This year looks to be another active recruiting year for independent broker-dealers—but beating the record results from 2017 may be tough. The growing diaspora of wirehouse brokers provided one source of recruits, while merger and acquisition activity provided another avenue.

Firms saw good numbers of recruits coming out of the National Planning Holdings (NPH) B-Ds, as reps at the four NPH dealers evaluated their options following the August 2017 purchase of NPH assets by LPL Financial.

That deal-driven movement ignited what had otherwise been an average year. Concerns about the DOL rule abated after the Trump administration came into office in January, causing some advisors to put transition plans on hold.

At least until the NPH announcement. “The August to December period made it a very interesting year,” says Amy Webber, chief executive of Cambridge Investment Research. The NPH deal is “what pushed us back into a really strong year.”

Cambridge picked up more than $80 million of recruited production last year, about $30 million from NPH firms, Webber says, matching a strong 2016. In a normal year, Cambridge sees about $60 million in recruited revenue.

Securities America was probably the biggest beneficiary of the NPH transaction. Last year was a record recruiting year, according to Securities America’s chief executive, Jim Nagengast. He declined to provide details, and parent company Ladenburg Thalmann does not break out individual B-D results, but Nagengast did confirm that the movement the industry saw in the last half of the year helped his firm reach record territory.

Nathan Stibbs, chief strategy officer at Triad Advisors, another Ladenburg Thalmann firm, calls 2017 a “revolutionary year” for his firm, with record recruiting numbers for advisors, revenue and assets. The hybrid firms that Triad caters to came from large IBDs, insurance-owned firms, and small private outfits, Stibbs says. The hybrid space should continue to grow from regulatory disruption, higher costs and risks, and fee compression, he adds.

LPL, of course, will be the biggest beneficiary of its NPH purchase. Its advisor count has been flat over the past few years, and the addition of NPH reps will allow the massive firm to scale up even more. (According to its latest reported figures, as of September 2017, LPL had 14,253 advisors, up by 68 bodies from 12 months prior. NPH firms had 3,200 reps as of last August.)

In November, LPL said it had retained about 70% of the NPH advisors in the first transition wave, with the second wave to follow in the first quarter of 2018. That looks to be in line with what LPL expected, based on the terms of the deal. With more than 15,000 reps, LPL’s growth rate is running into the law of large numbers, prompting several observers to expect the firm to remain on the prowl for acquisitions.

Bill Morrissey, LPL’s managing director of business development, wouldn’t confirm if the firm is still on track with NPH reps, nor would he speculate on what the final head count would be. But LPL’s recruiting efforts have continued apace, he says. “We did not overly divert our recruiting team to focus on NPH.”

The recruiting outlook for this year “will look a lot like 2016 and 2017,” Morrissey says, with movement driven by profit-margin compression among B-Ds that can’t make needed investments, a tougher regulatory environment and more consolidation.

At the Advisor Group, recruitment of fee-based assets came in 30% above target for the year, according to Jamie Price, the company’s chief executive. In fact, it “was the best recruiting year in the history of the company,” he says.

The Advisor Group does not disclose recruited head count or revenues, but it also landed some large NPH offices. Next year’s pace should fall to more normal levels, Price says, although major consolidation “would create larger than normal opportunities.”

Commonwealth Financial Network, considered the most selective independent B-D, also had a record year last year, helped by concerns about the DOL rule implementation and the NPH deal, says Andrew Daniels, the company’s managing principal of business development.

As of late December, Commonwealth had added about 150 advisors with just over $62 million in production, he says, including some $17 million from 29 NPH-affiliated recruits. The firm lands about 100 advisors in a normal year.

The NPH reps Commonwealth nabbed were “used to a more intimate connectivity with their firm … and were concerned that they weren’t going to get that” at LPL, Daniels says. This year should “be equally as good, because I think there will continue to be turbulence and a flight quality,” he adds.

According to Scott Curtis, president of Raymond James Financial Services, recruiting at his company ran “well ahead of last year” in its fiscal first quarter, ended December. And the full years of 2017 and 2016 were both good years, Curtis says, although the all-time record came in 2009 as wirehouse and regional recruits joined in droves following the financial crisis.

“My belief at this point is that we will surpass last year’s results,” Curtis says. RJFS doesn’t report recruiting data, but as of its September 2017 year-end, the independent unit had 4,305 advisors, up by 257 from the previous year. Among all brokerages, recruiters believe Raymond James’s various platforms, including its division for employees, was able to capitalize on the exodus from wirehouses better than any other independent firm.

