January 29, 2014

National Financial Chief Sees ‘Tremendous Opportunity’ for Survivors of BD Consolidation

Mirchandani says ‘weak players have been winnowed out’ of the broker-dealer space, with successful firms leveraging their partners

According to Sanjiv Mirchandani of Fidelity’s National Financial, 2013 “was a good year for the retail brokerage business,” as the retail investor returned to the risk-based markets — as they normally do 18 months into a bull market, he said.

“As our clients’ results improved, so did ours,” said the clearing firm's president, even without “any short-term interest rate help.”

Looking at the broker-dealer business in toto, Mirchandani said in an interview Tuesday at the FSI OneVoice conference that “the weak players have been winnowed out” of the BD business, in part because “the regulators have been busy,” leading to increased consolidation pressures in the industry.

“Given halfway decent markets” in 2014, he said, “there’s a tremendous opportunity this year” for the independent BD business, though he remains worried that “investors’ underlying skitttishness might send them back” out of the market.  

He warned of other dark clouds on the horizon for BDs.

“This can’t be a business where only baby boomer advisors serve boomer clients,” he said, though he cited some BDs that are bucking the trend, such as Cambridge Investment Research, led by that BD’s president, Amy Webber, in Cambridge’s next-gen advisor efforts.

The IBD model, he said, has been built on firms recruiting advisors with existing books, but the traditional avenues of training advisors have largely disappeared. But some of the “discount brokers,” such as Fidelity itself, and firms like Edward Jones, are hiring and training younger people.

As for consolidation in the broker-dealer space, he said that “to some extent it’s inevitable: run the math.” But while some firms “are looking for an exit plan,” he suggested that the “real winners will be BDs who can run a business well,” producing organic growth from their existing rep force, and not those who “just buy a business.”

Another key to growth, he said, is buiding a strong firm culture. He cited Commonwealth Financial for doing “a brilliant job at culture, with very high productivity,” and the aforementioned Cambridge, which is “growing like weeds.”

While independent broker-dealers have low margins, Mirchandani aruges that “they’re different from other low-margin businesses like the airlines since they can leverage the scale of their clearing firms.”

He also said National Financial was encouraging BDs to look at their increasingly expensive compliance budgets as an opportunity.

“Are you getting a return on your compliance? It’s a potential competitive advantage” for those BDs, he said, noting that National Financial is providing technology tools to help them do so, including a “compliance hub” with Fidelity partner SunGard, which uses aggregated data for compliance reporting from both direct and held-away business.

As for what’s next in terms of products, Mirchandani said that over the next few years he expects to see growth in professionally managed accounts, since the trend of rep as portfolio manager “is not the way to go.” In addition, he expects broker-dealer reps to increasingly use ETFs and ETF wrap programs, and alternative investments.

ETFs are a “growth area for us,” he said, helped by Fidelity’s “broad range of commission-free ETFs” and  through a partnership with Envestnet that provides an ETF wrap program offering “inexpensive advice, along with tactical tilts” in ETF-based portfolios.

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Check out Schwab’s Sonders: Today’s Market Is Best We’ll Ever See on ThinkAdvisor.

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