There’s a concept in evolution called “punctuated equilibrium,” when long periods of stability and slow change are interrupted by cataclysms such as rising sea levels or mass extinction events that cause new species to branch off. Think of the meteor that brought about the decimation of the dinosaurs. Scientists now say that it also wiped out some competitive mammal groups, allowing our own mammalian forebears to bulk up and diversify, to be unleashed into the world in the widely variegated species we have today.

The advisory industry has gone through an evolution of its own—much of it a reflection of its distant origins in securities brokerages and the insurance business. Here, too, long periods of stability have been interrupted by moments of upheaval, including massive consolidation, the entry of private equity into the advisor space, the Covid crisis, the giant cohort of retiring advisors and the rise of interest rates.

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Louis Diamond, an advisor recruiter, says the trend he sees is that there are simply fewer broker-dealers recruiting now because of consolidation. “Many of them are being picked off by Osaic, Cetera, LPL and others. … This has put a big gap between the biggest [companies] and everyone else. It’s made it more difficult to compete with the scale players. But it’s also made it so there’s been a lot of forced movement and asset-in-motion opportunities for most firms.”

Higher interest rates have been a huge driver of broker-dealers’ profitability, allowing them to make money hand over fist on cash sweeps or attachment revenue (asset-based fees), as well as the money they are getting from asset managers to be on their platforms. That’s also helped the big firms when fees in other places are shrinking—the “race to zero,” as Diamond puts it, on admin fees charged to advisors and custody fees charged to clients.

“Especially for admin fees, the basis points that firms charge for clearing and custody, we’ve seen those fees go down,” Diamond says. “There are still some firms that charge an exorbitantly high admin fee,” he says, and those firms will likely be put on their heels in a recruiting war. “Others have lowered their fees considerably either because they are self-clearing like an LPL or they have just gotten better pricing with Fidelity and Pershing. … The B-Ds are able to push some of those savings onto the advisor,” Diamond says.

Some of the biggest deals this year include LPL’s announcement in mid-February that it would purchase Atria, a firm with $100 million in brokerage and advisory assets and one well-known for its inroads with banks and credit union clients. Many people’s first dealings with the financial services industry start with banks, which allows bigger companies to start on smaller relationships with clients and grow organically.

As LPL’s CEO Dan Arnold said in a February earnings call, “The traditional bank and credit union space continues to be a consistent contributor to organic growth, as we added approximately $1 billion of recruited assets in Q4.” The move surprised some in the industry who noted Atria was a firm that cleared through Pershing, which meant repapering would be needed to move those advisors over to LPL’s custody platform. In a world where scale has become so important, the custody move didn’t seem to matter as much as it might have in the past, say sources.

The willingness to keep paying for acquisitions is changing the business and leaving independent brokerage reps with fewer options. Larry Roth, a private investment and M&A consultant with RLR Strategic Partners (he’s also a former CEO of both Cetera and Advisor Group), says, “By now, with interest rates increasing and the cost of capital increasing, some people thought acquisitions would cool a little bit, but they haven’t. The IBDs for the most part are not experiencing any organic growth. And that’s a big deal. Especially if you’re private equity owned, the idea is to buy and consolidate and reduce costs and accelerate growth. The organic growth component that’s been so prominent in our industry for so long is absent, with the exception of market value.” So what you have is an aging workforce of advisors whose growth is dependent on markets, which would otherwise disconcert broker-dealer acquirers, he says.

It’s long been anticipated that advisors who began in the brokerage model business will be drifting toward fee-only models—and many have. But that’s been a slow process, and there are reasons for smaller advisors to stay in the broker-dealer channel—for instance, some have important commission business they need to hold on to and others need back-office, HR and technology help. Many advisors come from wirehouses where they are used to working in a certain way with a familiar pay grid. It may be uncomfortable or impractical to quit the commission world cold turkey.

Still, the broker-dealers have become aggressive at launching RIA presences for advisors working in a hybrid format, and their RIA businesses have grown so big that executives at some firms, such as LPL and Commonwealth, chafe at even being called broker-dealers. What the B-Ds fear most is that reps will move off the grid from one of their affiliated hybrids to a completely independent hybrid RIA or OSJ—and then move assets off the B-D platforms entirely to go to a custodian like Schwab or Fidelity.

When they’ve got so much cash in sweeps making them money, there’s a lot at stake for broker-dealers if that money moves, so they are looking for different ways to keep advisors in their orbit. In some cases they are buying stakes in hybrid firms (sometimes known as OSJs or super-OSJs). Or they are building big RIA businesses themselves or launching them (as Cambridge Investment Research did earlier this year when it launched an RIA acquisition firm, BridgePort Financial Solutions). Or they are staying close-knit with the next generation of advisors, helping transition the assets of veterans to those younger professionals trying to build their books. All of these things are meant to generate goodwill and increase the advisors’ dependence on these firms.

