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Designing a plan for growth in today's booming investment climate--in which the investor population and assets under management are both growing fast--is not rocket science. But you still have to have a model.

On these six pages, we've spoken to executives at four exemplary broker-dealers: Cambridge Investment Research, Raymond James Financial Services, First Allied and Royal Alliance. Each one has ventured way beyond the basics to devise a distinct growth strategy, whether it's ramping up technology, cutting costs to the bone, fostering a flexible, nurturing environment or carving out a highly specialized niche. As the broker-dealer industry continues to mature, getting the details right won't be enough to satisfy demanding top producers--or their clients. These four firms, like other members of the FP50, have gone the extra mile to create a distinctive package. The rest are sure to follow--if they can.

A Visionary on a Lucrative Path

Cambridge Investment Research is leaping ahead on the strength of a prescient business model and a special niche as an expert in fee-based business.

It isn't totally a coincidence that Cambridge Investment Research CEO Eric Schwartz practices Transcendental Meditation and has one of the fastest-growing independent broker-dealers in the country. Cambridge, which ranked No. 21 in the FP50 this year, has been doubling its revenues every two years.

Here's how Schwartz's stint as a TM teacher some 30 years ago and his ability to provide a broad range of services at low costs are connected: In 1993, Schwartz wanted to move his young broker-dealer from Washington to a small town like the one in upstate New York where he grew up. The TM organization had bought a college in Fairfield, Iowa, and when he went to visit some friends there, he found he knew a lot of people from his college days. His new location was found.

Although Schwartz is not affiliated with the TM school, called Maharishi University, establishing his business in this rural area, with its low costs, allowed him to charge much lower fees than his competitors could. This year, Schwartz expects to do $190 million in revenue, up from $150 million in 2005, and $104 million in 2004. Cambridge has been growing about 40% a year. "Looking back, moving to Fairfield was brave at the time, but it proved to be one of the best business decisions I ever made," says the elfin and enthusiastic CEO. "Our competitors in California and Boston are paying five times as much for their buildings, and the pay scale is just higher. But with all the technology that exists today, you don't need to be in a big city. If I can save $5 million in overhead, I can pass that along to advisers."

That's just what he does. Advisers who come to Cambridge were paying on average 17 basis points on their previous broker-dealer's platform. "The maximum anyone ever pays here is five basis points," Schwartz says. "They're saving 10 to 15 basis points, and that means many millions of savings a year for reps and their clients."

OPEN-DOOR POLICY

Lower fees also enable Cambridge to offer advisers a much broader choice of platforms than its rivals. "Our single biggest distinguishing factor is that we are the leader in open architecture," says Schwartz. "The fact that overhead is controlled allows us to work with outside platforms, where we make less money but can still be profitable." Like other independent broker-dealers, Cambridge offers an in-house platform, called CMAP; but it also has a FlexMap program that allows advisers to work not just with the multiple third-party asset management firms that are allied with many independent broker-dealers, but also with 10 to 15 outside firms--including behemoths Schwab, FRIAG and TD Ameritrade. "We make double or triple as much if they use our platform, but we also have a lot more work to do," Schwartz says. "But if they're working with Schwab and there's a problem, they call Schwab." Schwartz's advisers have $6 billion at Schwab. Cambridge still takes its five basis points from those assets.

His rivals, who make 20 to 25 basis points off their in-house platforms, can't afford to be so tolerant about where client assets go. And while most independent broker-dealers claim to have open architecture, Schwartz says that's only in comparison with the wirehouses. At most they offer one or two platforms. "Most of our competitors just want to drive the money to their platform, but we grow a lot faster and make friends out of Schwab instead of enemies," Schwartz says. "If you start with the assumption that the purpose of the business is to help the public, I don't see why it's bad to give advisers a choice. If you're choosing not to do so, you're just protecting your profit margin." Cambridge's open-architecture derives in part from its hybrid business model. When Schwartz started in the business in the early 1980s, all broker-dealers catered to series 7 reps who survived off commissions. He was ahead of his time in setting up Cambridge to serve both NASD-regulated commission-based stockbrokers and SEC-regulated fee-based registered investment advisers. "Everyone thought we were crazy to be a broker-dealer and focus on fees," says Schwartz. "It was like an oxymoron. But now they are following us and realizing that fees are as important or more important than commissions."

