Is Consolidation Finally Here?

No Longer a Cottage Industry

When the leaders of the four winning Broker/Dealers of the Year for 2008-2009 met for an editorial roundtable in Chicago in August, the issue of consolidation arose when I asked if size alone was necessary to ensure survival as an independent broker/dealer. After all, look at the biggest independent B/D, LPL, which has hedged its traditional broker/dealer business risk by offering clearing services to outside firms and, more recently, launching a custodial service. That’s not exactly how Nick Sondel of Harbour Investments sees it. “If you look at the big firms,” referring to Bear Stearns in this instance, “you’d never have guessed that these big icons of the industry would have dissolved. I wonder if LPL, with taking on all these different roles, is kind of mimicking the wirehouses. It’s more risk. It’s harder to watch the shop when you’re doing 20 different things.” Sondel thinks the “mid-sized firm has got a good future.” There have been benefits to being small, notes Sondel, and as the founder and leader of a firm with only 195 representatives, he knows whereof he speaks. But some of those benefits may be on their way out. “I think the small firms will have a real tough time keeping up because they’ve been overlooked by regulators unless they’ve had some complaints,” Sondel says.

Ralph DeVito of The Investment Center argues, however, that “there will always be a place for any sized firm,” said, “as we get bigger, as long as you can continue to provide good service–whether you have 1,000, 2,000, or 3,000–you can continue to do that, but you have to stay focused on what you’re good at. When you start spreading it out, you become a totally different kind of firm.”

NEXT Financial has expanded its lines of business as its rep force has grown, following what President Barry Knight calls “an intelligent growth model. Since many of its reps own a piece of NEXT, “if we see a lot of our reps [wanting to offer a product or service], and we have the size and the critical mass to do so, I’d rather we do it than giving money away to some other company.” That expansion, says Knight, is “all tied into our core.”

But Eric Schwartz of Cambridge Investment Research says that “Linsco would argue that everything they’ve done is part of their core. They’ve built the capacity to clear for themselves, so why not clear for others?” Schwartz notes that “we were a cottage industry 20 years ago. Now, broker/dealers and reps are becoming institutions.” As the industry moves from its “adolescence into maturity,” argues Schwartz, “you end up having more segmentation as firms try to find their niches in a much bigger industry.

He thinks that there will be three different categories of independent broker/dealers in the near future: small niche players; “really large ones” who “can be, somewhat, all things to all people” because of their very size; and those in the middle. To survive, he believes mid-sized firms will need “to build a value proposition that isn’t identical to everybody else’s.” He argue that “when you get a crowded industry, the ability to have a divergent formula, to distinguish yourself from a group whose core capacities are very similar, is what makes you successful.” Finally, he says, to succeed in the B/D business, “it’s one thing to do it,” you also need “to have a brand that’s identified with doing it.”

Editorial Director James J. Green can be reached at [email protected].