In this new fiduciary era, broker-dealers see their business models experiencing radical transformation as they evolve into robust solution providers for advisors, not simply back offices and technology providers for hire.
And it’s not just the DOL fiduciary rule that’s driving this sea change. Industry executives say the movement to a fiduciary (or similar) standard of care is part of a longer-term trend, regardless of whether the DOL rule goes into effect or whether the SEC ever acts on its own uniform standard of care.
“The industry is really embracing this transition, principally the notion of how to serve clients differently, offer a unique value proposition and emphasize planning over a transaction mind set,” says Jim Crowley, chief relationship officer at Pershing. “That’s the cool thing that’s happening in our business.”
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This means reimagining the business. “Sure, we’re an independent broker-dealer, but we’re really a service company first, a technology company second, a giant RIA third and then fourth a giant B-D,” says Wayne Bloom, chief executive of Commonwealth Financial Network.
At Cambridge Investment Research, “we’ve gotten away from calling our firm a ‘B-D,’” says chief executive Amy Webber. That term is too restrictive for a company that offers services through multiple B-Ds and RIAs, and through specialty units focusing on consulting, practice management and technology.
The trends toward a higher standard of care, more planning, lower product prices and better transparency are all good developments, to be sure, but dealing with the DOL has been a challenge, to put it mildly. And now that the Trump administration is angling to delay and possibly kill the rule, firms are in a “regulatory twilight zone,” says Wade Wilkinson, chief executive of Securities Service Network.
The brokerage industry is hoping to get a single standard of care across all types of financial firms and accounts, to be overseen by the SEC. And industry execs are particularly eager to get rid of the DOL rule’s private right of action, which exposes firms to class-action lawsuits for violations of the rule. Whether the new administration and new SEC leadership can deliver on this wish list remains to be seen.
In the meantime, firms have little choice but to head down the expensive path toward compliance with the rule, which takes effect this month. “It’s all systems go with the DOL” rule, says Scott Romine, chief executive officer of National Planning Holdings (NPH), the holding company for four broker-dealers owned by Pru plc.
Some things could be put on the back burner if the rule is delayed or changed, Webber says, like the additional website disclosures and new contracts with vendors that Cambridge is working on. “But otherwise, I think in all honesty, a lot of it moves ahead,” she says. That includes the company’s level-fee digital advice platform, which was designed to comply with the DOL rule.
There is probably no going back on a number of other fundamental changes being made. B-Ds have been working on paring the number of vendors they work with, moving to cheaper products, ending direct business with fund and insurance companies to better supervise and capture some of the economics, and rethinking revenue sharing with product sponsors, tying the payments more closely to training and educational activities.
And advisors have moved more assets into fee-based accounts. Growth in fees has been fairly consistent over the years, “but now fee accounts are growing at twice the rate” as they have in the past, says Scott Curtis, president of Raymond James Financial Services.
Pershing’s Crowley says a representative cross-section of his clients, across all channels, have grown flows of pure advisory assets by 74% for the past five years. Add in hybrid assets under a corporate RIA, and growth has more than doubled, up by 110%.
Reinventing The B-D
While the DOL rule has caused a flurry of activity within the past year or so, industry managers have been taking a deeper, introspective look into how they want to position their businesses for the future.
“We call it the upending of the value stack,” says Matthew Chisholm, senior vice president of business development at Fidelity Custody and Clearing Solutions (formerly National Financial). “Traditionally, advisors’ value was about alpha—picking money managers. Then came tax optimization, behavioral management and financial planning. That whole stack is inverting, where the largest value will be around goals-based financial planning, while money management is a commodity and robos [are] getting as cheap as possible.”
Clients are demanding more of this holistic approach, Chisholm added, “which has not been ingrained in the traditional broker-dealer model.”
Romine at NPH is encouraging his advisors to focus on financial planning and get away from being “investment-centric.” The problem with an investment focus is the “race to bottom” in terms of fees, he says. “Our value proposition [is] built around relationships and advice,” Romine says. “Investments are really a means to an end.”
“We as an industry need to do a better job of delivering outcomes,” adds Dean Harman, founder of Harman Wealth Management, a hybrid advisor (he’s also the incoming chairman of the Financial Services Institute for 2018). Harman manages money for other advisors and his own clients, in addition to running an economic consulting firm.
Whether it’s achieving investment results or meeting other needs, advisors are going to increasingly be put on the spot by consumers, Harman says. “My sense is that [consumers] under age 50 are much more evidence-based, much more outcomes-based. … It’s scary if you’re not in a position to deliver.”
Firms of all types are trying to digitize their businesses around advisors and create an easier and more enjoyable experience for them, Crowley says. That means identifying “pain points” and eliminating them, like speeding up account opening and funding; cutting paper; and integrating customer-relationship software, document management and reporting, all in flexible formats. Additionally, digital capabilities must work on all devices and browsers.
“Let’s face it, as an industry, we’re behind other industries” in using technology to enhance customer experience, Crowley says, pointing to the mortgage industry’s automation.
Robert Moore, chief executive of Cetera Financial Group, is in total agreement. Moore derides the investment industry’s “antiquated” practices and wants Cetera to be a “thought leader built around the client experience.”
Automation plays a big role in Moore’s vision. For example, “a client might look online for [information] on a Saturday night, then set a meeting for next week, book a time, get confirmation, with all the materials for the meeting automatically produced and delivered in a seamless experience,” he says.
Challenged Business
The need for reinvention comes at a time when broker-dealers are challenged to make huge investments in their businesses as they struggle with flat revenues and skinnier margins.
