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SPOTLIGHT Eric Schwartz describes how his small investment firm became a trendsetter in a highly competitive industry. Michael Sharkey reports. Cambridge Investment Research Investing Trust in W W W . A M E R I C A N E X E C U T I V E . C O M M A R C H 2 0 0 6 E ric Schwartz talks fast, and his business moves even faster. In the past 10 years, Cambridge Investment Research has rocketed from $2 million in revenue to $200 million by following a philosophy the founder and president describes succinctly: What everyone else sees as a problem, we see as an opportunity. When the industry believed that fee-based financial adviser services were problematic, Schwartz saw opportunity and created an innovative fee-based system that’s become the model for broker-dealers nationwide. When the industry lacked a comprehensive technology platform that allowed financial advisers to process, manage, and store documents, Cambridge Investment Research created one. And now, Schwartz has his eyes set on the industry’s latest problem—regulatory compliance. “Over the last five years, the regulatory burden has jumped monumentally,” Schwartz said. “More and more financial advisers are worried about regulatory compliance, and some are thinking about getting out of the industry. We’re forming a separate division of our company, which is specifically devoted to providing regulatory support for our reps who have their own registered investment advisers. It’s another way we’re focusing on staying way ahead of our more advisers to the company, Schwartz first added clearing through Pershing and National Financial, errors and omissions insurance, and an RIA to compete with larger firms. To find a way to truly differentiate his company from the competition, Schwartz said he began listening to what his advisers wanted. “I listened to what they were dissatisfied about,” he said. “My competitors at the time just brought advisers in to sell stocks, bonds, mutual funds, and insurance. I found out that many advisers wanted to move toward becoming a trusted adviser instead of being a stockbroker or insurance sales person. They wanted to move more to the client side rather than the sales side. And they didn’t want to simply sell what their company wanted to sell—stocks recommended that week by the analysts or products manufactured by the parent company. They wanted to sit down with the customer, find out their needs, and become their trusted adviser.” Schwartz created a fee-based program where advisers were paid an annual fee of around 1% to manage a client’s money rather than a 2% to 5% commission every time a stock was sold or a mutual fund or variable was purchased, and he gave his advisers full discretion over their client accounts. Most significantly, Schwartz implemented an open architecture system where The difference in our philosophy: we see opportunities to help our advisers and clients where many firms see problems. competitors and striving to provide an umbrella of services at a far better cost.” Listening close Based in Fairfield, Iowa, privately owned Cambridge Investment Research is a registered independent broker-dealer that emerged from its sister broker-dealer, Eneric Financial Services, in 1995. Today, there are 350 independently owned Cambridge Investment offices across the US. But in 1995, Cambridge was still a small investment firm with 45 advisers and gross revenues of only $2 million a year. In an effort to attract advisers can sell Cambridge’s fee-based program as well as programs of qualified competitors and third parties. “We have over $4 billion in managed assets at Schwab,” Schwartz said. “Most companies wouldn’t allow that. We feel that if one of our advisers and their client thinks that’s the best place to put a client’s money, then that’s the best place to put their money. We’re a trusted adviser to the rep, and the rep is a trusted adviser to the client. We’re not trying to get our advisers to do what we want; we want to help them achieve their own goals.” W W W . A M E R I C A N E X E C U T I V E . C O M M A R C H 2 0 0 6 Shortly after the program was implemented, Cambridge began to experience a mammoth growth surge. Year after year, the firm added more reps, generated more revenue, and grew at an average annual rate of 50%. Today, the company has nearly 900 producing reps and $200 million in revenue. W e believe in the Zen expression that the tightest grasp is with an open hand. If System solution Four years ago, Schwartz and his management team began looking at ways to streamline operations through imaging technology. Traditionally, larger companies within the industry had implemented imaging systems for their home offices, but did not link the systems with their adviser’s offices. “We were shocked by that,” Schwartz said. “We worked with vendors to build a system that not only images everything in the home office, but with a $1,000 scanner and nothing else, all the documents our reps need to send to us can be sent electronically.” Documents scanned into the system are not only sent to the home office, but also to Cambridge’s clearing firms. Paperwork that once took three to four days to route through the system to create accounts can now be done in one day. The adviser’s documents are also stored electronically at two separate locations, providing them with a seamless disaster recovery program. Schwartz also extended his open architecture system to imaging by allowing advisers to store any business documents they want on the system, including client tax returns. Along with the benefit of not having to invest in their own IT systems and staff, advisers can also access a client’s documents from anywhere in the world via the Web. “We recently attended a conference and discovered that none of our competitors have a system that can do the things ours can,” Schwartz said. “And it’s not that we have a technology that they can’t implement. Some of our competitors are 10 times our size, and implemented imagery before us, but they apparently weren’t thinking about rolling it out to their advisers at the same time. The difference in our philosophy: we see opportunities to help our advisers and clients where many firms see problems.” you give people the greatest opportunity to do the most things and help them be successful, that’s the best way to keep them rather than force them into a small box. Helping hand The latest problem the industry faces that Schwartz views as an opportunity is in regard to regulatory compliance. Cambridge has never been fined or penalized for violations, and Schwartz wants to leverage the company’s ability to solve compliance issues into service. The company has formed a separate division specifically devoted to regulatory support for advisers who own their own RIA firms. Cambridge is providing compliance consulting, audits, reviews and risk assessments for these advisers. “We believe in the Zen expression that the tightest grasp is with an open hand,” Schwartz said. “If you give people the greatest opportunity to do the most things and help them be successful, that’s the best way to keep them rather than force them into a small box. In terms of the products, the fee-based platforms, and technology, we’re always trying to figure out what’s the most we can provide our advisers, rather than providing them with choices that force them into a narrow place we want them to be. There is a little fear. If we give them too many options, they might go elsewhere. But if we’re truly their trusted adviser, they’ll stay with us because they trust us.” W W W . A M E R I C A N E X E C U T I V E . C O M M A R C H 2 0 0 6 CORPORATE SPOTLIGHT