From the December 2006 issue of Research Magazine • Subscribe!

December 1, 2006

Shifting Tides

In Research's June 2006 issue, the article "Going Independent" taught us that the financial services industry continues to attract new entrants. The industry segment showing the greatest 2004-05 growth, according to a table sourced to Nelson's, SIA and Cerulli Associates, was the independent broker-dealers, whose advisor numbers increased from 81,400 to 107,000 in that single year's time.

But is that the end of the story? Why does the industry continue to grow and what is its true size? What explains the huge jump in IBD reps? Why do some channels, like the regional broker-dealers, continue losing advisors? Why are the RIA numbers growing much more slowly than IBD numbers? Advisors are flocking to IBDs, but do those advisors control a commensurate share of client assets?

Overall Industry Size and Growth

Joseph Lamoureux and Bing Waldert, both research analysts with Cerulli's Intermediary Distribution Team, provided some answers. On a grand scale, says Waldert, "People are joining this industry because they see an opportunity to serve retiring baby boomers."

But is the total advisor population suggested by the table of around 194,000 accurate? "It seems right to me," says Chip Roame, managing principal of Tiburon Strategic Advisors, "depending upon how one defines 'financial advisor.' The problem is they've left off some channels, such as bank trust officers, family offices, discount broker reps such as Schwab's private client group, and boutique brokers at firms like Goldman and Lehman Brothers."

Matt Bienfang, research director of TowerGroup's Brokerage & Wealth Management division, adds, "I believe the table under-represents the total number of advisors. I have the total at 307,000 with another 10 percent to 12 percent in the insurance, CPA and legal markets who are 'part-time' advisors."

Independent Broker-Dealer Numbers Explode

Why the explosion in IBD reps? Roame comments that IBDs used to be looked down upon by wirehouses, but now the inverse is true. "Our guess is that the number of IBD reps will continue to roar ahead. The larger IBDs are now able to recruit junior planners into existing businesses as well as senior planners from other professions. For these reasons, the IBD channel should maintain its growth rate for some time."

This new trend is borne out of necessity, says Roame, precisely because the insurance and wirehouse channels are shrinking. "How can LPL keep recruiting from these channels? The IBD channel has to recruit from other places and stand on their own with training programs just as the wirehouses have always had."

Ironically, even though most IBD reps are now doing some fee-based business, Bienfang says IBDs may be more attractive to advisors who don't want to go the fee-based route. "The desire not to change their business model to fee-based is an underestimated motivator in going independent," says Bienfang. "In other words, brokers may jump to IBDs because their wirehouses are pressuring them to go more fee-based, which they don't expect IBDs to do."

Declining Channels

What will be the fate of the national full-service (wirehouse), regional and bank BDs -- all of which declined last year according to our table? Says Roame, "The actual wirehouse decline of 4 percent is negligible. What's more important is that it's a stagnant space. The total number of wirehouse brokers has remained around 70,000 for some time." However, this may be intentional, says Roame. The wirehouses may be concentrating more on upgrading reps, making them more productive serving higher-net-worth clients. "Maybe they don't want to grow their number of reps, but simply upgrade."

As for the regional broker-dealers, Roame says, "We call it 'The Death of the Regional BDs' which are now down to just five to seven firms. Wheat First, Legg Mason and others have all been absorbed or put out of business, and that trend will continue." Surviving as a regional firm will be difficult, says Roame. "They don't have the technology or the marketing resources of a wirehouse, but they have all the regulatory headaches."

In contradiction to the table, Roame thinks bank BDs are growing. "Banks are piling into the investment business. Separate accounts are being developed just for banks." Will they be a competitive force? "Absolutely. Lately, there have been amazing recruiting successes by banks. We're seeing Bank of America, Citibank, JP Morgan and others landing high-end wirehouse guys."

Even H&R Block is getting in on the act, says Roame. "H&R Block says 'We'll give you the same payout you're getting and we can refer potential clients to you.' The bank channel is alive and well and will increasingly become a threat to these other channels."

Lamoureux doesn't disagree: "Regional bank advisors will still be needed if only because there will always be less wealthy individuals who will need modular retirement planning services as they get older."

As for insurance broker-dealers which increased moderately last year, Roame says it's both hard to measure and not really growing. "The number worries me. For example, is an MSC guy included in this number because MSC is owned by Pacific Life?" In any event, says Roame, this channel is similar to the wirehouses -- more about upgrading, not growing, its sales force.

RIAs Grow Slowly But Get More Assets

Why don't advisors start out as RIAs? "When you're in your early 20s, just out of college, it's hard to imagine yourself shaking down your parents' friends for assets, so it tends more to be second career people who go directly to the RIA channel," says Lamoureux. He admits, though, that we're beginning to see a trend of students from CFP-preparatory colleges going to work for RIAs.

Not only are RIA numbers growing slowly, Roame doesn't even think there exist the 35,000 or so RIAs the table shows. "It isn't logical. They must be counting Fidelity Funds as an RIA."

Do assets follow the same concentrations as the number of reps? That's hard to say, according to Lamoureux. "We see the largest practices in the wirehouse and RIA channels, which leads us to believe they're doing a better job of attracting wealthy investors."

Roame says there's no doubt. "Although the fee-based guys are growing fast and most are in the IBD channel, assets are just the opposite. Assets under management with RIAs are far outgrowing those with IBD reps."

Future Tides

What does all this mean for the future of the industry? Who better to weigh in on this question than Dan Moisand. A principal with Spraker, Fitzgerald, Tamayo & Moisand in Melbourne, Fla., Moisand also serves as the current president of the Financial Planning Association.

"I would be surprised if the makeup of the FPA didn't resemble this chart," says Moisand. "We've seen, by far, more independent broker-dealer reps becoming members than wirehouse brokers. I think -- because we keep pushing to make financial planning a profession with advocacy positions on fiduciary responsibility and full disclosure -- IBD reps are more able to work within those types of mandates than are wirehouse brokers."

Moisand, his own firm an RIA, expressed surprise that the RIA number wasn't larger, but wasn't surprised at the fate of the bank broker-dealers. "Most arrangements I've seen with banks are built on a model of teller referrals. That doesn't seem as conducive to forging the relationships most advisors want to be in with clients. It strikes me as very transactional in nature." And, notes Moisand, it comes at a time when the prevailing trend is toward a more broad-based, financial planning-oriented approach to handling personal finances. "Advisors delivering broader services will be more attractive to consumers," says Moisand.

What would our table look like if we were to chart the period 2006 through 2016? Says Lamoureux, "We think it will show the regional broker-dealer and bank channels continuing to decrease while the RIA and IBD channels continue to increase." Interestingly, both he and Waldert believe there will remain a place for the wirehouses.

Says Waldert, "Just as the IBDs are scared of reps going fully independent, the wirehouses are scared of brokers moving to IBDs, so they'll give advisors more options. We'll see wirehouses letting advisors structure practices much as they would under IBDs." Wirehouses are trying to respond to the trend of end-clients needing more than just asset management, says Waldert, so they'll give advisors more of what they need to be successful. "Wirehouses will look more and more like IBDs."

As for the apparent dominance of the IBD channel, Moisand sees it playing a role in the industry's future: "As more IBD reps become better at running their businesses and better equipped to bring in younger employees with no background in the industry, they become the new training ground."

And that should be a good thing. As the industry's salespersons and advisors take on more distinct roles, entrants taking an advisory career path will be more likely to start out in a channel aligned better with their ultimate goal.

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