Many broker-dealers are now expecting the final implementation of the DOL rule to be delayed until July 1, 2019, but the disruption triggered by the rule is already causing turbulence in the advisor and broker recruiting world. And however the soap opera in Washington plays out, the brokerage business is already being changed forever.

Increased compliance and technology costs are driving consolidation, prompting many small B-Ds to consider strategic alternatives—including the sale of their firms. But the glut of potential sellers is producing recalcitrance on the part of normally interested acquirers. The upshot is that individual reps affiliated with brokerages often find themselves dealing with pervasive uncertainty about their key service providers.

In early August, Kestra acquired H. Beck from Securian Financial Group. At presstime, LPL Financial announced that it was acquiring the National Planning Holdings’ (NPH) network of four independent broker-dealers from Jackson National for at least $325 million with a contingent payment if LPL can retain more than 72% of NPH reps. The agreement’s terms indicate that LPL expects an all-out recruiting free-for-all ensuing for NPH’s 3,200 reps. And more B-D’s are looking for buyers, so turbulence is likely to continue.

The biggest buyers are only interested in larger firms with more than 500 reps. With several insurance companies looking to exit the low-margin B-D business, more opportunities are presenting themselves.

For smaller firms that can’t attract good offers from acquirers, another option is to convert to a hybrid office of supervisory jurisdiction (OSJ) and affiliate with a larger B-D. Some so-called super-OSJ hybrids are already larger than many small B-Ds.

Ongoing disruption creates recruiting opportunities. When the word is out that a firm is looking to sell or explore strategic options, “the phones light up,” says Gregg Johnson, executive vice present of branch development and acquisitions at Securities America, which has completed nine acquisitions in eight years. In 2016, it added nearly $100 million in new revenues through both the recruiting of new branches and individual reps and the purchase of the firms Wall Street Financial Group (rebranded as Evolution Financial Advisors) and Foothill Securities.

Ever since the financial crisis, B-D owners have grappled with margin compression thanks to increased regulatory costs, at the same time revenue sources are shrinking or being eliminated, Johnson explains. For many, adding the ever-changing DOL rule to the mix was the final straw.

Among super-OSJs operating on razor-thin margins, the trend is even more pronounced and some key revenue sources such as 12b-1 fees will disappear next year. Johnson says his firm’s key concern is strengthening support systems so advisors in their groups can focus on their clients and not get so distracted by industry and regulatory changes.

For individual advisors, stability and the strength of their service providers is critical. If a B-D is owned by a private equity firm looking to dress the business up for sale and cash out in two to four years, a rep is likely to wonder if the firm is willing to make investments that will support advisors’ business even if it hurts short-term profits, Johnson notes.

According to one third-party headhunter who requested anonymity, Raymond James Financial Services has been “killing it” on the recruiting front this year. Commonwealth Financial Network, considered far and away the most selective independent B-D, has also enjoyed a strong year attracting new reps, though it is well-known for seeking “advisors who are perfect fits.” This recruiter adds that both these firms got out in front of the DOL rule early on, though it’s not clear whether that explains their recruiting success.

Despite the DOL rule’s wide-ranging impact on broker-dealers, it isn’t influencing the way Raymond James Financial Services recruits, says the firm’s president, Scott Curtis.

“We haven’t experienced a slowdown in interest from experienced financial advisors affiliated with other firms due to the DOL fiduciary rule or other regulatory changes,” says Curtis. “The changing regulatory landscape impacts all firms and financial advisors. Most advisors exploring potential affiliation options are thinking about the next 10-plus years of their career and which affiliation model and firm makes the most sense for their clients and their business.”

Bill Morrissey, LPL’s managing director and divisional president of business development, says “there is more disruption today than we’ve seen in 30 years” in the advisor landscape. And the rate of that change is accelerating, he adds.
Morrissey sees four or five major trends in financial advice intersecting at the same time.

Brokers are becoming advisors. Investors are shifting from active to passive investments. The regulatory environment is putting pressure on firms and advisors, even if it is, he says, for the right reasons. And there’s an aging advisor population.

“The thing we don’t talk enough about is that the needs of investors are more complex than ever,” Morrissey says. Before, advisors mostly managed investors’ money, he says. “Now that’s only one of the things you do.”

Nor is it necessarily the most important thing, he says. It depends on whom you are working with. “So the average advisor has to solve for a much broader set of financial planning needs than ever before.”

Yet, frustratingly, the amount investors are willing to pay for that advice is decreasing. “It creates an interesting set of conditions where the demand for advice is increasing, the pool of advisors is shrinking, but for the advisor to maintain quality of life, they have to work with more clients and solve for a broader set of needs,” Morrissey says. “And there are only so many hours in the day.”

Morrissey suggests there will be quite a bit of consolidation in the financial advice business in the coming years. “So the last thing you want to do as a financial advisor is go from one firm to the next,” he says. “It’s very disruptive to your business. It’s very disruptive to your clients. You need to find a partner that has the financial stability to last in our business. You need to find a partner that has the history, and a track record of investing in people and technology and infrastructure. And not every partner, not every broker-dealer, does that.”

That means advisors will have to outsource whatever jobs they can. “So automate, eliminate or outsource,” he says, adding, “You’ve got to be really selfish about how you spend your time.”


The Greatest Growth
According to Morrissey, LPL is still benefiting from advisors leaving wirehouses, which are in the midst of dramatic changes. Third-party recruiters confirm LPL’s success in this area, though they think it is Raymond James that has the most momentum. Dynasty Financial Partners is also landing a handful of very large firms.

Among other things, Morrissey notes that wirehouses are closing branches, eliminating “outsize” signing bonuses, and changing compensation. Sometimes the companies have suffered public image problems that compromise the advisors’ relationships with their clients. “I don’t know if that will increase the movement, but I think it will increase the independent capture for advisors who are at a wirehouse today,” he says.

Morrissey says LPL is recruiting across business models—registered reps, hybrids and stand-alone financial advisors. “And that allows us not just to cast a wider net but to be really nimble and take advantage of the cyclicality of our business.”

“Being a good planner is not enough,” he says. “You also have to operate your own business.”

But he says the greatest growth in recruitment of advisors is coming from other independent broker-dealers. “What’s happening is a general flight to quality,” he says.

The DOL Changes the Game
The Labor Department’s fiduciary rule is another major trend that will figure into advisors’ business. “Investors want more transparency and lower fees,” Morrissey says. “Advisors need more tools and resources. Those are the drivers.”

The rule has also accelerated advisors’ interest in switching firms. “Advisors are very interested in learning about how we are preparing for the ultimate rule,” Morrissey says. Though worry about the rule waned somewhat following the U.S. presidential election (perhaps because there were hopes the new president might not follow through with it) the interest is “bubbling up again,” Morrissey says.

Given the regulatory environment, he suggests his firm has to be careful about advisors it brings into the LPL fold. “We have a really rigorous review process,” he says. “And typically, the due diligence process that happens on both sides lasts anywhere from 120 to 180 days. Our business development people in the field get to know the advisor, their staff, and they meet their families. We get to know who the advisor is … and learn what kind of compliance and operational controls they have in place. And look at their CRD and their credit scores. So it gives us a great screening process.”

He suggests the firm’s newly launched “Mutual Funds Only” platform gives advisors the investment options they need to satisfy the requirements outlined in the fiduciary rule. “We think it provides a wonderful tool for the advisor and the investor.

Many mutual fund firms are employing new fund share classes, such as “T shares” and “clean shares,” that try to level the compensation advisors receive, but Morrissey says, “I’m not so sure that provides the best answer for the investor or the advisor. It’s a blunt way to do it.”