATIONAL PLANNING CORPORATION $131,628
SCUDDER INVESTOR SERVICES, INC $131,497
MUTUAL SERVICE CORPORATION $131,410
ROYAL ALLIANCE ASSOCIATES, INC $131,168
LINCOLN FINANCIAL ADVISORS CORPORATION $130,753
CAL FED INVESTMENTS $130,652
CENTAURUS FINANCIAL, INC. $130,294
MORGAN KEEGAN & COMPANY, INC. $129,992
COMMONWEALTH FINANCIAL NETWORK $129,761
MORGAN STANLEY DW INC. $129,712
WELLS FARGO INVESTMENTS, LLC $129,536
FINANCIAL NETWORK INVESTMENT $129,458
STEPHENS INC. $129,341
C. J. M. PLANNING CORP. $129,307
IFG NETWORK SECURITIES, INC. $129,225
MML INVESTORS SERVICES, INC. $128,986
TOWER SQUARE SECURITIES, INC. $128,828
HORNOR, TOWNSEND & KENT, INC. $128,585
PRIME CAPITAL SERVICES, INC. $128,333
AXA ADVISORS, LLC $128,080
HOCHMAN & BAKER SECURITIES, INC. $127,821
WM FINANCIAL SERVICES, INC. $127,768
SECURITIES AMERICA, INC. $127,731
JEFFERSON PILOT SECURITIES CORPORATION $127,554
SECURIAN FINANCIAL SERVICES, INC. $127,263
ROBERT W. BAIRD & CO. INCORPORATED $127,113
1717 CAPITAL MANAGEMENT COMPANY $127,033
QUEST CAPITAL STRATEGIES, INC. $126,822
MFS FUND DISTRIBUTORS, INC. $126,801
ALLMERICA INVESTMENTS, INC. $126,621
FIRST MONTAUK SECURITIES CORP. $126,522
1ST GLOBAL CAPITAL CORP. $126,502
SECURITIES SERVICE NETWORK, INC. $126,448
CITICORP INVESTMENT SERVICES $126,403
NORTHWESTERN MUTUAL INVESTMENT $126,241
BANC OF AMERICA INVESTMENT SERVICE $125,883
LINSCO/PRIVATE LEDGER CORP. $125,580
H. BECK, INC. $125,541
TRANSAMERICA FINANCIAL ADVISOR $125,492
EQUITY SERVICES, INC. $125,343
NEW ENGLAND SECURITIES $125,281
STIFEL, NICOLAUS & COMPANY, INC $125,161
RAYMOND JAMES & ASSOCIATES, INC $125,092
WACHOVIA SECURITIES FINANCIAL $124,759
FSC SECURITIES CORPORATION $124,543
MCDONALD INVESTMENTS INC. $124,498
WACHOVIA SECURITIES, INC. $124,446
WASHINGTON SQUARE SECURITIES $123,888
H.D. VEST INVESTMENT SECURITIES $123,688
DREYFUS SERVICE CORPORATION $123,623
SIGNATOR INVESTORS, INC. $123,315
SCOTT & STRINGFELLOW, INC. $123,191
VESTAX SECURITIES CORPORATION $123,145
MONY SECURITIES CORPORATION $122,793
WALNUT STREET SECURITIES, INC. $122,730
ING FINANCIAL ADVISERS, LLC $122,377
A. G. EDWARDS & SONS, INC. $122,325
TERRA SECURITIES CORPORATION $122,275
RAYMOND JAMES FINANCIAL SERVICE $121,960
CADARET, GRANT & CO., INC. $121,502
CAMBRIDGE INVESTMENT RESEARCH $120,956
LEGACY FINANCIAL SERVICES, INC $120,897
ESSEX NATIONAL SECURITIES, INC $120,864
LIBERTY FUNDS DISTRIBUTOR, INC $120,702
SWS FINANCIAL SERVICES $120,485
NYLIFE SECURITIES INC. $120,020
BENEFITSCORP EQUITIES, INC. $119,939
A I M DISTRIBUTORS, INC. $119,729
MULTI-FINANCIAL SECURITIES CORP $119,318
SUNAMERICA SECURITIES, INC. $119,282
INVESTACORP, INC. $119,124
FRANKLIN/TEMPLETON DISTRIBUTOR $118,648
NATIONWIDE SECURITIES, INC. $118,239
PMG SECURITIES CORPORATION $118,169
QUICK & REILLY, INC. $118,098
METLIFE SECURITIES INC. $118,009
ALLSTATE FINANCIAL SERVICES $117,866
LOCUST STREET SECURITIES, INC. $117,747
PRINCOR FINANCIAL SERVICES CORP $117,705
HSBC BROKERAGE (USA) INC. $117,333
SOUTHTRUST SECURITIES, INC. $117,255
J.P. TURNER & COMPANY, L.L.C. $117,188
