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.”