Clients don’t always want to be parked in low-yielding cash, of course, and have been engaged in “cash-sorting,” or moving money to higher-yielding products like money market funds, but broker-dealers are responding to that, too. An overreliance on sweep accounts isn’t necessarily healthy, and regulators have warned B-Ds about failing to make full disclosure to clients. Firms like E*Trade that haven’t provided better-yielding alternatives in 401(k) plans have been sued.

Tana Marcom, a director and ratings analyst at Fitch Ratings, says that a number of firms have come up with high-yield savings products to keep the cash on their balance sheets. The payoff is stickier clients willing to pay stickier fees. “When you’re thinking about the high-net-worth and ultra-high-net-worth segments, they are providing a number of ancillary, family-office-type services. And clients are willing to pay for those services. So you’re seeing less [fee] compression there.”

Evolution And Growing Pains
Consider also that the advisors in question are aging and the broker-dealer pool of reps is shrinking. That’s caused an interesting age gap question in both the RIA and broker-dealer worlds. As the stock market has raced to nosebleed highs, so have the revenues at advisory firms, and thus have the firms’ valuations. That’s made it harder for the younger generation to buy in as successors. The emergence of private equity firms as buyers has made this problem more acute in the RIA space: PE has to spend the money (to earn its fees), so firm valuations go higher, and younger advisors find it’s harder to catch the car.

Not everyone is buying into the reasoning behind the lofty prices PE firms are paying for RIAs. On an earnings call in late January, Raymond James CEO Paul Reilly (who later announced his resignation in mid-March), voiced skepticism about the wisdom and financial viability of the acquisition fever sweeping the RIA space. “Probably the biggest change in the competitive landscape has been RIA roll-ups that pay prices [for advisory firms] that we can't quite figure out, and it's a bet on aggregating and being able to go to market at some point even though those higher multiples are much bigger than public multiples,” he said. “So that's a new kind of competitor that's kind of led price.”

Other firms have taken a more aggressive approach than Raymond James. Competitors like LPL Financial and multiple rivals backed by private equity and venture capital have bid up prices for hybrid advisory firms. “The market determines pricing,” says Rich Steinmeier, the managing director and chief growth officer at LPL. “There's huge value to wealth management practices. There's huge value to recurring revenue streams.”

The dilemma for advisors with higher valuations could favor the B-D industry, which can help in a few ways: The big firms have deep pockets to help advisors cash out. They can help advisors hunt for successors on the same platforms. They can help younger advisors buy in with transition assistance.

Steinmeier at LPL says, “By and large, 80% of the practices we’re buying have a next generation that does not have the wherewithal to be able to get the capital to purchase the practice, and so we will purchase the practice, develop the G2 advisor and then allow that advisor to buy it back from us over time instead of putting the burden on the selling advisor.”

In this way firms provide a bridge but also cement relationships with the clients. LPL offered a plan last year to take over partial books of business—in other words, create a direct relationship with clients. The mere suggestion that the clients work directly with the broker-dealer and go around the advisor would likely have startled advisors 15 years ago, but in a world where uncomfortable demographic questions need to be solved somehow, those old concerns likely don’t cause jump scares anymore.

Broker-dealers offer other advantages as well besides technology and client help. In some cases, they can help advisors scrape commission business off the books to increase the valuation of the firms.

Why Move?
Advisors are often prone to inertia when it comes to switching broker-dealer affiliations. According to LPL and Raymond James, advisors still aren’t moving as much as they used to, though Diamond Consultants published a study earlier this year saying the opposite: that movement has picked up.

Ryan Salah is a rep in Towson, Md., and he and his partner, both of whom are in their 30s, recently switched broker-dealers, moving to Kestra from the firm their senior partner had been with for decades. “I think the younger demographic of advisors is keenly aware of trends and capabilities at different firms,” Salah says.

He claims it’s easier now to open up accounts. “The new broker-dealer has invested the money in making it easier for the clients to do business. We also started to expand our offering when it comes to managing 401(k) plans. The new broker-dealer was much more equipped to handle our questions and concerns around compliance and service and all those things and even the paperwork than the prior broker-dealer.”

The fact is that practical necessity is requiring that advisors think about their affiliations in new ways. That reality likely played into the thinking at Advisor Group when it last year consolidated its legacy brands and recast itself as Osaic. The former AIG subsidiary carried a rainbow of well-known brokerage names such as SagePoint, FSC Securities, Ladenburg Thalmann, Woodbury Financial and Royal Alliance—brands its advisors were fiercely loyal to. But consolidation made sense for several reasons, according to Greg Cornick, Osaic’s president of advice and wealth management.