As a result, Cambridge boasts the highest percentage of the more-lucrative fee business in the industry, with 55% of its advisers making money from fees compared with, at most, 30% for other independent B-Ds. "No other broker-dealer has established itself as being set up for the sole purpose of people doing fees and commissions," says Schwartz. Having a foot in both camps attracts brokers who want to go independent or switch over from commissions to fee business.

HIGH-TECH ADVANTAGE

Judicious use of technology is another key to the firm's profitability. "We've chosen ways to do fee business a little cheaper," says Schwartz. While most clearing firms offer some fee services to broker-dealers, such as fee notification, performance reporting and fee debiting, they charge 12 to 15 basis points to do it. "As good as those programs are, we consider them a bit expensive," Schwartz says. "We built or bought technology to do all that for around four basis points, giving us one basis point of profit."

Cambridge also was early to create a document management system that enables its advisers to truly go paperless. "A lot of other firms do imaging now, but it's mostly just for current trades," says Schwartz. "We're letting advisers store hundreds of thousands of past documents even if they have nothing to do with trading." This not only allows clients to save on valuable file-cabinet real estate, but also gives them the freedom to work after hours and access any kind of document from anywhere in the world. Cambridge also uses imaging technology to help streamline its compliance process, requiring documents to go through fewer hands and stages and still be overseen by the firm.

The independence and quality of service that Cambridge offers has attracted growing numbers of advisers, many of whom have both fee and commission assets. This year, the firm will have 950 producing advisers nationwide, according to Schwartz. And in 2006 those producers should enjoy an average production per rep of $250,000, well above the industry average of less than $200,000.

Who is Cambridge looking to serve? "Independent business owners who like to have a choice in making their business the way they want it to be," says Schwartz. "The whole idea of proprietary products is nasty for them. If one of their clients has money at Schwab and wants to keep it there, they don't want to have to tell them, 'You can't have it there.' Reps join us because we show that we're really trying to help them, that we work for them--and not the other way around."  --Pamela Black

PASSING THE MOM TEST

Raymond James is focused on nurturing its advisers while it tightens up on recruiting--and seeks out reps who are squeaky-clean enough to take care of Mom.

Over the past 20 years, Raymond James Financial has grown from a small, privately held regional firm in Florida to a publicly traded independent giant ranking No. 2 on the FP50. The firm houses both independent contractors and employee brokers and has more than 3,400 independent financial advisers in over 2,000 offices nationwide. Total client assets under management at Raymond James Financial Services (RJFS), the independent unit, are $102.4 billion.

We've enjoyed the stature to be one of the biggest, but our focus is to be the best," says Richard G. Averitt III, the CEO of RJFS. "We seek to grow the firm, but we seek to grow it in terms of assets--not in terms of financial advisers or branches. If we increase revenues 20% a year, we'll hit all our targets." RJFS, which accounts for three-quarters of the company's revenue, has been the driver of that growth.

The stock has notched 18% compound annual growth (without dividends) since it went public in 1984. (The firm's highest producers get stock options or grants as part of their compensation.) During that period, RJFS revenues grew at 19.8% a year. About half that growth comes from recruiting new producers and half from boosting the productivity of affiliated advisers. Since 2003, when Averitt built a program to track it, average gross revenue per adviser rose 13%.

A lot of that productivity is due to the firm's emphasis on continuing education. Its national and regional conferences, like those of many B-Ds, are geared to continuing education and practice management. But it can also be chalked up to a nurturing culture. "The adviser is our client," Averitt says.

In recent years RJFS has amped up its adviser focus with AdvisorChoice, a unique program which lets advisers to choose from five business models how they'd like to affiliate with the firm. In addition to the independent and employee channels, advisers can sign on as a registered investment adviser, a correspondent at a community bank or a hybrid known as Advisor Select. In that program, a rep can set up an office outside the branch, but remain an employee with full administrative support. Advisers can switch business models freely depending on what "suits them best at this point in their lives," Averitt says. The firm also spent $104 million on technology in 2005.

The flexible culture is smart business. "If you have total control over your environment, you're happy and motivated, says Raymond James COO Chet Helck. "Happy people do better than unhappy people. That's a law of the universe."

RJFS has dramatically ramped up its standards, too, according to Averritt, even halting its recruiting to hold out for the highest quality reps. In 1999, it would have brought in an office that produced $150,000 in revenues a year. Now that bar is $250,000--and the average new office generates more than $550,000. To support these bigger producers, RJFS has added a 12-person wealth services team. Based in the St. Petersburg, Fla., home office, they help advisers deal with issues specific to high-net-worth clients, such as estate planning and philanthropy.

