Big mergers in the independent broker-dealer channel will continue to alter the space, according to a new report from Fidelity Clearing & Custody Solutions.

Year-to-date, $136 billion in assets have changed hands among large IBD acquirers as a result of five deals, the largest being LPL Financial’s purchase of National Planning Holdings.

Fidelity defines large IBD acquirers as those with $10 billion or more in assets. These larger firms, with the resources and know-how to do deals, are driving a trend in which a smaller number of large firms dominate. The top 10 IBD firms now manage 65 percent of all broker-dealer assets and 48 percent of all broker-dealer advisors, the report says.

The consolidation trend is being driven by the rising costs for technology and advisor support and to meet regulatory requirements—costs small firms are challenged to take on.

Tellingly, B-D operating margins have fallen from 12 percent in 2006 to 3 percent in 2016, the report says, citing data compiled by LaRoche Research Partners from SEC filings.

One challenge is that “in the IBD channel, average assets are half what they are in the RIA space,” said Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions, who spoke with nine large acquirers in producing the report.

IBD-affiliated advisors average about $33 million in assets, according to Cerulli Associates, while advisors average $67 million in the RIA channel.

As the large firms grow, they are finding it necessary to be more selective in the firms they acquire and the platform investments they make, Slater said.

“Many broker-dealers are investing heavily in technology,” he said, “but they don’t have to build it, [they can] buy it.”

Large B-Ds have grown more selective in doing deals, he added. For one thing, they’re already large enough to compete, so they’re under little pressure to make acquisitions. Plus, “they have fewer potential targets, and recruiting [individual reps] is the foundation of what they do.”

In addition, any deal needs to fit into a long-term strategy of what the firm is trying to create, Slater said. “There’s a lot of discussion [at B-Ds] around what they’re trying to build, and less about just doing a transaction.”

Keeping Close

As firms get bigger, however, they face challenges in maintaining close relationships with advisors.

“There’s a tension they’re trying to manage there,” Slater said. “The risk is that they become too removed from individual advisors.” Senior managers report that they must spend a substantial part of the time connecting with their advisors, he said.

Small firms can survive, Fidelity says, but they must have a definable niche to attract and retain advisors. Boutique firms offer one way to compete, since they offer clients close contact with senior management.

Advisors themselves will increasingly have to decide what they want, such as a close connection to management, or the robust technology and support that scale offers, Slater said.

Large RIA firms are also on the prowl for merger partners, the report says, although none have yet reached the scale of the large B-Ds.

But as RIAs continue to grow, and B-Ds shift to more fee-based business, the lines between the two channels are blurring.

RIA firms have become “real businesses” with regional and national brands, Slater said, and many retain the ability to do some commission business, making them attractive landing spots for both fee-based and hybrid advisors.