But the Raymond James results last year were not driven by the addition of NPH reps, Curtis adds. “We just haven’t found many who would be a good fit,” he said. “We’ve found that advisors at NPH are heavy in variable annuities, and that’s not typical for us.”

For Cetera Financial Group, last year was “not the best year ever, but close to it,” says Adam Antoniades, president. Cetera doesn’t share recruiting data, but Antoniades says his firm’s B-Ds saw “an awful lot of at-bats because of the NPH deal.”

This year should be strong, fueled by industry consolidation, he says. “We raised our goals significantly [for 2018], based on the trajectory of our pipeline.”

Remarkably Upbeat

After robust results last year, B-Ds remain remarkably upbeat about recruiting, given a number of underlying trends.

For one thing, there’s a lot of soul-searching going on. “A lot of advisors are not happy right now,” Nagengast says. Advisors are evaluating whether their current firms are where they want to be for the long term, and they are finding that “their current partner is just not the one for their future,” he says.

Fears of an ownership change at their B-Ds are rife among reps. As smaller firms sell out to larger firms, brokers feel they become “just a number [and] become frustrated that they become less important” to their B-D, Webber says.

Case in point: Following the NPH announcement, many of the advisors at the NPH firms had just a couple months to make a decision about staying with the much-bigger LPL.

As a result, Nagengast thinks advisors will be more proactive in lining up possible alternatives should something happen to their existing firms. “What we saw in 2017 was that advisors want to control the process, and evaluate their [B-D] alternatives on their own timetable,” he says.

Although it’s on the back burner for now, the DOL’s fiduciary rule will continue to drive movement, observers say, as B-Ds implement policies to comply. Firms that maintained commission business in retirement accounts and maintained broad product choices are using those decisions to their advantage.

B-Ds also enjoy an advantage if their platforms are flexible—accommodating B-Ds, independent RIAs and corporate RIAs, and offering reps options to use multiple clearing firms and custodians. At the same time, companies are upgrading their technology, practice-management support and succession-planning capabilities.

Policy choices driven by the DOL rule “are making us all very different,” Webber says of the way recruits view the major B-Ds.

Meanwhile, those who recruit wirehouse reps say that this market has become better informed about independent channels. Wirehouse advisors are notoriously misinformed about what’s available outside of the traditional firms.

“Recruiting has been fun, because the reality is more and more people understand the main difference between the wirehouses and the independents,” says Steve Dudash, the president of IHT Wealth Management, a former Merrill Lynch rep who broke away in 2014 to set up an LPL-affiliated branch that now serves about 65 advisors with $2.7 billion in assets. “That’s why more higher-end advisors are moving away,” Dudash says.

“We’re seeing a lot of wirehouse-type advisors trying to figure out how to liberate themselves,” agrees Richard Dragotta, head of INC Advisors, another large LPL branch network with 160 advisors.

And when Morgan Stanley and UBS dropped out of the protocol for broker recruiting, wirehouse advisors took notice. “Man, did that scare everybody,” Dudash says. “It really opened people’s eyes. It very much escalated time frames many of these teams are looking at” for a move.

Since 2004, when a number of big firms developed the protocol, wirehouse reps have been free to change firms, take customer contact information and solicit those clients. Suddenly, with the protocol possibly on the ropes, it’s become clear once again to employee reps that they don’t own their clients—their employer firms are acting like they do.

“Even for those at the wirehouses [that] stayed in the protocol, I think it’s opened their eyes to the question of, ‘Where do I want to be in the long term?’” says Mark Mersman, head of marketing at USA Financial, a broker-dealer and TAMP.

Pulling out of the protocol might help the wires slow the breakaway trend, though, at least for now. “Advisors at UBS and Morgan Stanley in particular, because of the change in exiting the protocol, are being a little more cautious,” Curtis says. RJFS gets over half of its recruits from employee-rep channels like the wirehouses and regionals.

Finally, the new tax law also offers an incentive to advisors looking to move from the employee channel to independent contractor status. Pass-through entities, including sole proprietorships, get a tax deduction equal to 20% of their business income, phasing out at incomes of $157,500 (for single filers) and $315,000 (for joint filers). The tax benefit isn’t enough by itself to draw someone to the independent side, but it is an added inducement, observers say.

All told, firms see another good year for recruiting in 2018—some are even a bit giddy about building up their ranks.

The money and time spent on the DOL rule “sucked a lot of fun out of the business” over the past few years, Mersman says. But with much of that heavy lifting done or put on hold, “we’re at the point now where we can have some fun with it—there’s renewed energy now.”