More important, the firm now scrutinizes incoming advisers much more comprehensively, including a police blotter check. Employees from registrations, sales management, business development and compliance all review prospective advisers. That applies to each financial adviser in every branch office, not just the branch manager. "We've made it tougher to join the firm and tougher to stay with the firm, because we've learned a lot," said Averitt.

In part, this move was triggered by the tech wreck of 2000. The firm also came to regulatory grief when a rogue rep bilked investors out of $44.5 million and cost the firm $6.9 million in fines last year. (He has since been dismissed.) Last year, RJFS also settled with regulators over the practice of "reverse churning," or keeping clients in fee-based accounts even when they made few trades. That cost the company a $775,000 fine plus $138,000 in restitutions.

Since 2002, the firm has nearly doubled its compliance expenditures, increasing its compliance staff by 61% and installing comprehensive software for reviewing client accounts. "We always grew this firm based on the Mom test,'" Averitt says, "as in, Is this adviser somebody we would let handle my mom's account?'"   --Elizabeth Wine

Going for the Growth

First Allied Securities is not only expanding through mergers, but helping its advisers do the same.

First Allied Securities has hit the biggest growth spurt of its 11 years in business. Last year, the San Diego-based firm posted $130.8 million in revenues, of which $30 million came from its merger with broker-dealer Round Hill Securities. The company is spreading the gospel of growth to its advisers as well, by offering a forgivable cash loan to cover the down payment on purchasing another adviser's practice. "There's no doubt that we're in growth mode, more so than ever before," says First Allied President and CEO Mark Dransfield. With its focus on acquisitions, the firm hopes to establish itself as a leading industry expert on business succession. It's a hot topic that will only become hotter as legions of baby boomer advisers approach retirement.

After being sold twice, the firm is now a unit of financial services firm Advanced Equities Financial Corp. of Chicago. The parent company owns three separate B-Ds: First Allied, FFP and Advanced Equities. The parent company bought Round Hill and merged it into First Allied since the two B-Ds shared many attributes, such as their small number of high producers, their clearance through Bear Stearns and their West Coast location, says Joel Marks, vice chairman and chief operating officer of Advanced Equities.

The broker-dealers give Advanced Equities Financial Corp. a predictable revenue stream and an opportunity to distribute its proprietary late-stage private equity products, Marks says. The firm plans to buy several more broker-dealers this year--Marks declined to name prospects--and then focus on building brand recognition in 2007.

TWISTS AND TURNS

In First Allied, the parent company acquired a firm with an experienced leadership team. At least seven senior managers, including Dransfield, worked together at a predecessor to First Allied, called First Affiliated Securities, which collapsed when its owner embezzled money from the firm and fled the country. After their paychecks bounced two weeks before Christmas in 1994, a group of employees secured financing from Josephthal & Co., a now-defunct employee broker-dealer in New York, and started a new company with no legal ties to the old one. In 2002, Josephthal sold the firm to Wells Fargo & Co., which in turn sold the company to Advanced Equities last year. That shifted First Allied business away from the proprietary banking products of Wells Fargo towards greater independence, Dransfield says.

The firm caters to a relatively small number (500) of big producers, of whom 18% do business through their own RIAs rather than First Allied's. About 23% of the firm's investment advisory business is fee-based, and the advisers have an annual average production of $282,000--significantly more that the industry average of just under $200,000. Minimum production at the firm is a hefty $150,000. "We chase small producers out of here, unfortunately," Dransfield says, since the firm doesn't have the services in place to support them.

Although First Allied offers its advisers a range of support including full-service trading, insurance services and technology such as paperless archiving and retrieval, it has carved out a specialty in helping advisers whose clients have family offices and use First Allied's advisers to access Advanced Equities' private-equity offerings. These give clients the potential for jazzing their returns by buying stock in a companies before they go public. A private-equity portal is one of many services that advisers can access through First Allied's i-Station intranet.

Advisers can clear through Bear Stearns, Wells Fargo or Pershing, and First Allied just introduced a new interface that standardizes the account opening process across custodians. I-Station also allows its reps to customize high-quality brochures designed for First Allied by an advertising agency, which saves them money on marketing.

SHOW ME THE MONEY

Of all of First Allied's services, the promise of cash to buy another business has been a particular draw, Dransfield says. First Allied added 150 brokers last year, with approximately 100 coming from Round Hill. The down payment money comes in the form of a loan that is forgiven after six years if certain performance and other conditions are met. The program only started late last year and no deals have yet closed, although Dransfield claims that many are in the pipeline.

