Independent broker-dealers facing a number of looming regulatory changes 

Coming 12 to 24 months could divide the industry into winners and losers — firms that will be able to adapt, and those that might fall by the wayside

Independent broker-dealers are facing a number of regulatory changes over the coming 12 to 24 months that could divide the industry into winners and losers — firms that will be able to adapt and become stronger and those that won’t and might fall by the wayside.

The changes include the pending Department of Labor fiduciary rule for retirement accounts, which could drastically increase business costs for IBDs; the continued decrease in commissions from a slowdown in the sale of high-priced nontraded real estate investment trusts due to an industry account-statement rule to take effect in April; and a growing focus by individual states on enacting legislation that would make it mandatory for financial services professionals to report elder abuse.

Other ongoing issues facing the industry include the cost of updating technology and compliance systems, which has been a constant battle, especially for small and midsize IBDs.

MARKET VOLATILITY

Volatility in the market, which scares advisers’ clients, also makes it harder for firms to predict fee revenue, which is calculated on clients’ accounts at the end of each quarter.

All in all, 2016 promises to be the start of one of the most disruptive periods in the industry’s history.

“We’re clearly going through a period of significant uncertainty, including volatility in the markets,” said Richard Lampen, chief executive of Ladenburg Thalmann Financial Services Inc., which operates a network of five firms employing 3,750 advisers.

Ever optimistic, broker-dealer executives see plenty of opportunities to emerge as winners while competitors struggle. Brokerage executives are particularly sanguine about the potential for recruiting this year.

“As the marketplace shifts, the firms that will win are the ones that can pivot along with the marketplace and take advantage of those opportunities,” said Bill Morrissey, a managing director in charge of recruiting with LPL Financial Inc. “The big winners are going to be firms that have size and scale to be a partner to advisers and can afford to invest in people, technology and infrastructure, and also focus on how to solve the increasingly complex needs for the end investor.”

“There will be a number of firms that lack the financial and intellectual resources to make those adjustments,” Mr. Lampen said. “There could be a strategic opportunity for us and other larger firms as we see some of the smaller firms [try to] make the necessary investments in post-DOL world.”

“It’s a tough environment if you don’t have the resources to solve issues,” said Amy Webber, president of Cambridge Investment Research.

“I think for the small IBD it’s a tricky space and 2016 will definitely be an interesting year because of the changes due to the Department of Labor,” said Ryan Smith, president and chief compliance officer at DFPG Investments Inc., a small IBD that had almost $10 million in total revenue in 2014.

In addition to smaller IBDs, executives said that firms under pressure or scrutiny right now include the Cetera Financial Group, the AIG Advisor Group and Transamerica Financial Advisors Inc.

Transamerica said in November that Signator Investors Inc., the IBD of John Hancock Financial Network Inc., was acquiring up to 1,100 Transamerica advisers. Some of those advisers, however, are reaching out to other IBDs, kicking the tires and exploring other alternatives, according to brokerage executives.

RCS Capital Corp., the parent company of Cetera, a network of 9,500 advisers, said it intends to file for Chapter 11 bankruptcy protection this month, although it said the move should not directly affect Cetera or its advisers.

A BUYER’S MARKET

Meanwhile, questions surround the AIG Advisor Group, which was put on the block in November and soon may be acquired. A glut of IBDs for sale is creating a buyer’s market for independent broker-dealers and could put pressure on the prices sellers are able to attract.

The unrest in the marketplace has some firms licking their chops.

In a typical year, Cambridge Investment Research Inc. recruits advisers who produce $50 million to $60 million in annual commissions and fees, known in the industry as gross dealer concession (GDC), Ms. Webber noted. But 2016 could be off the charts for Cambridge. Its recruiting pipeline currently is filled with advisers with $200 million in GDC, with $40 million of that from Cetera and AIG advisers, she said.

“We won’t get all $200 million but if $100 million comes our way and is a good fit for the firm, that’s a great story,” Ms. Webber said. “And so much of that is advisers in large groups,” she added, citing offices and groups producing $2.5 million to $20 million in GDC.

Meanwhile, not all small and midsize firms are preparing to throw in the towel. Executives at those firms see plenty of opportunity, too, especially as some advisers move away from larger firms to boutiques that emphasize more personal service.

“The recruiting outlook is very positive,” said Brian Kovack, president of Kovack Securities Inc., a firm with about 400 registered reps and advisers. “We believe the trend has just started, and we are excited about the opportunity.”

He said Kovack has recently added reps from insurance company-owned broker-dealers, including the AIG Advisor Group Inc.

“For insurance companies in this space, the outlook is extremely cloudy,” Mr. Kovack said. Insurers continue to flee the business because of low margins and high risk.

Some independent broker-dealers could see an increase in interest from potential recruits currently working as employees at the large wirehouses. Many will see retention packages signed during the financial crisis run their course over the next 12 to 24 months, creating the potential for a move.

Meanwhile, some wirehouse advisers are growing weary of the constant pressure to cross-sell products such as credit cards and mortgages managed by the bank, noted Scott Curtis, president of Raymond James Financial Services Inc.

“I don’t want to suggest [selling bank products and services] is a conflict for clients, but it’s at a point for some advisers at those firms where they want to seek the freedom to manage their business their way and are considering the independent route,” he said.

WIREHOUSE TAKE

Wirehouses would disagree with Mr. Curtis, claiming it is a competitive advantage to have the ability to look at all of a client’s financial needs.

While many executives said they expected a bumper year for recruiting, the market for mergers and acquisitions could slow down.

The number of question marks hanging over the IBD industry right now is pushing some private equity funds, the main acquirers of wealth management firms over the past decade, to the sidelines, noted John Rooney, managing principal with Commonwealth Financial Network.

“The linchpin to industry consolidation and understanding how the industry will evolve is figuring out what’s going to happen as a result of the DOL rule,” Mr. Rooney said. “Private equity money is on the sidelines. I don’t know how you value a broker-dealer if you are a private equity fund right now.”

Source: InvestmentNews – Independent broker-dealers facing a number of looming regulatory changes

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