The retail division of the Dallas, Texas-based firm reported a $1.9 million dollar loss in net income over the fourth quarter, which ended June 29. The total losses for fiscal year 2012 were also $1.9 million.
A court case that James Ross, the company's president and chief executive, said came "so much out of left field and so wild that there was no way to anticipate it" ended up costing the firm $1.3 million in legal expenses in the fourth quarter despite the firm's beating the claim. Ross expected that those expenses are "as much as we work to avoid them, a matter of fact in this day and age" and would continue into upcoming quarters.
In addition, yearly income declined in large part due to a $10.8 million overall drop in commission revenue at the firm, $4 million of which the company chief financial officer, Stacy Hodges, attributed to a decline in retail commissions that resulted from the decreased advisor headcount. The average number of advisors at the firm this year had dropped by 18 to 166. According to Hodges, the firm is in the process of beefing up its advisor headcount.
"Retail revenues were down for the fiscal year because of the departure of a number of private client group reps in 2011. With the completion of the capital raise, we're actively recruiting and expect to show improvement in retail revenue as we fill existing seats and fill out our footprint," Hodges said in a conference call.
According to Ross, the firm had added a number of advisors in the March-ending quarter, which helped to boost the average headcount. He expected that once their assets had all transitioned over revenue would expand, but he cautioned that growth would be tempered:
"One of our worst recruiting quarters is the September-ending quarter," Ross said. "Reps are spending lots of time with their family. Clients are spending lots of time with family. I don't think we'll have the type quarter we had March-ending."
In addition to recruiting to fill empty seats, the firm is also looking to expand its footprint by adding new offices and acquisitions.
"We are pursuing a range of growth strategies in our retail segment," Larry Tate, the director of Southwest Securities' retail division, said in an e-mail. "These include recruiting established advisers in existing locations, as well as expanding into new areas through acquisitions or by opening new offices. We are open to each of these options."
Ross said that Southwest is "spreading the word, running the ads and seeing who responds" with regards to making an acquisition. He said there is an existing agreement with the board that it will open new offices in Denver, Phoenix or Seattle by the end of this year.
The strongest part of the report came from growth within Southwest's existing client base. Total assets under management increased $72.6 million from a year earlier despite the decline in advisor headcount. Macroeconomic factors were not a significant impediment to growth, Ross said. While the company saw some moderate interest among clients looking to pursue a more conservative strategy, it was "not to a great extent," and Ross said that he even saw some silver lining in the investment strategies in the company's California and Nevada offices.
"I hate to sound too corny, but it's not broke so we're not trying to fix it, but I don't see any sense out there in a more conservative approach," Ross said. "In fact, there may be a little more optimism among the brokers and their clients."
The firm has recently partnered with a third-party consulting firm, Creative Management Group, to help capitalize on growing those assets and also adopted new software, which Tate said is helping to expand client relationships.
"The immediate opportunity to build revenue comes from within our existing adviser and client base. Our managers are focused on integrating the tools available through PriceMetrix for coaching opportunities with our advisers," Tate said. "The PriceMetrix data and reports highlight adviser-level opportunities we believe will drive revenue. Our advisers are using this information partnered with educational events and additional product and sales training to expand relationships with their current clients."