5 Big IBD Deals Dwarf RIA Mergers in 2017

Fidelity issues its report a month after LPL Financial bought the advisors and assets of four NPH broker-dealers

Fidelity Clearing & Custody Solutions says $136 billion in assets is changing hands among IBDs as a result of five deals so far in 2017 — substantially more, 70%, than the $80 billion of assets moving as a result of 82 RIA deals among RIAs during the same time period.

In its Insights from Independent Broker-Dealers report, released Thursday, the authors stress that five large IBDs with more than $10 billion in assets “are helping to shape the IBD channel into a concentration of a small number of large firms.” The top 10 IBD firms, in fact, now manage 65% of all broker-dealer assets and 48% of BD advisors, according to research done by Cerulli Associates and cited by Fidelity.

IBDs had some $3.2 trillion of client assets under advisement as of 2015, while RIAs had about $2.2 trillion, Cerulli said in a 2016 report. RIAs, though, have been growing assets at 11.3% annually in the past decade, while IBDs did so at a 7.5% yearly clip.

“There are many emerging multibillion-dollar RIA firms, but they are still far behind the significant scale of the largest independent broker-dealers, which have substantial assets and advisor bases,” said Scott Slater, vice president of practice management and consulting for Fidelity Clearing & Custody Solutions, in a statement.

Thus, though there are fewer IBD deals vs. RIA transactions, the broker-dealer M&As “are significant, both in size and in how they are creating innovative business options and platforms for advisors,” Slater explained.

For instance, LPL Financial said in August that it had bought the advisors and assets of National Planning Holdings' four IBDs, which had some $120 billion in assets. Also in August, Atria Wealth Solutions struck a deal to buy CUSO Financial Services and Sorrento Pacific Financial, which had $30 billion of combined client assets.

Earlier in the year, Kestra Financial announced it was buying H. Beck, from Securian Financial Group. H. Beck had about $2.4 billion in assets under management. Another large deal this year was led by Ameriprise Financial; it involved the purchase of Investment Professionals Inc., of San Antonio, Texas, which had some $8 billion in assets.

Cost Crunch

Costs continue to rise as broker-dealers invest in technology, advisor education and oversight, largely to comply with regulations. Plus, lower advisor productivity “is straining bottom lines,” the report says. Average assets per IBD advisor are roughly $33 million vs. close to $67 million per independent RIA, according to a 2016 Cerulli study.

In fact, regulations “are pressuring already thin margins,” Fidelity explains, as firms invest in technology, advisor education and oversight. From 2006 to 2016, operating margins dropped from 12% to 3%, statistics compiled by LaRoche Research Partners show.

IBDs, Fidelity suggests that IBDs should focus on these four goals to continue to benefit from M&A transactions:

  • Refine their growth strategies. Two models are emerging in today’s IBD landscape – large firms with scale and focused firms with a distinct value proposition to serve a niche.
  • Balance size and culture. Large IBD acquirers are standardizing practices and procedures to boost efficiencies, while also maintaining advisor independence, choice and productivity improvements.
  • Strengthen the value propositions. Large IBD acquirers are creating additional value to appeal to firms looking to sell and to retain reps post-acquisition by leveraging technology, reinforcing FA independence, easing transitions and helping new reps grow their books of business.
  • Mitigate operating and regulatory risk. Many IBD acquirers have well-defined strategies and vetting processes, so they pass on deals that pose potential risks to their culture, sales record and firm value.

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