A host of factors are putting the squeeze on profit margins at some broker-dealers, according to Cerulli Associates. In its recent report, U.S. Broker/Dealer Marketplace 2017: Segments of Strength, the Boston-based research and consulting firm noted that margins are contracting across all channels in the space.

At the wirehouses, for example, the profitability accrued from productive advisor workforces has been partially offset by the high cost of recruiting packages aimed at keeping profitable advisors on board. To compensate, wirehouses have trimmed both recruiting budgets and bonuses.

And small B-Ds already working on slim profit margins are grappling with high technology, compliance and operations costs at the same time that many of their most productive advisors have jumped ship to the registered investment advisor channel.

“Small B-Ds are ill-equipped to shoulder losses to their already thin profit margins, and consolidation will accelerate,” said Kenton Shirk, director of Cerulli’s intermediary practice. “The impact of these challenges has been masked by market growth. Still, some boutique B-Ds are joining larger IBDs and becoming large offices of supervisory jurisdiction. The move allows them to lean on the IBD’s scale and infrastructure, but still maintain a reasonable degree of autonomy.”

Meanwhile, several insurance companies have left the U.S. wealth management business in recent years, in part because of the U.S. Department of Labor’s fiduciary rule governing retirement accounts. Though the rule was vacated by a court ruling in March, the prospects that it would become law had put pressure on proprietary annuity sales. The proposed fiduciary rule had also impacted the wealth management programs at banks.

According to Cerulli, return on assets across the B-D ranks shrank from 87 basis points in 2011 to 75 basis points in 2016. One reason for this is that advisors have migrated toward fee-based models, a trend aided by the proposed DOL rule. Fee-based advisors have been using more institutional share classes and “clean shares”—mutual funds stripped of distribution and marketing fees. They’ve also gravitated toward lower-cost passive products and exchange-traded funds. All of that translates into less revenue sharing paid to B-Ds by asset managers.

To help combat this, Cerulli said, broker-dealers have used their ace in the hole—i.e., their access to advisors who buy funds for clients—as leverage to renegotiate revenue-sharing agreements with the asset managers providing the funds. Morgan Stanley, for example, announced a new revenue-sharing schedule for asset managers that would shift depending on a product’s expense ratios. That means asset managers will pay Morgan Stanley more in revenue sharing for more expensive products.

Cerulli’s B-D report provides market sizing and competitive analysis of B-D channels, including wirehouses, national and regional B-Ds, IBDs, insurance B-Ds and retail bank B-Ds.