How Bob Oros is dramatically changing HD Vest

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HD Vest Financial Services CEO Bob Oros admits there’s “a certain level of emotion” whenever a firm changes its culture like HD Vest has since he took over. However, he argues that a thinned-out advisor head count and other major shifts are taking the firm where its “best advisors” want it to go.

“This is a business that needs focus. You need to be committed to it. We’ve had way more advisors actually, believe it or not, thank us for making them step back and think about whether they were committed to this part of their practice or not,” he says. “They want our resources to go to those who are committed and will provide a return for it.”

Yet some who remember the largest tax-focused independent broker-dealer as it was under founder Herb Darwin Vest and his then-wife Barbara Vest might take exception to new advisor quotas forcing “profound changes on the current culture, as well as the future of the firm,” says Carolyn Armitage. She’s a former HD Vest staffer who is now managing director at Echelon Partners, a consulting firm and investment bank.

Oros only came to the Irving, Texas-based firm from Fidelity Clearing & Custody Solutions last year, but he cites HD Vest’s founder and its longtime advisors as pioneers for pushing state governments to lift their ban on CPAs accepting commissions and fees for planning services.

The question remains whether advisors will embrace variation which Oros describes as a “transformation.” The 19th largest IBD has rolled out new minimum client asset levels for advisors, a conversion to Fidelity as its clearing firm and, the latest move, a switch to Envestnet as its advisory platform.

HD Vest plans to complete its migration to Fidelity from Wells Fargo’s First Clearing in late September. Oros sees it as a catalyst for a barrage of enhancements driving scale and efficiency for advisors with services like paperless processing and e-signature, Oros says.

“All those things matter a lot to a broker-dealer in a world that’s highly competitive,” he says. “We felt it was the right time to look at everything that plays a role in driving the advisor-client experience.”

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HD Vest’s new requirements on advisors don’t look like much by industry standards, but they’ve made a major impact on the firm’s advisor force. Advisors needed to manage at least $1 million in assets under administration by May and will need at least $2.5 million in AUA by the beginning of the year.

The policy has helped push HD Vest’s head count down by 16% year-over-year to 3,709 advisors, according to parent firm Blucora’s second-quarter earnings. Over the same span, HD Vest’s quarterly productivity per advisor has jumped 31% to $21,700 and its revenue increased 8% to $92 million.

HD Vest’s head count should stop falling and start heading upward again next year, Oros says. He calls the policy a “win-win” because the firm now matches the advisors who would rather focus on their tax practices with others who are more committed to advice and planning.

Armitage, however, says the “dramatic shift” of a quota could cut the head count in half. She worked at HD Vest from 1991 to 1998, serving as an OSJ branch manager and overseeing marketing and sales.

She remembers Herb and Barbara Vest’s vision of the firm as 5,000 representatives on a mission to “change the way America invests.” Most reps were lower producers, but the Vests gave them flexibility to keep their investment services part-time and made it clear that advisors were the boss, she says.

“I have recently spoken to some advisors. They did feel it was kind of a shame because it wasn’t the spirit in which the firm was founded,” Armitage says, noting a possible reason for the new policies under Blucora.

“It would make sense that they polish up the firm and prepare it for sale again, whether that’s three years, four years, six or seven years down the road,” she continues. “It would be consistent with some of the moves that they’ve made, such as putting in place a quota system.”

Blucora, which is also the owner of tax preparation software TaxAct, borrowed $400 million and paid $613.7 million to buy HD Vest from Parthenon Capital Partners and other private equity owners on New Year’s Eve in 2015, according to Blucora’s 2017 annual report.

HD Vest changed hands twice prior to the acquisition by Blucora, which also spent $7 million to move its headquarters to Irving from the Seattle area last year as part of its own strategic changes. Wells Fargo had sold the IBD to the PE firms in 2008 after buying it for $127.5 million from the founder in 2001.

From a low point of $5.18 per share in March 2016, the parent firm’s stock value has soared to $35.75 over the past two years. William Blair analyst Chris Shutler has an “outperform” rating on Blucora, saying in an Aug. 1 note that his team likes the firm's stock as “a multi-year transformation story.”

The conversion to Fidelity will boost Blucora’s earnings by as much as $120 million over the next decade through technology savings, higher interest income on cash sweeps, increased revenue-sharing and opportunities for bringing back assets held directly by fund companies, according to the firm.

Advisors will see some of the differences right away. Later this month, HD Vest will also integrate Fidelity’s planning software, eMoney Advisor, into its client portal and launch VestStrategist, a unified managed account program for high-net-worth clients, along with a robo advisor called VestAccess.

Helping advisors gain better wallet share from clients while increasing their productivity is a “critical” evolution for HD Vest, says Carolyn Clancy, head of Fidelity’s broker-dealer segment. The firm is devoting a lot of resources to ensuring a successful transition into Fidelity, she adds.

“The behavior changes and the training required for advisors to get them comfortable with the systems has really been job one right now,” says Clancy. “We’re trying to help them enhance their overall value proposition and the end experience for their clients.”

“Our whole industry is focused completely on efficiencies,” she adds. “That’s so critical as well. I don’t think those two are at odds with each other.”

Envestnet helped HD Vest develop the VestStrategist models. Collaboration with the service, software and asset management provider will also result in wrap fee and rep-as-portfolio programs called VestAdvisor, online reporting tools and access to Envestnet’s compliance program for data aggregation.

The firms will complete the full rollout of the move to Envestnet from HD Vest’s proprietary platform in the fourth quarter, says John Yackel, Envestnet’s head of institutional development. The firm wanted to make sure advisors had several choices while consolidating everything into one desktop tool, he says.

“We felt that HD Vest was best positioned with their tax professionals to really start bridging that gap between advisory and tax preparation and get those two more aligned,” Yackel says, noting the firms’ discussions centered on advisors’ organic growth. “It wasn’t around a managed account technology platform, it was a broader view of it.”

Tax management adds about 100 basis points in advisor-created value each year, according to a 2016 report by Envestnet. Oros also cites past results “created and proven by accounting firms” showing practices that generate $1 million in accounting revenue have the potential to manage $100 million in wealth-management client assets.

He sees another reason for optimism: Out of some 200,000 to 250,000 tax practitioners in the U.S., a figure including CPAs and enrolled agents, fewer than 20% have added planning services, according to Oros.

“There’s a lot of headroom there. The greatest competitor has been inertia, because you’re trying to teach people a second language and that can be intimidating to some folks,” Oros says. “For most tax professionals who get to critical mass on their financial advice practice, they would much rather do financial planning than another tax return.”

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Independent BDs Independent advisors Recruiting Clearinghouses/custodians Fintech Bob Oros Avantax Wealth Management Blucora Fidelity Clearing & Custody Solutions Envestnet