PROEQUITIES, INC. $117,141
PRUCO SECURITIES CORPORATION $117,088
NATIONWIDE INVESTMENT SERVICES $116,940
SIGMA FINANCIAL CORPORATION $116,826
AMERICAN EXPRESS FINANCIAL ADVISORS $116,703
INVESTORS CAPITAL CORP. $116,619
THE O.N. EQUITY SALES COMPANY $116,558
THE LEADERS GROUP, INC. $116,476
VAN KAMPEN FUNDS INC. $116,387
FIDELITY INVESTMENTS INSTITUTIONAL $115,788
ONEAMERICA SECURITIES, INC. $115,754
J.J.B. HILLIARD, W.L. LYONS, INC. $115,562
CHARLES SCHWAB & CO., INC. $115,534
FISERV INVESTOR SERVICES, INC. $115,439
STATE FARM VP MANAGEMENT CORP. $115,373
AMERICAN GENERAL SECURITIES INC. $115,361
ADVANTAGE CAPITAL CORPORATION $115,129
FFP SECURITIES, INC. $114,704
SAMMONS SECURITIES COMPANY, LLC $114,626
SUNTRUST SECURITIES, INC. $114,536
MONEY CONCEPTS CAPITAL CORP $114,456
GUNNALLEN FINANCIAL, INC $114,423
AMERITAS INVESTMENT CORP. $114,043
SAFECO INVESTMENT SERVICES, INC $114,010
UVEST INVESTMENT SERVICES $113,811
USALLIANZ SECURITIES, INC. $113,784
H.D. VEST INVESTMENT SERVICES $113,692
VALIC FINANCIAL ADVISORS, INC. $113,121
UNITED SECURITIES ALLIANCE, INC $113,095
AMSOUTH INVESTMENT SERVICES, INC $113,037
CAPITAL BROKERAGE CORPORATION $112,906
HARRIS INVESTOR SERVICES LLC $112,765
CHASE INVESTMENT SERVICES CORP. $112,677
INTERSECURITIES, INC. $112,662
SII INVESTMENTS, INC. $112,204
WOODBURY FINANCIAL SERVICES, INC $112,137
INVEST FINANCIAL CORPORATION $111,693
WADDELL & REED, INC. $111,287
SUNSET FINANCIAL SERVICES, INC. $110,893
TIAA-CREF INDIVIDUAL & INSTITUTIONAL $110,886
MUTUAL OF OMAHA INVESTOR SERVICES $110,725
CITISTREET EQUITIES LLC $110,669
FIRST COMMAND FINANCIAL PLANNING $110,507
AMERICAN FAMILY SECURITIES, LLC $110,484
LUTHERAN BROTHERHOOD SECURITIES $110,392
CIGNA FINANCIAL SERVICES, INC. $110,030
FIDELITY BROKERAGE SERVICES LLC $109,324
TD WATERHOUSE INVESTOR SERVICE $109,202
WORLD GROUP SECURITIES, INC. $108,728
COMPASS BROKERAGE, INC. $108,549
FARMERS FINANCIAL SOLUTIONS, LLC $108,030
H&R BLOCK FINANCIAL ADVISORS $107,907
SECURITIES MANAGEMENT & RESEARCH $107,741
VANGUARD MARKETING CORPORATION $107,532
BANC ONE SECURITIES CORPORATION $107,295
NATCITY INVESTMENTS, INC. $106,822
CUNA BROKERAGE SERVICES, INC. $106,794
FORESTERS EQUITY SERVICES, INC. $106,551
M&I BROKERAGE SERVICES, INC. $105,981
AAL CAPITAL MANAGEMENT CORPORATION $105,900
U.S. BANCORP INVESTMENTS, INC. $105,697
FIFTH THIRD SECURITIES, INC. $105,685
EDWARD JONES $105,566
AMERICAN CENTURY INVESTMENT SERVICES $105,270
FIRST INVESTORS CORPORATION $105,115
FRANKLIN FINANCIAL SERVICES CORP $104,640
T. ROWE PRICE INVESTMENT SERVICES $103,810
STRONG INVESTMENTS, INC. $103,125
PFS INVESTMENTS INC. $102,983
BB&T INVESTMENT SERVICES, INC. $102,300
THRIVENT INVESTMENT MANAGEMENT $101,376
THE HUNTINGTON INVESTMENT COMP $101,339
E*TRADE SECURITIES LLC $101,235
SOUTHERN FARM BUREAU FUND DIST $99,545
USAA INVESTMENT MANAGEMENT COM $99,068
PFIC SECURITIES CORPORATION $98,522
PRIMEVEST FINANCIAL SERVICES, $97,891
EQUITRUST MARKETING SERVICES, $87,342
N.I.S. FINANCIAL SERVICES, INC $79,893
* Now part of Wachovia
Whatâ€™s your Firm Worth?
