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After last year’s frenetic merger activity, together with strong equity markets and a competitive recruiting environment, independent broker-dealers are recommitting to organic growth. They’re also making plans to reinvent themselves for the next generation of advisors and investors, by building practice-management and consulting services, addressing the challenge of planning for succession and beefing up their technology—even by coming up with some robo-like offerings.
Last year, the industry was fixated on the rampant merger activity of real estate investor turned broker-dealer player Nicholas Schorsch and his RCS Capital Corp. (RCAP), which purchased Cetera Financial Group.
That changed in the wake of an accounting scandal late last year at Schorsch’s American Realty Capital Properties. After that, the REIT mogul ended any associations he had with his publicly traded companies, including broker-dealer owner RCAP. “Schorsch is no longer affiliated with our parent, and was never affiliated with our retail business,” says Larry Roth, chief executive of Cetera.
Thus, compared with last year’s M&A activity, the environment this year seems downright placid. There was a “fair amount of noise in the market” after the accounting fiasco, Roth adds, “but we hope to see less of that in the future.” RCAP is still open to making strategic acquisitions, but for now is more focused on growing organically, Roth says.
Meanwhile, competitors who had hoped to get a flood of calls from advisors at the RCAP broker-dealers seem to have been disappointed. “We’ve seen less activity out of the Cetera organizations than I would have anticipated,” says Scott Curtis, president of Raymond James Financial Services.
Even if RCAP’s spending spree for broker-dealers slows, industry executives predict continued consolidation as firms seek to protect margins by building scale. The “costs of compliance and technology are all very expensive,” says Wayne Bloom, chief executive of Commonwealth Financial Network. “So if you don’t have critical mass, I think it will be very difficult to survive.”
“Industry margins continue to deteriorate” as the commission and fee rates gleaned by broker-dealers are pushed downward at a time of increased competition, says Bill Morrissey, managing director of independent advisor services at LPL Financial.
B-Ds will also have to spend more on technology to remain in compliance with regulators and meet the increasing demands from clients for improved access to their investment information, Curtis says.
The growing cost pressures are, of course, particularly hard on small firms. While each firm is different, Fidelity executive Sanjiv Mirchandani thinks it will be tough for B-Ds to survive unless they are at $50 million or more in revenue.
“Among those cost pressures, litigation is an ever-going risk,” says Mirchandani, the longtime head of Fidelity’s National Financial clearing unit who has also recently been given responsibility for the RIA custody business. “You don’t want to be in a position where, with one bad arbitration ruling, you’re going out of business.”
Look for outside investors to continue playing a role in consolidation. “There is still a lot of private equity [money] in this space” looking for deals, says Mirchandani. Outside investors understand that there’s a rosy future for the independent advice business—since there will be fewer advisors and a growing demand for advice from an expanding population of retirees. “If you get the right price, retain the assets, get the scale and if [interest] rates go up, you can get pretty good return on capital” from buying a broker-dealer, he says.
Stuck In Their Seats
The consolidation trend should also give surviving broker-dealers an opportunity to pick up some good advisors who may not want to remain at firms that have merged. But industry observers caution that the overall recruiting environment has slowed, and it might not change this year. Good markets beget good business conditions and keep busy brokers in their seats.
“Reps aren’t moving as much as they used to,” says recruiter Jon Henschen, founder of Jon Henschen & Associates. Sometimes people move for compliance reasons. Either the brokers have been asked to leave their firms or have issues with their firms, Henschen says. Placing those types of advisors can be difficult because broker-dealers have gotten stricter about taking on any kind of regulatory baggage.
What’s more, “there has been a little bit of slowdown on the breakaway trend,” Mirchandani says. “Advisors tend to move when markets are more difficult. Now they’re too busy” handling clients.
Despite a tepid recruiting environment, the bigger firms seem to be adding advisors and revenue as some advisors flee to quality names and others seek independent firms with significant resources and services. LPL Financial added 363 net new advisors in 2014, up from 321 in 2013, bringing its total past the 14,000 milestone.
Raymond James Financial Services gained 100 advisors in 2014, bringing its total to 3,379. “The quality of advisors we’re meeting with is consistent with last year, which was a bit better than the prior year,” Curtis says.
Commonwealth picked up almost $48 million in recruited revenue last year, up from $33.4 million in 2013. “Last year, we had the second-best recruiting year ever, and the pipeline remains very full,” Bloom says.
Cambridge Investment Research added “north of $60 million” of advisor production, says president Amy Webber, besting the $52 million gained last year. While the firm has been able to attract some high-quality recruits, in terms of raw numbers, “I don’t see an awful lot of movement out there,” Webber adds.
Cetera Financial Group added a net 123 advisors last year, bringing its total to just over 9,000. The firm’s fourth quarter ended December “was the strongest one we’ve ever had,” says Adam Antoniades, president of Cetera Financial Group.
The Cetera firms picked up 242 financial advisors in the fourth quarter, while losing 116.
“Generally there’s a negative effect on recruiting when we acquire a firm, so to see the strongest quarter like that with the bad news from our parent company ... was really refreshing,” Antoniades says.
Broker-dealers also report that the “tuck-in” trend continues. Tuck-ins are recruits who join an existing branch, usually an OSJ, which offers a turnkey office and support structure. The ease of joining a fully staffed branch, with a manager to run interference and technology that’s ready to go, appeals to those who don’t want to hassle with starting up their own offices.
An established office also provides a sense of community for a recruit who is used to having some branch camaraderie, Morrissey says. Last year, about 40% of new recruits at LPL were tuck-ins, up from 25% in 2013.
Large ensemble groups that can add brokers either to existing locations or new offices under an OSJ are growing especially quickly, Morrissey says. These larger producer groups are adding value with a brand name, often in local markets or in a particular industry, with mentoring and training and with a marketing effort that’s drawing a flow of new clients.
Cambridge has three branches doing over $20 million in revenue. “We call them the B-Ds inside a B-D,” Webber says. “They are successful organizations that add a lot of value” to advisors who join. “They’re growing, and definitely here to stay.”
Last year, about 70% of Cambridge’s new advisors joined one of the firm’s existing branches, Webber adds. In 2013, that number was closer to 50%, and for 2015 it looks as if more than half of recruits will again join as tuck-ins.
Everyone knows the so-called hybrid space is the place to be. Other than the RIA channel, it is the only channel that’s been adding bodies.
Total advisor head count has shrunk 2.5% per year over the past five years, according to a January report from Cerulli Associates (which has data through 2013). Over the same period, though, the RIA and dually registered channels were up 1.8% and 9.0% per year, respectively.
Cerulli defines dually registered advisors as those who have their own RIA firm plus an affiliation with a broker-dealer. How independent broker-dealers handle hybrids is a critical issue, especially the way each advisor balances custody assets between the RIA and B-D sides of his or her business. In that regard, IBDs seem to be making some progress by offering incentives and services for hybrid advisors to keep more assets on the brokerage side.
As of last year, hybrid advisors had 59% of their fee-based assets at an independent RIA (held away from their broker-dealers), down from 73% in 2012, according to Cerulli. The commission assets those hybrids held at their broker-dealers rose to 30% of the total, up from 16% in 2012, while fee-based assets under broker-dealers’ corporate RIAs inched up a percentage point from 2012, to 12%.
The Next Rung
April 1, 2015
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