Can firms pay for all the investments needed for a transformation? “No, is the answer,” Crowley says. Brokerage firms will have to prioritize projects and accept the risks of outsourcing, he says. Smaller firms may have to convert to an advisory shop, set up as an OSJ or sell out.
At the same time, advisors looking to change firms are questioning whether smaller firms will have the wherewithal to survive the challenges. “Perception is everything, and it’s pretty well ingrained [among advisors] now, that if [a firm is] not big—$75 million to $100 million in revenue or larger—the perception is that they can’t survive,” says recruiter Jon Henschen of Henschen & Associates.
Many firms have a hard time differentiating themselves, other than by competing on price, observers say. “It’s clear we don’t need 4,000 broker-dealers in the marketplace,” Moore says.
Crowley notes that almost a third of all B-Ds have five or fewer reps. “I think we’ll see consolidation of advisor groups as well,” says Harman, who has been recruiting reps into his firm, where he takes over money management and other duties for them. “They are ready to scale back, but not retire.”
Merger activity among B-Ds may pick up with a market slowdown or other “disruptive forces,” Chisholm says. Valuations will settle down, bringing out a number of potential acquirers now sitting on the sidelines who are “waiting at the ready.”
Still, Chisholm thinks there’s a place for smaller dealers who are not as encumbered as the larger players with legacy technology and systems. “The cost of entry is much lower than it historically has been,” he says, and growth in the hybrid space shows the demand for brokerage capabilities to complement an advisory business.
Recruiting has been slow with the uncertainty surrounding the DOL rule and the presidential election, but it’s expected to pick up this year. “We think advisors are taking a wait-and-see approach” to changing firms, Wilkinson says. They are waiting not so much to see whether the DOL rule survives, but to see what their current broker-dealers are doing to adapt.
“Once there’s clarity … with the changes that other firms are making, I think there’s going to be a healthy pent-up demand” from advisors looking to make a change, Wilkinson says.
Webber at Cambridge has seen the same thing, with recruitment slowing until last September when activity picked up. Some advisors who would normally be ripe for a move “put on the brakes to determine if they even wanted to be in the business,” Webber says.
Older reps who see that their business model has to change might finally consider retirement, she says. “We just don’t see a lot of enthusiasm from them” to stay in production.
Webber thinks the best recruiting opportunities are in the insurance-company owned B-Ds that may get out of the brokerage business. Insurers see their B-Ds as distribution centers more than profit-makers, so they have to think hard about investing resources to stay in the game. Moreover, proprietary products will become more difficult to push in the face of heightened regulatory scrutiny.
Some insurers have already unloaded their distribution arms. In November 2015, Transamerica announced it was selling its broker-dealer to John Hancock Financial Network. Several months later, American International Group announced the sale of its Advisor Group unit to private equity firm Lightyear Capital and Canadian pension fund manager PSP Investments. That sale was followed by the news that MetLife was selling its broker-dealer unit to Massachusetts Mutual Life Insurance Co.
Throw in some recent management shake-ups at Cetera and LPL Financial, and you have what should be a fruitful recruiting environment.
Yet despite the management and ownership changes at these firms, competitors say there hasn’t been a rush to the exits; instead, advisors are biding their time to see what shakes out.
Moore, who replaced Larry Roth as chief executive at Cetera last September, says the firm is in a good place after emerging from bankruptcy with a new board and capital structure. “We’re a battle-tested team, with oxygen and life breathed into [us],” he says. “We’re like a $2 billion start-up almost.”
He says some prominent advisors have recently joined the team, and that this is proof the firm is on the right track. One new recruit he was no doubt referring to is industry icon Ron Carson, of Carson Wealth Management, who ended his long affiliation with LPL in January.
At LPL, Bill Morrissey, managing director of business development, says recruiting is in good shape, especially after the firm put to bed questions about whether it would be sold. “Anytime there is clarity around the capital structure, it’s helpful,” Morrissey says.
Upgrades to the advisor workstation, beefed up compliance and improvements in LPL’s call center should be a positive draw, he says.
Curtis at RJFS, which attracts a high percentage wirehouse recruits, says advisors at the big national firms are driven to look around for new situations when their companies impede their client interactions and push lending products—issues that still irk some in the wirehouse crowd.
“Our last fiscal year [ended in September] was the best year we’ve had, and I expect this year will still by very strong,” Curtis says.
An uptick in recruiting may not be the only bright spot for the industry this year. Industry execs are also hoping to see better working relationships with regulators. Industry lawyer and former SEC official Jay Clayton will be running the SEC, and Robert Cook, also with a long resume as an industry attorney, took over as Finra chief executive last August.
“There may be a bit more balance in that dialogue” with regulators, “and I feel better about that,” Moore says. “There’s been a period of regulation by enforcement, which creates headlines, but it doesn’t create a better industry.”
At the Financial Services Institute’s annual meeting in January, Cook promised to continue listening to industry participants and be accessible. “I’m very encouraged by what I’m hearing from [Cook],” FSI chief executive Dale Brown told Financial Advisor during the meeting.
But make no mistake, regulatory pressures aren’t going away. In fact, Curtis notes that with all the technological tools available for surveillance, firms can be much more efficient in their oversight. As a result, “the expectations [from regulators] around how we do [supervision] have increased,” he says.
Politics and regulation always create some threatening storm clouds, but industry leaders say the overall outlook is favorable. “A lot of people are all twisted up about regulation, but it’s a really exciting time,” Crowley says. “This is a great time to be in the business, because demand for financial services from investors has never been greater, and the supply of providers has never been fewer.”
Of the roughly $60 trillion of investable assets in the U.S., only about $18 trillion is covered by an advisor or some type of advice platform, Moore says. “So providing financial planning, access to advisors, robo-advice and [other] tools … to people who need them, that is our mission.”
