One response to the turmoil has been to cut staff, a tack taken by both TD Ameritrade and LPL Investment Holdings. Meanwhile, in its effort to streamline operations, LPL consolidated three of its affiliated broker-dealer operations-Associated Securities Corp., Mutual Service Corp. and Waterstone Financial Group and brought them onto its LPL Financial platform.
"When the world kind of fell apart in October [2008]," says LPL's Bill Dwyer, president of national sales and marketing, "we were able to do a step back and say, 'What's the opportunity set going forward?' Top-line revenues were going to drop. We wanted to be prudent about spending-more importantly, what we saw were opportunities to grab market share-so we made strategic moves to streamline the organization and [move] resources to existing advisors."
After past downturns, companies could take advantage of the many baby boomers rushing back into the market and reinvesting to position themselves for growth, Dwyer says. But now these boomers are poised to retire, and will likely take more conservative positions in low-yielding assets. This, too, will hurt the broker-dealers' bottom lines. He stresses, though, that he thinks it will be harder for smaller broker-dealers than for larger firms like his own.
"For many firms," he says, "just operating profitability will be a challenge as you look at consumers paying less for advice [and look at] less asset growth in client accounts. Clients' risk tolerance should be down, so their returns are less. You're just going to see that the opportunity to operate profitably is going to be challenging for many firms."
John Rooney, a managing principal at Commonwealth, a private company, said that the owners of his firm took pay cuts this year in response to declining asset levels. But he said that the firm was able to avoid staff cuts.
"We took a material cut in pay but we did that because we wanted to avoid laying off anybody. We take bonuses; we still match 401(k)s. But benefits haven't changed a lick, and frankly my head count has grown this year because I took advantages of layoffs at some of my competitors."
While some of the figures may look glum, the outlook for independent broker-dealers may be sunnier than first appears. Because the accounts new advisors are bringing over into this independent channel have likely been beaten down by the bear market, they haven't shown their true potential yet in broker-dealer earnings.
A case in point is Raymond James, writes Morningstar analyst Jason Ren. "We don't expect robust growth from [the company's] investment advisory fees or investment banking, but we think that its growth in financial advisor headcount, up 8% year over year, wasn't reflected in its 2009 earnings due to general market declines and skittish clients."
B-Ds in general have managed to maintain a profile of independence free from the stains of Wall Street sin. Nonetheless, firms such as TD Ameritrade and Raymond James were hurt by auction-rate securities, the long-term, variable rate debt instruments that froze up in 2008 when the Dutch auction mechanisms they use stopped working. Some $330 billion in these supposedly cash-like instruments suddenly became traps, and many institutional and high-net-worth investors found themselves unable to get their money out.
The SEC and state attorneys general stepped in and settled with several firms that had sold these securities, including TD Ameritrade, which agreed to redress clients (it had received tenders for some $271 million as of October 26). Charles Schwab and Raymond James, however, were notable holdouts against settlement, claiming that they were not responsible for the underlying failure of the ARS market. Raymond James still had $750 million in ARS sitting on its books at the end of the year (from a high of $2.2 billion in 2008), and repeated its claim in its SEC filings that it didn't have enough capital necessary to pay clients back their money immediately.