The number of broker-dealers is decreasing as cost pressures continue to mount, according to Cerulli Associates, which released new data on Monday.
At the end of 2016, there were 1,070 broker-dealers with retail-focused advisors, 438 fewer than in 2006, a decline of 29 percent, the research organization said.
The 2008 financial crisis triggered numerous mergers and acquisitions and broker-dealers and broker-dealers have faced a decline in their return on assets, dropping from 87 basis points to 75 basis points over the five-year period ending in 2016, Cerulli said.
“While several factors caused return on assets to decline, the adoption of fee-based advice likely has had the largest impact,” the report in the latest Cerulli Edge said.
Advisors have decreased the amount of assets they assign to brokerage accounts to 31 percent of their business, and they plan to reduce that even further to 21 percent in the next two years.
The fact that markets have done well has countered some of that downward pressure. From 2011 to 2016, overall revenue for broker-dealers grew at a 4 percent annual rate.
Another factor impacting independent broker-dealers in particular is the introduction of hybrid RIA platforms by advisory firms, Cerulli says. These programs offer higher payouts to advisors and pricing aligned with the RIA model, which results in lower return on assets for broker-dealers.
Controlling expenses also is an ongoing challenge for broker-dealers. Costs associated with compliance responsibilities and legal liabilities can be especially onerous, the report said. For instance, while the Department of Labor Conflict of Interest Rule was overturned in the court system, firms struggled to comply with its imposed costs.
At the same time, broker-dealers are going to have to continue to invest heavily in technology to stay competitive, the report said,
Recruiting bonuses have been another major factor weighing on profitability for broker-dealers. Wirehouses wound down their massive recruiting deals in 2016 and 2017, which had reached as high as 350 percent of an advisor’s trailing revenues.