By Rogan LaBier
Nobody in this business needs to be reminded that the past few years have been brutal. Between the market action, scandals and new compliance requirements, many owners are
wondering what their practices are worth. Every day, without exception, I get calls from old acquaintances or new contacts asking this question. Regardless of whether they are willing â€” or even interested in â€” selling, the curiosity remains. Somewhere, at some deep level, these guys are just plain tired, but still fighting the good fight. In many cases, I am glad to be able to deliver some good news. Although the market has been as bad as it has, there has arguably in our lifetime never been a better time to sell a firm or practice. There are a number of conditions that have coincided to make this sellersâ€™ market happen.
The historical context interests me a great deal, however, I find that most owners are less interested in â€œwhyâ€ than in â€œhow muchâ€. In this article I will address the â€œhow much.â€ You may well be pleasantly surprised at the conclusion. And please keep in mind â€” as CEO of Broker Dealer Market, a broker/dealer acquisitions intermediary, I see where deals actually transact. This is no theoretical exercise, but one based on current market conditions, which I hope will give you some sense of where practices are currently trading, and more specifically what you might expect if you went on the offer.
There are nearly as many models for valuing a practice as there are different types of businesses. Sure, you can say a firm is a â€œfinancial planningâ€ firm, or that a firm is a standard â€œindependent repâ€ house. However, there are financial planning firms that sell a majority of stocks and bonds, and there are firms that sell only packaged products. And although different firms may produce similar numbers in terms of net, the fact that the revenue streams are derived from different products is significant. These differences must be taken into account when valuing a practice.
Where the money comes from is vitally important, because it speaks directly to one of the most important issues to consider when valuing a practice: transferability of assets. There are several other major factors that must be looked at, as well, and these in turn have certain indicators that speak to valuation. It is important to note that every firm is different, and requires an individual look, rather than a simple â€œX % of Assets Under Managementâ€ approach that is in favor today at some of the less thorough firms.
In short, there is no one- size-fits-all for effective valuations. There are indications of worth, but remember, broker dealers exist in a world where valuation doesnâ€™t mean everything; in the end, assets trade where they trade. In final analysis, one needs to look at individual transactions and where they really execute â€”as opposed to theoretical value. And there, trends can be seen.
So a current, in-depth transactional knowledge is also critically important in valuing a practice. A valuation should fairly anticipate the price that the assets may
fetch at the current market in a reasonable timeframe. Otherwise, what utility will the valuation serve? Again, because the market is always in motion, it is important for anyone providing the valuation to have a firm understanding of where the market is currently trading.
In the latest bubble, for example, individual retail investors werenâ€™t the only folks fooled by runaway prices. The sale of CyberCorp to Schwab for $488 Million in 1998 can be argued as pure folly by almost any kind of standard valuation. But it is important to note, that even though that transaction may have marked the high water mark of irrational pricing, Schwab had its reasons, and to date has made it work.
On the other hand, one needs to have an appreciation of the current market so as not to be duped into exaggerated expectations by CyberCorp-style transactions. One can talk about a seemingly outrageous price all day, but the transaction was a product of its time and the strategic plans of the buyer. Just because Cyber got a massive price at market (and that Schwab has made it work) does not imply that any other firm will. Particularly in light of market performance since the bubble burst.
The following are some terms to become familiar with. Keep in mind, though, that there are many other factors that come into play.
