Southwest Securities on a tear with expansion plans

By Bruce Kelly
December 13, 2004

NEW YORK - Southwest Securities Inc. continues its expansion, this time recruiting a top broker from the Houston office of Oppenheimer & Co. Inc.

The Dallas firm last month hired Mari McCain, a leading institutional broker with Central- and- South American clients. At New York-based Oppenheimer last year, she produced $2 million in fees and commissions, an industry source said.

Southwest Securities, a subsidiary of SWS Group Inc., has been on a hiring spree of late and has also been making changes since the summer in the managers of many key branch offices.

The firm's top management is making the moves as part of an aggressive growth strategy, which includes increasing the number of employee and independent-contractor registered representatives over the next five years.

And the firm's Texas roots will only help it achieve its goals, one executive said. "Texas people like to do business with Texas people," said James H. Ross, director of Southwest Securities' private-client group and chief executive of SWS Financial Services, the independent-broker-dealer subsidiary.

The firm wants to quadruple its number of brokers to about 400 by 2009. At the same time, it wants to triple the number of independent-contractor brokers affiliated with the firm over the same time, to 1,200.

'Tremendous challenge'

Broker-dealers, however, routinely made such aggressive-growth plans during the last bull market, only to come up short. Executives at many broker-dealers are loath to make such predictions of increasing the head count of brokers, instead pointing to the average revenue each rep produces as a better standard for a firm's growth.

"Quadrupling the sales force is a tremendous challenge. I'm not familiar with anyone who's been able to do that," said Steven Testerman, president of BrokerHunter.com, an online recruiting service based in Cumming, Ga.

"There's competition in both channels, particularly on the independent side," he said, adding that because of the very nature of the independent-contractor business model, it is very difficult to recruit.

It is more of a challenge because firms typically don't give upfront money or cash when independent reps change their affiliation, Mr. Testerman said. Another difficulty is convincing a broker to become an entrepreneur and start a business.

Recruiters said that top brokers such as Ms. McCain were receiving upfront bonuses of as much as 100% of their past 12 months' fees and commissions. One recruiter said that firms are offering to pick up the deferred compensation of the most attractive recruits, which has long been a sticking point in luring reps in the past, as they have lost that money.

Mr. Ross declined to discuss the deal to land Ms. McCain or what the firm currently offers recruits, but said that it is "very competitive."

There have been no acquisition discussions, he said, but SWS executives are constantly approached with such opportunities.

Southwest Securities features a very high payout, in the range of 44% to 54%, Mr. Ross noted. With many firms offering payouts about 10 percentage points less, he said he thinks that that will attract brokers.

Another advantage in recruiting brokers and advisers to Southwest Securities and SWS Financial is that SWS Group clears for about 200 other broker-dealers, Mr. Ross said.

"More and more reps out there today are looking to go independent," he noted.

While the national wirehouses are fighting for market share of 20% in such areas as Dallas and Houston, Southwest Securities would be content with 3% or 5% of the local market. The firm could expand into Arizona and Southern California while growing in Texas, Oklahoma and New Mexico, Mr. Ross said.

Since June, the firm has added five new branch managers for offices in downtown Dallas, Oklahoma City, Houston, Albuquerque, N.M., and suburban Dallas. Those managers are key to recruiting, he said.

Mr. Ross is also a newcomer to SWS Group, of which he is an executive vice president, joining in January. Before that, he had a variety of positions in California with UBS Financial Services Inc., formerly UBS PaineWebber Inc., of New York