“In our situation, as you get into succession planning as advisors are continuing to move out of the industry and new ones are coming in … we had multiple broker-dealers where you couldn’t do seamless succession planning with books of businesses across broker-dealers. If it was two advisors at Royal Alliance that wanted to come together with a succession plan or M&A, they could do it,” Cornick says. “But if it was a Royal advisor who got to know a SagePoint advisor and the broker-dealer walls were still up, that would have required an entire repapering.”

Osaic became even bigger with its addition of Lincoln Financial Advisors Corp. and its brokerage unit last year. The firm also found that its advisors wanted an option at both the beginning and the end of their careers to be W-2 employees rather than just independent contractors, Cornick says. “They wanted to be part of the industry longer but they wanted a monetization event.”

Wayne Bloom, CEO at Commonwealth Financial Network, argues advisors move for a number of reasons, and that his firm saw two huge recruiting years in 2022 and 2023. He says services like Commonwealth’s turnkey asset management program help advisors grow organically faster, since it gives them a bigger time component with their clients. But he also says that advisors move because those, particularly from insurance cultures, might feel that they are getting penalized by not selling more product, even if the clients are well-insured already. An insurance culture might feel like a safe harbor at the beginning of a rep’s career, he says, but once an advisor grows into more of a wealth management role, they might well get itchy feet to leave.

Some advisors prefer small, privately held independents, says Jodie Papike, a recruiter at Cross-Search in California. But that pool is shrinking. “Every year, privately held independents have sold,” she explains. “But there are so many privately held midsize companies. They aren’t able to offer the amount of upfront money bigger firms are, so they focus more on service and helping advisors grow.” Margins are thin in the independent broker-dealer space, she says, and if you add regulatory pressure, that eats into profits, especially in low-interest-rate environments, which could easily come back.

Some recruiters say advisors chafe at the fees they’re charged by their broker-dealers, especially if those fees are opaque. But Salah, who admits that switching broker-dealers is always a big lift for advisors and clients, also says that it was more important to consider what his firm would be getting in terms of technology, compliance and research tools from his new broker-dealer.

“We were very aware of what we were being charged at our old broker-dealer and what we were getting, and what we are being charged at our new broker-dealer. The difference is not much. If anything, we felt like it made sense to run a successful business. Maybe the old broker-dealer wasn’t charging enough for the service.” He says, in fact, that while both his old firm and Kestra use Envestnet, Kestra allowed The firm to reach certain fee break points on pricing if certain asset levels were reached. Having more solutions spread out at the old firm led to a more expensive business. “The new broker-dealer is able to offer more competitive pricing to advisors if they hit certain break points.”

Shannon Reid, president of Raymond James’s independent contractor business, says that her firm definitely has a reputation for quality over quantity and that those seeking higher payouts at the expense of all else might not find RJFS to be the right fit, even though the firm has both independent and employee models (and an RIA presence). Reid notes advisors’ interest in the firm’s Independence Plus offering, a suite of services that helps advisors transition to the independent channel by helping them with things such as real estate and employee benefits.

The offering was beefed up earlier this year. “We pair advisors with a dedicated consultant who can really help them develop their strategy and build out their own business model, including HR, real estate, [the] structure of their business, compensation—any question they might have as they transition from being an employee to becoming a business owner.”

Reid says Raymond James, like others, is helping advisors with succession plans, and that efficiency through better tech platforms is what attracts younger advisors trying to grow their businesses. “They can see a future … where we may have fewer advisors serving more clients,” she says. “So we really need to have the tools and resources that help those advisors be more efficient, particularly on the simple stuff. The administrative stuff, [such as] making sure we make it as easy as possible to open accounts. We make it as easy as possible to do some of the day-to-day functions.”

But not all the bells and whistles are going to keep some advisors from eventually seeking to go off the grid altogether and become independent RIAs.

Matthew Gottshall is an advisor in Westlake, Ohio, who left the broker-dealer space. “For us it all revolved around freedom,” Gottshall says. “Working in the broker-dealer space has a lot of advantages,” he says, but in that world, “you’re being told you have to use this CRM and this trading platform and this financial planning software and this money management system. They have to cater to a wide-ranging advisor base [and] not everyone practices the same way.”

Many of the leading IBDs, including Raymond James, LPL, Commonwealth and Cambridge, are preparing for these reps going RIA-only and already are servicing hundreds of them through their own custodial operations. Whether the big IBDs can become major rivals to Schwab, Fidelity and Pershing in the slim-margin custody game remains an open question.