One eager adviser called Dransfield right away, as soon as he came over to First Allied from Raymond James, to ask about buying a business. "Oh man, settle down first, you have four or five weeks of hard work ahead of you,'" Dransfield counseled.

The going price for a small (under $3 million) fee-only financial practice is about $1 million, up from $491,000 in 2004, and the average down payment is now 39%, making competition to buy fairly stiff, according to FPTransitions, a website that helps independent registered representatives buy and sell independent practices.

Dransfield worked as an adviser more than 20 years ago and says he can empathize with the challenges that First Allied's advisers face. They're doing business in a much more complicated world than the one he practiced in, he says. Compliance requirements are much more demanding, and consumers are far more wary of cold calls. In the days before computers, cold calling would prompt some people to send off a check to an adviser for financial products, sight unseen. Although the B-D climate has changed a lot since then, Dransfield's commitment hasn't: "I enjoy working with advisers and helping them be successful." --Elizabeth O'Brien

The Change Agent

With a new CEO on board, Royal Alliance is accelerating its move into the business of fee-based accounts.

When Larry Roth started at Royal Alliance last January, more than a few of the industry's eyes turned his way. His abruptly departed predecessor, Mark Goldberg, had led the company as a visionary, confidently carving Royal's path through an industry of thinning profit margins and adviser turnover that, even on a good day, approaches attrition. The appointment of Roth--a seasoned mergers and acquisitions consultant--produced more questions than answers.

Less than half a year later, it is the company's trajectory, rather than its leadership change, that is turning heads. With his professorial and gracious charm, it's not hard to imagine that the new Royal chief calmed a lot of nerves upon arrival. Royal is No. 4 on the FP50, holding the same spot as last year. Turnover at the company remains a paltry 3%, far below the industry average of 16.6%, but Roth doesn't measure turnover by affiliated reps. "The number I measure is revenue and profitability of reps who have left the firm," says Roth. "I don't take a body count."

According to some of his clients, he doesn't need to. "Let's put it this way: I'd never had the head of the broker-dealer visit me," says Jack Abriola, founder of Select Financial Group in Carnegie, Pa., a long-time Royal Alliance affiliate. Within a month after after Roth started, he paid a visit to Abriola's office. "He took a lot of notes and asked a lot of questions. He came across as someone who really knew the players in the industry," says Abriola. "He even wrote me a hand-written note thanking me for my time."

Judging by the company's vital signs, Roth is more than just a nice guy. Total revenues at the New York-based firm, which is also the largest in the AIG Advisor Group, are up 5.6%, while Royal's payout pool grew 4.7% during the last year alone. "The first quarter of '06 was our best quarter ever, both in revenue and profitability," says Roth, "but I can't really take any credit for that." Behind that profitability, however, is a statistic more important to Roth's long-term vision for the company: "For the first time ever, our No. 1 source of revenue at Royal Alliance was fee revenue."

In migrating toward fees, Roth need merely sail the company in a straight line. Commission revenues declined 3.5% over the last year, a loss of revenue easily offset by a whopping 29.5% rise in fee revenues. "If you're fee-based, or you're migrating toward fees over the next three, four or five years, we want to have a platform that serves you now and then serves you in the future," says Roth.

His goal for recruiting extends beyond merely attracting fee-based advisers. "Historically, we've recruited advisers with significant assets or revenues. We're going to refine that to be more business-model specific," by targeting successful entrepreneurs more than merely successful advisers.

According to Abriola, that's already happening. "Before, there was huge emphasis on recruiting, but now, there's more emphasis on helping the reps build their own businesses," he says. Roth compares Royal's approach to that of a finely tuned retail brand: "You pick your customers well, and you serve them well. We are trying and be all things to the successful businessperson who is also a financial adviser."

Unlike many of his counterparts, Roth comes close to defending the tough regulatory environment. "I think it's a good thing," he says. "Open architecture has proven to be the model of the future. For that to maintain its place in the marketplace, it needs to be squeaky clean."

Compliance spending at AIG-member firms is worth scrutinizing. Just last month, a federal judge certified a class-action lawsuit against the AIG Advisor Group that refers to previous violations. Long before Roth arrived at Royal, the NASD fined the network for "shelf-space" violations during 2000 to 2005, when the group is accused of giving preferential treatment to certain mutual funds. --Marshall Eckblad

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