From the July 2006 issue of Boomer Market Advisor • Subscribe!

Independent broker/dealers - Healthy, but at risk

Christopher Cox, chairman of the SEC, told an interesting story last November. The Roman Emperor Claudius, whose wife tried to kill him with poisonous mushrooms, received quick attention from a doctor who tickled his throat with a feather to bring the poison up. But Claudius instead choked on the feather. The moral of the story?

"Regulation intended to improve the competitiveness of our markets can have the opposite effect," Cox says. "We know we've got to take care with the medicine we employ to cure the ills and maintain the health of the securities markets."

Mary Schapiro, incoming chairman and chief executive officer of the NASD, describes the mood of independent broker/dealers regarding the regulatory environment as one of "weariness." I know few broker/dealer executives who disagree. I also know of few who would claim that, although weary, they are optimistic about their industry's health and stamina for the challenges ahead.

The independent broker/dealer community has reason to be optimistic. Although compliance costs continue to rise (firms have one compliance employee per 66.3 reps, a 33 percent increase from 1998 through 2004, according to a Moss Adams report), profitability is in positive territory. Thanks partly to client demand, fee-based business continues to increase, with 31 percent of independent firms now generating fees greater than 20 percent of revenue.

Broker/dealers and affiliated advisors are well-positioned to respond to increasing consumer demand for independent advice, especially as aging boomers seek experienced advisors as they enter their retirement years. According to our own research, 23 percent of advisors/representatives affiliated with FSI member firms with more than 2,000 reps receive at least 50 percent of their total income from advisory fees. The number decreases slightly, to 15 percent, for firms with 500 to 1,000 reps. This is expected to grow significantly in the years ahead, as the use of asset-based, hourly, annual, a la carte fee structures increase to more closely align with client needs.

While fiscal health has stabilized, independent broker/dealers have not lost sight of the need to lobby Washington. The good news is that while we disagree with politicians and regulators on some issues, the NASD and SEC leaders welcomed our involvement in the process. With the election of ING Advisors CEO John Simmers to the NASD Board of Governors, we expect our voice to strengthen.

As Mary Schapiro said, "All of us in the financial services industry have an obligation to be aware of, and concerned about, the aging of our population and the ability of retirees, and soon-to-be-retirees, to meet their financial needs over the years. I think the challenge it's going to create is for brokers and advisors to give intelligent and careful advice to people who are facing the most uncertain time in their financial lives."

We couldn't have said it better.

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