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Big risk pays off for Tampa brokerage

Stagnated in 2002, GunnAllen Financial began signing up hundreds of brokers as independent contractors. Since then, revenue has soared.

By HELEN HUNTLEY
Published November 1, 2004

The stock market decline that began in 2000 did more than ravage investors' portfolios and curtail their enthusiasm for risk. It also brought a small Tampa brokerage to a crucial decision point. In the spring of 2002, GunnAllen Financial had to choose whether to fire employees in response to falling revenue or to launch a major expansion.

"When production went down, we couldn't stay the same size," chief executive Richard Frueh said. "With the staff and systems we had, we could no longer make a profit unless we were bigger."

GunnAllen's owners decided to go for it. In two years the company has grown from 200 to more than 900 brokers and from $35-million in revenue to what Frueh projects will be $150-million this year.

"There was an opportunity to take advantage of the fact that there were lots of brokers out there who were not happy where they were," company president Donald Gunn said.

GunnAllen's strategy tapped into one of the biggest trends in the securities business. The company signs up brokers as independent contractors, an approach Raymond James Financial Services in St. Petersburg pioneered and other companies have copied.

Nationally, there are nearly as many brokers working as independents as brokers working as employees, said Chip Roam, managing principal for Tiburon Strategic Advisors, a financial services consulting firm in San Francisco. Counting fee-only financial planners with the independent brokers, they outnumber the employee brokers.

Some of the growth in the field has come from people who have their own businesses in insurance sales or tax preparation and want to add investment sales to their repertoire. But a lot of it has come from brokers who are simply tired of working for somebody else.

GunnAllen says it has brought in brokers from 68 brokerages over the past 10 months.

"If you're independently minded and want to run your own business, there are a lot of reasons to do it," Roam said. Not only do you have more freedom, you also own a business you can sell to another independent broker when you get ready to retire.

However, you have more work and administrative headaches and you might or might not make more money.

Independent brokers pay their own expenses, including rent, communications and salaries for support staff. In exchange, they get to keep more of the commissions and fees they generate.

On average, independent reps keep 80 percent of their commissions, compared with 35 percent for the average broker working as an employee, according to a survey commissioned by Registered Rep magazine. Payouts are negotiable, so a million-dollar producer might get 90 percent of the payout as an independent and 45 percent as an employee.

But start-up costs and ongoing expenses take a considerable chunk of the independent's payout. GunnAllen says brokers have to be generating at least $150,000 a year in commissions to make it financially feasible to go independent.

The expense arrangement is the beauty of the setup for the brokerage. It doesn't have to tie up capital getting an office up and running, although GunnAllen lends money to some brokers to help with those expenses. And when trading activity goes into a slump, it's the broker, not the brokerage, who is paying most of the overhead.

Gunn said his company's brokers even did most of the recruiting that helped the firm grow.

"We just put out the word that we were looking to expand," he said.

Gunn said the company used direct mail and follow-up phone calls to brokers, but word-of-mouth has been most effective.

"We had groups of brokers that were here and were happy telling other groups of brokers, and it accelerated," he said. "We have a pipeline now of brokers who want to come. We're spending quite a bit of money on technology to make sure we have the systems in place to manage these guys and to grow."

Matthew Archer, a Raleigh, N.C., broker, said it was GunnAllen's reputation as an "up and coming" brokerage that attracted his attention two years ago. Then GunnAllen's managers and employees clinched the deal.

"They know our needs," he said. "They're willing to take our phone calls."

Archer was one of about 600 GunnAllen brokers in Tampa recently for the company's sales meeting, getting to know one another and listening to pitches from insurance and investment companies whose products they sell.

Gunn, who goes by "J," his middle initial, says the emphasis on personal service has been a big selling point.

"In many firms, the experience of the broker dealing with the corporate office is not necessarily a pleasant one," he said. "Our corporate culture is to help the broker."

However, it will be a challenge to maintain the personal touch as the company grows. Gunn prides himself on taking phone calls, but his workday routinely stretches into the evening. He keeps a full book of brokerage clients and takes no salary for serving as president.

"I still really enjoy it," he said. "By being a broker myself, I am dealing with clients and I can relate to what the brokers are dealing with. That's what sets our firm apart."

Gunn, 42, is the "Gunn" in GunnAllen and Frueh, 48, is the "Allen," choosing to use his middle name over Frueh, which is pronounced "free." They formed the company in 1996 by buying and renaming Napex Financial Corp. They are the primary shareholders, with chief operating officer Dave McCoy, and have brought in other investors.

Their goal is to take the company public once it reaches about $300-million in annual revenue. To prepare for that, they brought in a chief financial officer, Jed Trosper, who had experience in the same role at Home Shopping Network, and a chief compliance officer, Richard Nummi, who was an attorney with the Securities and Exchange Commission.

The ambitious expansion plan included the acquisition this year of a new headquarters at 5002 W Waters Ave., Tampa, which Tropical Sportswear International built but never occupied. Although the 130,000-square-foot building is larger than what the company needs, Gunn said the plan is to "grow into the building" rather than lease part of it. A parking garage is under construction.

GunnAllen's brokers are spread across 32 states, although Florida remains its biggest market. The company's brokers have access to mutual funds, annuities and other investment products from a wide range of companies, in addition to stocks and bonds.

Helen Huntley can be reached at 727 893-8230 or huntley@sptimes.com

[Last modified November 1, 2004, 00:11:20]