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.

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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.

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.


“Broker-dealer RIAs are now increasingly multi-custodial,” says Jodie Papike, a partner with advisory recruiting firm Cross-Search, “so that if an advisor wants to plug in under their RIA and enjoy the benefits of being on a multi-custodial platform, they don’t have to change tickets anymore. Advisors benefit from that.”

For example, Triad Advisors in 2016 launched its own RIA, Triad Hybrid Solutions (THS), that blends the multi-custodial attributes with the back- and mid-office support of traditional corporate RIAs. “We provide the tech stack, we do the billing and the reporting, and in a very simplistic viewpoint, it allows an advisor to be an advisor,” says Triad CEO Jeff Rosenthal. “The advisor doesn’t have to create an investment committee, because that can be done on the corporate RIA level. They can be multi-custodial and they won’t have to repaper or move accounts.”

Different advisors want to be able to operate under a variety of regulatory structures, says Antoniades, and accommodate advisors charging fees for service or retainers or subscriptions.

“I don’t think of Commonwealth as a broker-dealer, I think of it as a national RIA that has a small, accommodative broker-dealer built into it,” says Andrew Daniels, managing principal of business development at Commonwealth Financial Network. “We’re well over 75% of our business being on the advisory side. I don’t view the growth of the RIA side of our business as cannibalization—I view it as an evolution.”

A strong stock market in 2019 provided a lift for many IBDs. Commonwealth had 2,258 representatives and $1.4 billion in total revenue in 2019, up from 2,172 and $1.2 billion in 2018.

Many former reps and hybrid advisors are also rethinking their identities and dropping their Finra licenses, says Rich Steinmeier, managing director and divisional president of business development at LPL Financial. Smaller broker-dealers may not have the scale to operate in such a flexible manner and retain their traditional commission-based platforms, he says.

“We have the capacity to invest that doesn’t have us compromising,” he says of LPL. “We don’t have to decide whether it’s better to invest in the traditional brokerage or the advisory platform. Because of our scale, we’re able to make both of those investments.”

LPL has reinvigorated its recruiting over the last year. It reported 16,109 representatives and $5.2 billion in revenue in 2019, up from 15,210 and $4.3 billion in 2018. (He said the firm had 17,000 reps as of this writing.)

Cerulli notes that fewer than one in four advisors who adopt the hybrid model will eventually drop their broker-dealer affiliation; that means holding on to the legacy businesses might be a good choice for many.

Amy Webber, president and CEO of Cambridge Investment Research, says of her own firm: “We are not one of the firms that has a formal strategy to force a conversion to fees, nor do we believe that an advisory account is suitable for all investors in all situations, and we believe freedom of choice is important for the investing client.”

Cambridge had 4,155 representatives and $906 million in revenue in 2019, up from 3,956 and $811 million in 2018.


High multiples, tightening margins, low interest rates and an aging workforce are driving broker-dealers to consider selling or merging with larger competitors. “The larger broker-dealers, many of which are public or private equity-owned, are continuing to acquire not only other broker-dealers but also RIAs in an attempt to grow,” Roth says.

This consolidation is being catalyzed by an influx of private equity. According to Echelon Partners, there were 80 private equity-fueled transactions in 2019, up from 34 in 2017. Among the largest recent acquisitions were Genstar Capital’s 2018 purchase of Cetera, Warburg Pincus’s 2019 acquisition of Kestra, and Reverence Capital Partners-owned Advisor Group’s recent purchase of Ladenburg Thalmann.

The Ladenburg acquisition created a $450 billion AUM firm, the second largest independent broker-dealer after LPL. The firm will have an 11,500-strong advisor workforce generating $3 billion in annual revenues, and offer a multi-clearing, multi-custodial platform.

Despite the headwinds like regulatory change and rapidly evolving financial technology, private equity buyers may be counting on the industry’s resilience. “Private equity has always been on the hunt for opportunities to monetize returns,” Webber says. Several firms have been players in the space for many years, she says, and indeed got the outcome they sought from their purchases. That suggests the space will remain desirable to private equity in the future.

Nash says that consolidation in the broker-dealer space may take “20 to 40 years to play out,” and that it will likely resemble the consolidation among national and regional banks in the 1990s and early 2000s. For the time being, further consolidation among the Advisor Groups, LPLs and Commonwealth Financial Networks of the world appears unlikely, says Nash, but larger firms will continue to acquire smaller competitors.

That will leave advisors with fewer options, says Papike, which will be a disadvantage when they try to change firms. “Now we’re seeing consolidation on the broker-dealer side, the RIA side and on the custody side,” Papike says. “This consolidation is not better for advisors in any way that I can see, because choice and competition is always good. For advisors who desire to work at a privately held firm not owned by a huge company, it becomes a problem, because those are fewer and farther between.”

Whereas advisors once looked at 10 or more potential destinations after deciding to leave their firm, today most are only going to look at two to five destinations, Roth says. But these firms will be well capitalized and should offer better technology and bigger payouts.

But when broker-dealers change hands, some of their advisors are likely to look elsewhere. Private equity ownership is by its nature short-term and profit-driven, says Papike. Advisors may question whether private equity-funded upgrades at the independent broker-dealers will make their lives easier—or merely increase the value of the firms for eventual sale.

Broker-dealers are also responding to fiduciary rulemaking by federal and state regulators. The SEC’s Regulation Best Interest has a June 30 enforcement deadline.