Net Before Owner Take-Out â€” This is an important concept. It reflects the number that the owner could arguably take out in a given year. This would reflect the gross revs, minus payouts, expenses, and extraordinary capital expenditure. It is a fact that many firms show a net zero at the end of the year, and yet the owner may not have â€œtaken outâ€ what he could have, in cash. There are many ways to extract cash beyond simple salary; car leases, office retreats, etc are all the sort of things that must be argued and explained. I once had a firm that the owner insisted was netting him approximately 3 million a year, but the audited financials showed an insignificant loss. He had hired an expensive design firm to redecorate the office (he wanted a more pleasant environment in which to spend his days) and also had several car leases, etc. Without making any judgment about his choices, it is well to follow the money, and consider what is extractable to the owner (or to a new owner) on an annual basis. Of course a certain amount of capital expenditure will be necessary in every given year. It is important to distinguish between the predictable, necessary expenses and the extraordinary.
Product Mix â€” The consistency of the product mix and the â€œflavorâ€ of the firm are important considerations. For example, a firm with salaried reps selling packaged products on a fee basis may have a certain net â€” but so might a company selling the same products, with commissioned reps. The revenues will be easier to predict with the fee based firm since they are recurring. The recurring factor speaks directly to the concept of transferability. Itâ€™s easy to imagine capturing those assets and making that fee year after year.
In the market of financial services practices and firms, higher transferability of revenues correlates directly to a higher price. But you also must take into account the longevity of the client base, age range and the personality of the owner. In the case of a dynamic owner, who is a true â€œcult of personality,â€ and therefore has an extremely loyal client base â€” who has been with the firm a very long time on average â€” you may be surprised to find that this could have a negative effect on the actual transaction price. The reasons are somewhat plain: this individual makes a very distinct mark on his firm. And that same client base, which is so loyal to him, may run for the door when somebody else takes over.
Profit Centers: Sometimes it is not altogether obvious just where the profits come from. For example, there are independent rep firms that have identical rep numbers, product mix and payouts; yet one is highly profitable and the other runs at a loss. There may be more independent rep houses running small profits than there are highly profitable firms. It is well to note this unusual characteristic of high-payout independent rep firms. It is not unusual for these firms to have a relatively high gross, and a very tiny net to the owner. With operating profits running on such a small margin, based on a small percentage of the repâ€™s transactions, one should be aware of the risk associated with this business.
However, there are high-payout independent rep firms that are tremendously profitable. These profitable firms seem to follow a similar model. Rather than relying on a small percentage of commissions, they tend to make money in an unexpected way. The successful independent rep firm seems to negotiate superior ticket charges from the clearing company, and then marks the ticket charge up substantially to the rep. In this scenario the margins are much higher â€” and predictable to boot. All other costs to the broker tend to be marked up as well; even E&O insurance.
Location is important too â€” If the firm is in a highly urbanized area and tends to service sophisticated clients who are used to having choices, you may well see a higher price. Conversely, in a truly rural environment â€” where the clients are not used to having choices, and furthermore are very comfortable dealing with the rep, who is a prominent member of the local community â€” you may well see a somewhat discounted transaction price. Again, it is necessary to consider transferability. I once had a client in a small Midwest town with a great book. However, the place was a true one stop light town miles from the nearest city. His client base had been with him 19 years, on average. Though the book was a traditional retail full service product mix, and reasonably priced, it was a difficult sell. The reason was that any estimate of transferability left one with the impression that the client base would rather simply close their accounts rather than go with a rep from a far away state â€” let alone New York or Florida. And there were no reps within a 50-mile radius who could afford the transaction. Eventually, the practice did sell, albeit for a price well less than it would have fetched had it been located in a highly urbanized center â€” or had the clients been less attached to the rep.
Total Assets Under Management â€” It is important to note here that significantly large books of assets can generate premium prices. It is also important to consider that small books may sell at a perceived discount. Part of the reasoning for this is the hassle factor. There is a substantial legal cost in vetting any potential transaction. And then of course, there is the contract itself. And the recordkeeping and monitoring of performance during any pay-out period. Consequently, buyers seem ready to pay more per dollar under management. Imagine if your plan was to acquire a total of $100MM. If you did this in one transaction, there would be significantly less hassle and cost then buying and monitoring twenty transactions of $5MM. Of course, the type of assets under management will effect the price as well, for the reasons above.
Terms Of the Offer â€” This really has nothing to do with the valuation of the practice per se, but it is an important tactical consideration when contemplating selling your practice. Typically, buyers want to put as little down as possible, and to stretch the transaction over as long an â€œearn outâ€ period as possible. Of course, no seller in his right mind will want to pay somebody to buy his book, and so, sellers typically want the highest percentage of cash up front with a short earn-out period.
