There's a point in every movie that screenwriters sometimes refer to as the part where "the bad guys close in." It's the point when the antagonists, stunned at first by the hero's actions, regroup and get in some blows of their own. Call it The Empire Strikes Back.

And the broker-dealer industry has its share of antagonists striking back, including their brokerage rivals, who are trying to hold on to advisor talent, and the huge legislative and regulatory apparatus lined up against the entire financial services industry.

After a cool-down period last year for high recruiting bonuses, headhunters say companies like Morgan Stanley and Bank of America/Merrill Lynch are once again throwing down the gauntlet and offering big checks to hold on to their prized advisor talent and keep it from going to independent broker-dealers and RIA firms.

"Three or four months ago, Merrill Lynch raised their deal to 300%," says recruiter Mindy Diamond, who works with both wirehouses and broker-dealers. In other words, the company was, for a few weeks anyway, offering bonuses of three times the broker's last-12-month production. "As a result," she says, "this forces deals up everywhere. Morgan is paying 330% for 'quintile 1' advisors and 280% for 'quintile 2' advisors. These were ultra-aggressive. We've never seen deals like this."

The main trend is that brokers are still leaving to go independent, she says, but it's become harder for the top talent to ignore these huge payouts for the sake of setting up their own shops-a choice which can bring a raft of nettlesome small business hassles. Not everybody has the entrepreneurial gene.

Also pushing back against the industry are the G-men. After years of indulging an environment of rampant deregulation, Washington is reasserting its authority over financial services with thick reams of bills and amendments wending their way through the paper canals of Congress. Indeed, on December 11, the House of Representatives passed a sweeping reform bill its authors called the most ambitious since the reforms of the Depression. Among other things, the House bill establishes a consumer financial protection agency, tightens regulations on financial instruments like asset-backed securities and offers regulators more scrutiny over financial companies so big their collapse could bring the economy to its knees. If that weren't enough, the bill could bring a bit more personal pain to broker-dealers, as it demands that they bring their standard of client care into tune with people giving advice in different service channels (such as registered investment advisories).

Operational Woes
Just in terms of doing business, 2008 was a bittersweet year for the B-Ds. Though the turmoil on Wall Street offered many firms the chance to snatch up new talent and bring in their prized accounts, companies such as TD Ameritrade, Raymond James, LPL and Commonwealth saw their bottom lines sag with the plunging asset values in the market. The chill in the markets, which didn't begin to perk up until last March, forced these companies to streamline operations. Some consolidated and slashed staff. Others cut pay.

"When the market price of the assets go down and the value of the account goes down, then obviously the amount of fees that you charge goes down as well," says Chet Helck, COO of Raymond James Financial. "And so you know that your revenue stream is going to be down similarly to what asset values are down, and that happened for us."

Also falling at Raymond James, he says, was transaction business, as skittish investors sat on the sidelines with cash. Interest income declined as well at a time when short-term rates fell to almost zero.

Those issues are hardly unique to Raymond James. TD Ameritrade said in its recent 10-K that its asset-based revenues fell 26% for the year ending September 30-to $1.10 billion from $1.49 billion the year before. Those figures include losses in net interest revenue, insured deposit account fees and investment product fees, though better transaction revenue due to intraday trading helped the company's bottom line. LPL Investment Holdings, meanwhile, saw declines in commission revenue, advisory fee revenue, asset-based fees and interest income for the nine months ended September 30 from the same period the year before. Total revenues for the period were off 17%.