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?
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.
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