At Broker Dealer Market, for example, we vet potential buyers to the following conditions (among many other factors): They must have the cash available to put at least 50% down and close out the rest within 12 months. This will help determine the size of firm that they can consider.
Of course, in practice, many owners do not want such a high percentage down, nor to close the transaction out within 12 months. Because the â€œearn-outâ€ portion of the transaction is typically tied as a ratio to a benchmarked performance â€” both in terms of total assets under management and in terms of production â€” owners are currently finding significant potential upside in stretching the transaction over a longer period.
Sellersâ€™ arguments for now being willing to work the â€œearn-outâ€ over a longer time-frame usually have something to do with market timing. They figure that the market is just coming out of the bottom of the business cycle, and so there is the potential for very strong growth in the near future. In order to potentially see a substantially higher dollar value for their transaction, they are in essence betting that the market will improve over the next three years, and with it, performance of the assets. So many sellers are currently willing to talk about longer earn-out timeframes, since they believe that this will allow them to participate in growth. Of course, the potential to add a premium for growth to the back end of a transaction is one of the reasons why this is arguably a good time to sell. In any case, it is good to consider the structure of any potential sale; there may be ways to increase the price while at the same time providing comfort to the buyer.
Three Years Audited Performance â€” Though it may seem cruel, most potential buyers will want to see the latest three year returns for the firm as part of their due diligence and in creating an offer/valuation. Unfortunately for owners, the past three years have been some of the toughest that the market has ever seen. But, it is what it is, and there is nothing to be done to change it â€” save waiting another three years and hoping that the market improves and that buyers are still around at that point in the cycle. Given that there are so many buyers right now, and that demand is so high, it might make more sense to consider structuring a current sale to capture that future growth potential, rather than waiting.
Recent Price Data â€” The issues discussed above by no means give a complete picture of what will go into a typical valuation. But it is possible to anticipate a range from a combination of these factors. Again, a valuation is nothing but an academic exercise if it does not adequately anticipate where the assets will likely trade. Broker Dealer Market has tracked all of this data continuously for over 15 years. Currently, there are some important statistics:
Over the previous three quarters, the mean at which assets and firms have traded is approximately 1.84 times â€œNet Before Owner Takeout.â€ This number reflects practices in rural areas as well as highly urbanized areas; transaction-based revenues and entirely fee-based revenues; high-payout independent rep firms as well as firms where the reps are on salary and the firm owns all the assets. This number, the average of all transactions, is useful only to a degree.
On the very bottom of the price curve are owners looking to get out quickly. These types of transactions, where owners are just â€œhitting the bidâ€ tend to skew the data. Also well into the lower end were the sort of practices where the assets were small, not highly transferable, and the revenues were by no means recurring. The low end went as low as 1.1 times â€œNet Before Owner Takeoutâ€.
On the higher end were highly urbanized, high net worth, fee-based practices with large dollar assets under management, where the company was known better than a particular rep. Of course, some practice owners will take their time, waiting for the right buyer to come along. To some, dollars received is most important, but to others the buyerâ€™s philosophy and record was of much more importance to the buyer. There were also firms with strategic plans to acquire certain asset classes, who were more willing to pay premium prices in order to be done with the deal and move on. Some of these deals take place at significantly higher than the mean, in the 2.1 to 2.5 times net range. There are circumstances where the numbers were even higher, but those were more anomalous than standard.
Change Is Constant â€” The average â€œmultiplesâ€ will change over time. What makes sense today may be ridiculously high tomorrow, or the converse may be true. The one constant is that the market is always evolving, and, just like in the equities markets, there are identifiable trends. Value is not a constant.
Typically, owners will ask a price that is significantly higher than where the practices actually trade. This asking price will usually be determined between the professional valuation expert and the owner, based on a number of factors.
Remember that there is no short formula for valuing all practices, and the numbers above reflect many different transactions. A large part of achieving the best price comes from finding the best suited buyer. Nevertheless, the above should prove helpful for understanding the current market.
M. Rogan LaBier is CEO of Broker Dealer Market, Inc., one of the nationâ€™s leading broker/dealer acquisitions intermediaries. Earlier in his career, he was a proprietary trader, NASDAQ Market Maker, sales trader and management consultant, leading turn-arounds at technology-oriented brokerages, and advisory on certain brokerage and technology acquisitions. He is the author of numerous articles and several books, including The Nasdaq Tradersâ€™ Toolkit. He was honored in Chapter 10 of Dr. John Bairdâ€™s book Electronic Trading Masters.