Adapt to Sur­vive.

The na­tion’s largest in­de­pen­dent bro­ker-deal­ers are grow­ing again, but are they in­no­vat­ing fast enough to keep up with in­dus­try trans­for­ma­tion?

Financial Planning - - CONTENTS - By To­bias Salinger

IBDS be­gan the move­ment to in­de­pen­dence. Now they risk be­ing over­taken by it. The head­winds shak­ing the in­dus­try haven’t re­lented, even af­ter in­de­pen­dent bro­ker-deal­ers pro­duced their strong­est rev­enue growth in three years. Se­ri­ous pres­sures face the top IBDS an­a­lyzed by Fi­nan­cial Plan­ning for the 33rd an­nual FP50. Shrink­ing mar­gins and bulked-up reg­u­la­tory over­sight, and grow­ing com­pe­ti­tion and con­sol­i­da­tion, are just a few. “The value propo­si­tion of an IBD from 20 years ago has to change. There’s lit­tle de­mand left for only pro­cess­ing trans­ac­tions,” says Cam­bridge In­vest­ment Re­search CEO Amy Web­ber. “It’s a re­la­tion­ship busi­ness. It’s a con­sult­ing busi­ness. If they don’t trans­form, sur­vival will be dif­fi­cult.”

By the Num­bers

The na­tion’s largest IBDS showed pos­i­tive steps on that front in 2017. Af­ter a slight con­trac­tion in rev­enue in 2015 and an even larger drop in 2016, to­tal rev­enue at the top 50 firms rose 8.6% to $25.7 bil­lion in 2017. While the list of the 50 largest IBDS changes slightly from year to year based on their level of busi­ness and merg­ers and ac­qui­si­tions, the past year marked the high­est growth among the FP50 since their rev­enue ex­panded by 12.7% in 2014. All but three firms re­ported in­creases in rev­enue, with 24 of the top 50 firms pro­duc­ing dou­bleor triple-digit per­cent­age gains.

In 2017, fee-based rev­enue over­took com­mis­sion-based rev­enue for the first time.

The record high in com­bined rev­enue amounts to nearly dou­ble the firms’ $13.2 bil­lion in 2007, but it ob­scures the no­table dis­par­ity be­tween fees and com­mis­sions. In 2017, fee­based rev­enue over­took com­mis­sion­based rev­enue for the first time. Fees of a lit­tle more than $11 bil­lion at the top 50 firms were $112.2 mil­lion higher than their com­mis­sions. Fee rev­enue has more than tripled in the past 10 years, while com­mis­sions have gone up only 21%. The rise in fee-based busi­ness is a switch “from com­mis­sion-based to re­cur­ring rev­enue,” says John Anderson, man­ag­ing di­rec­tor of SEI Ad­vi­sor Network’s prac­tice man­age­ment so­lu­tions team. “You’re hav­ing bet­ter fi­nan­cial per­for­mance at th­ese IBDS to­day be­cause more and more of their clients have moved to this re­cur­ring rev­enue model,” he says.

Reg­u­la­tory Bur­den

The U.S. De­part­ment of La­bor’s fidu­ciary rule ac­cel­er­ated the change, says John Rooney, a man­ag­ing principal with Com­mon­wealth Fi­nan­cial Network. Even though the rule is most likely dead af­ter an ap­peals court va­cated it, com­pli­ance ef­forts that had al­ready been put in mo­tion and are now mostly so­lid­i­fied — cou­pled with strong stock mar­ket re­turns and ris­ing in­ter­est rates — paid off for IBDS in 2017. The Se­cu­ri­ties and Ex­change Com­mis­sion’s pro­posed Reg­u­la­tion Best In­ter­est may force IBDS to make fur­ther ad­just­ments to get into com­pli­ance as the agency gath­ers public com­ments. Rooney, who is also the chair­man of the Fi­nan­cial Ser­vices In­sti­tute’s po­lit­i­cal ac­tion com­mit­tee, sees en­hanced over­sight, in part, as an op­por­tu­nity for IBDS, though. “Iron­i­cally, what we’re see­ing is that the in­creas­ing reg­u­la­tory scru­tiny be­ing ex­tended to the RIA chan­nel, ei­ther from the SEC or the state agen­cies, is work­ing in our fa­vor,” Rooney says. “A num­ber of large RIAS are con­cerned that they’ll en­counter reg­u­la­tory is­sues which could be­come ex­is­ten­tial and ap­pre­ci­ate hav­ing a full-time com­pli­ance staff to sup­port them.” Nev­er­the­less, the en­hanced reg­u­la­tory bur­den and the rise of low-cost, pas­sive strate­gies in as­set man­age­ment have also cut into the mar­gins of IBDS, says Ken­ton Shirk, who is di­rec­tor of the in­ter­me­di­ary prac­tice at Cerulli As­so­ciates. For ex­am­ple, the aver­age as­setlinked fee on mu­tual funds and ETFS dropped roughly 8% to 52 cents per

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