Reg BI’s requirements mostly deal with disclosures to clients, says Roth, and IBDs are well-prepared, mainly because they had already prepared for a rule from the Department of Labor that was eventually struck down by a U.S. appeals court in Texas in 2018.


“Because we all prepared so hard and long for the DOL rule, we know what we need to do already,” Roth says, “and the questions that do need to be answered, like ‘Where is the client investing? What does it cost? And how does it look relative to other options?’ are already answered within each of the big firms.”

At Cetera and Raymond James, a concerted effort is being made to educate and inform advisors about the changes required by Reg BI. “We remain focused on keeping advisors … apprised of the changes and actions they can take to be in compliance with the new rules while minimizing disruption to their business and clients,” says Jodi Perry, president of Raymond James Financial Services’ independent contractor division. Raymond James had 6,433 representatives and $2.4 billion in annual revenue as of 2019, up from 5,999 and $2.1 billion in 2018.

Steinmeier says it’s easier for larger firms to afford the platform upgrades they need to handle more stringent fiduciary rules. Smaller shops, on the other hand, may have to sacrifice their entire technology budget for a year or more in order to bring their operations into compliance.

IBDs are also keeping a watchful eye on regulations being debated and issued by legislators and agencies in Massachusetts, Nevada, New Jersey and other states. While the large firms think they can comply, they are concerned that dozens of different state fiduciary regulations would be cumbersome.

“I think that if there are 50 different state-level Reg BIs, the complexity for any parent wealth management organization is going to be challenging,” Commonwealth’s Daniels says. “The more challenging it gets, the harder it gets to effectively apply the regulations.”

Growth And Recruitment
Meanwhile, the head count growth projections don’t paint a bright picture in this IBD space. In November 2019, Cerulli Associates projected a 1.4% decline in advisor count between year-end 2018 and 2023, a decrease caused by demographic trends. Nearly 41% of IBD advisors are planning to retire and transition their businesses within the next 10 years. Yet large IBDs continue to grow in advisor personnel and revenues.

According to Steinmeier, 2019 was a record year for LPL’s growth. The firm recruited 30% more advisors than in 2018, and its existing advisors enjoyed 4% organic growth above and beyond what the market created.

Raymond James now has 4,729 independent advisors across its independent contractor division and its financial institutions division, says Perry.

 Webber said that Cambridge has recruited approximately $80 million in additional annual revenues in each of the last four years. In the first few months of 2020, it’s already added $30 million in new annual revenue to its platform.

Broker-dealers like Cetera are focusing on organic growth and retention as well as recruitment and acquisitions. Fostering organic growth means finding next-generation clients to replace the assets being drawn down by retiring baby boomers, says Antoniades.

“Most firms are setting up platforms for the mass affluent,” says Roth. “What IBDs are hoping to do is offer the advisors the opportunity to sell those mass affluent clients to the broker-dealer. Then those clients would be served by the employee channel.”

Cerulli estimates that $18 trillion out of the $60 trillion of investible assets in the U.S. is currently covered by advisors, so capturing clients new to financial advice may be the key to continuing the IBD segment’s growth.


Succession Planning
The generational turnover in the financial services industry has pressured IBDs to create solutions to help younger acquirers and older sellers alike. “Successful broker-dealers have platforms in place and know which advisors want to acquire and which ones want to sell,” Papike says.

These are often matchmaking platforms linking like-minded older sellers and younger buyers. The broker-dealer can then step in with financing and operational support to ease the transition, Papike adds.

Cetera has helped finance or facilitate approximately 250 succession-type acquisitions in the past two or three years, according to Antoniades. “All too often, succession plans [fail] because there’s not an appropriate funding source,” he says. He says his firm helps advisors with that problem.

As advisors age, being affiliated with an IBD gives them an opportunity to phase their retirement, says Roth, by turning over part of their book of business to the firm’s employee channel.

LPL, Raymond James and Cetera have also developed formal training, internship and apprenticeship programs to bring young advisors—and career changes—into the fold. “All firms are facing this challenge, and there is no silver bullet,” says Perry. She touts Raymond James’s Advisor Mastery Program for helping source and train younger financial advisors.

Broker-dealers have had to play catch-up to the RIA channel in their technology offerings, but the tide is turning, says Roth. Advisors want to work remotely and engage in collaborative planning with their clients via software. Larger IBDs are also rolling out efficiency and time-saving programs for advisors.

While some firms, like Commonwealth, build fully integrated stacks in-house, others, like LPL, offer more integrations with third-party technology providers to make it easier for their representatives to do business in the manner of their choosing. Webber says Cambridge’s tech strategy focuses both on the efficiency made possible by a controlled, centralized ecosystem and offering its advisors the flexibility to use technology as they please.

As IBDs add new services and ways of doing business, the profit margins must inevitably compress. According to a 2016 report from Fidelity, broker-dealer operating margins fell from 12% in 2006 to 3% in 2016, but an 11-year bull market may be muting the impacts.

“Spreads on cash are down now,” Roth says. “Revenue-sharing from mutual funds is declining because of shifts from active management to index funds and ETFs. It’s a lot harder to make money the old-fashioned way. It’s becoming better to make money the new fee-based way, for sure.”

But Roth says that the commission-based side of the business isn’t going away. “I think the broker-dealer side survives,” he says. “There’s still demand and desire among advisors to operate on that side of the business.”