Twenty-five years ago, Investment Advisor was founded. Fifteen years ago, IA ran its premiere directory of independent broker/dealers. Much has changed over that time, and that’s particularly true in the independent B/D world. For example, in the first directory, published in June 1991, there were 21 broker/dealers listed with a total of 17,848 representatives. Gross revenue for those companies was $509 million. By the time of the 10th directory, in 2000, 60 B/Ds participated. They could boast 61,484 reps, and total revenue was $5.7 billion.
This year, the number of broker/dealers has risen to 74 in the directory that begins on page 93. While there’s been only a slight increase in the total number of reps since 2000 (64,325), total gross revenue has soared to $7.5 billion from 2000′s $5.7 billion.
Fee-based revenue has nearly doubled in absolute dollar terms since 2000, to $1.4 billion, or 18.7% of 2004′s total revenue, from 14.7% in 2000.
By some measures, bigger is better for B/Ds, particularly when it comes to sharing the ballooning costs of compliance and technology. A ranking of the biggest independent broker/dealers by revenue and reps (page 92) shows LPL Financial Services on top of both lists; familiar names like Raymond James, H.D. Vest, and NFP Securities appear as well. Among the fastest growing B/Ds are Cambridge Investment Research and NFP, which lead the way in number of reps and gross revenue, respectively.
A few caveats about the size-and-growth-equals-success formula. While numbers may illuminate, they can also obscure. Take NEXT Financial, for instance. This Houston-based broker/dealer was the second-fastest-growing company over the past five years as measured by gross revenue, which more than tripled, from $10.8 million in 2000 to $38.7 million in 2004. But NEXT didn’t find its way into our directory until 2001, at which point it could report its actual revenue for 2000. However, the “number of reps” in our directory is actual as of the survey date–April 1. So NEXT wasn’t in the running for fastest growth in reps, though its rep force increase nearly matched its revenue’s–from 161 reps in 2001 to 590 reps this year.
Then there are the broker/dealers that have merged into larger B/D families over the years, such as AIG, ING, and National Planning Corp. For the most part, the individual B/Ds in those “families” have reported their results separately; if they consolidated their rep forces and revenue numbers, the ratings might very well be different. For instance, combining the individual ING B/Ds (ING Financial Partners, FNIC, Multi-Financial, and PrimeVest) would produce a single entity with 7,215 producing reps as of April 1, 2005. That would top the single largest B/D by number of producing reps, LPL, which reported having 5,800 reps.
Moreover, there’s at least one area where headcount growth can be a sign of weakness, not strength, points out Jonathan Henschen, who recruits reps for a number of broker/dealers through his firm, Henschen & Associates in Marine on St. Croix, Minnesota (see his tongue-in-cheek suggestions for “ruining a B/D” on the following page). He notes that broker/dealers used to proudly point to the ratio of reps to home office staff–a smaller ratio was a sign of better service. These days, however, it might signal instead that the B/D is employing outmoded technology, and that it needs more people to perform manually the work that new software and hardware can do more efficiently.
Home office staff growth might be prompted by another development, however. Peter Wheeler, president and COO of Commonwealth Financial Network, notes that Commonwealth’s home office staff has increased–from about 220 in last year’s directory to close to 300 this year–for one reason: compliance. Wheeler says, “I have to get more and more people to review the exception reports; now that it’s all electronic, if you’re spitting out reports, you’d better be looking at them.”
Compliance is also having an effect on the kind of reps that are attractive to broker/dealers. Henschen says B/Ds want advisors who take a financial planning approach. “The motive is that they’re much less likely of getting arbitration and customer complaints,” he says, “because the investment decisions have a financial plan behind them.” That’s why more and more B/Ds look askance at advisors whose business is heavy on the stock transactions, and on putting qualified money into variable annuities.
The Current Environment