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Being an independent broker-dealer isn’t what it used to be.

A series of regulatory, technological and consumer-driven disruptions are challenging independent broker-dealers (IBDs), says Adam Antoniades, CEO of Cetera Financial Group, and smaller firms may become the victims of change. “The environment continues to favor firms of scale,” says Antoniades.

The pace of change for the independent broker-dealer space has accelerated over the past four or five years. Broker-dealers now offer advisors new ways to work within fee-based and fee-only structures, including the ability to start their own RIA and work with multiple custodians.

Larger firms are also creating robust in-house succession-planning solutions for advisors, including options for financing internal acquisitions and transitioning independent practices into their employee channels. At the same time, IBDs are modernizing and opening up their technology to offer advisors more flexibility and ease.

All this change occurs as the industry adjusts to an influx of private equity investment and accelerated dealmaking and as it pivots to comply with the SEC’s Regulation Best Interest and state-based fiduciary rules.

Hybridization
Today, revenues generated by fees are growing at a significantly faster pace than commissions, to the point that the RIA side of their businesses will soon overtake their legacy broker-dealer revenues. The Charles Schwab-TD Ameritrade merger also sparked interest from many smaller RIAs who fear they could be viewed as incidental clients by the colossal custodian that would emerge from that deal. For its part, Schwab has sought to reassure the RIA community.

That’s just one reason why IBDs are taking on more RIA characteristics. Many have operated fee-only platforms under the radar for years, says Lawrence Roth, managing partner at RLR Strategic Partners and senior advisor at Berkshire Global Advisors (he’s also the former chief of Cetera and the Advisor Group). “The larger independent firms are all hybrids, and they generate well over half of their revenue from recurring sources, mostly fees, and some of it from custody and spreads on cash.”

According to 2016 research from Cerulli Associates, the average IBD-affiliated advisor averages about $33 million in client assets, while advisors in the RIA channel average about $67 million. As margins across the industry shrink, advisors who bring in more revenue with fewer regulatory issues become more attractive.

Traditionally, broker-dealers have had corporate RIAs whose advisors use the broker-dealer platform for custody and clearing purposes. Today, IBDs are going further to compete directly with RIAs, says Jeff Nash, CEO and co-founder of Bridgemark Strategies, often by acquiring or creating RIAs under the umbrella of the independent broker-dealer.

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