Small B-D Outlook Improves

One year ago, small broker-dealers weren’t feeling particularly upbeat. With the implementation of the DOL rule looming, most were scrambling to re-engineer their businesses.

But in the 12 subsequent months, all signs point to a far less onerous regulatory environment than many anticipated. That, in turn, is making the independent brokerage business appear far more attractive than it has for several years.

One indication of a turnaround in the IBD space is the renewed interest of private equity investors. One year ago, two Morgan Stanley executives—Doug Ketterer and Eugene Elias —and Kevin Beard, former head of acquisition and recruiting strategy at AIG Advisor Group, formed Atria Wealth Solutions to acquire registered investment advisors and broker-dealers. It was backed by Lee Equity Partners.

Atria immediately acquired two California B-Ds, CUSO Financial Services, which serves credit unions, and Sorrento Pacific Financial, which works with banks and has an independent B-D as well. Then in April, it acquired Syracuse, N.Y.-based Cadaret Grant & Co. with 900 affiliated reps and $23 billion in assets under administration. Most industry observers expect Atria to continue looking for other acquisition candidates.

However, the biggest vote of confidence in the IBD space also occurred in April 2018 when one of LPL Financial’s largest super OSJs, Tampa-based Independent Financial Partners (IFP), announced it was leaving the mother ship and forming its own B-D. Only nine months before, the industry was expecting to see that strategy play out in reverse, with IBDs selling themselves to big firms and becoming super OSJs within those B-D networks.

IFP’s CEO Bill Hamm didn’t respond to calls from Financial Advisor, but his decision to take 550 reps with more than $50 billion in assets under management or advisement out of LPL stunned many B-D executives. Despite initial rumors that IFP was financed by its clearing firm, most B-D execs now believe it received private equity backing.

One analyst said it was a smart move if IFP is looking to create shareholder value, since an independent brokerage firm probably would sell for double the price of a super OSJ with similar financial metrics. Moreover, that’s factoring the decision of some IFP reps to stay with LPL, which is expected to make a compelling case to them to remain.

It’s also no surprise that 2017 was a good year, thanks to the bull market that helped draw reluctant investors back into the markets. Also helping some B-Ds recruit new reps is the ongoing consolidation that has caused some advisors at affected firms to affiliate with small firms for a more personal relationship.

Finra lost 109 firms last year, about the same number that disappeared in 2016. It’s part of a longer-term trend that has seen the number of B-Ds decline 25% from a decade ago, but the shrinkage has prompted many reps to reconsider their options.