Cetera is the independent broker-dealer network that arose last year—renamed and refocused, says its CEO, Valerie Brown—out of the former ING Advisors IBD network. Acquired in February 2010 by Lightyear, a private equity firm headed by former Paine Webber and UBS America executive Donald Marron, the network comprises the BDs Financial Network (FNIC), Multi-Financial and PrimeVest.

Speaking to Brown (left) in a wide-ranging telephone interview on Jan. 13, the discussion covered the “stressors” in the overall industry, touched on the increased regulatory burden coming out of the SEC and the Dept. of Labor, then focused on what sets Cetera apart when it comes to advisors and their partners addressing those stressors and regulatory mandates. Her conclusion: increased margin pressure on all IBDs, will lead—is already leading—many smaller broker-dealers to seek the shelter of larger BDs whose size and expertise can accommodate those pressures.

Q: What is your take on the overall industry? What are the big challenges facing broker-dealers and their representatives?

A: Not unlike how the economy is going, there are many stressors in the industry—costs are going up and margins are shrinking. With the options that have become available to advisors over the past decade, you might have expected to see payouts shrinking—that clearly has not happened, and it won’t happen. Advisors have a lot of choice, and when you’re an independent advisor you need a certain margin—and the independent broker-dealers have to respond.

Q: What specifically are those ‘stressors’?

A: Technology costs have increased. Advisors of all kinds are struggling to make the economics work, and technology is really the only answer to that—now it’s critical. The smaller BDs are struggling since they don’t have the money to spend on technology.

Then there’s the crisis of less-than-quality products going bad, leading to increased compliance costs—when one product goes bad, smaller BDs can get in trouble.

While advisors may have chosen smaller BDs—those with less than $50 million [in revenue]—for the freedom, they’re concerned with the longevity of BDs, and need more tech support than the smaller BDs can provide. We’re interested in helping these smaller BDs, especially through Financial Network (FNIC).

What’s made these smaller broker-dealers open to looking? Costs are up, driving margins down; but risks have gone up—I’ve seen many of my compadres deal with this with their E&O [insurance], so they need to limit their personal financial risk. Another development  is that advisors are demanding more integrated data, which costs money. Many BDs were getting much of their margins on revenue shares from money market funds, but now that's no longer the case.

It’s put more pressure on the whole industry, but larger BDs have the scale to absorb that pressure. The [smaller BD] needs a succession plan: the biggest hurdle is finding the right culture, the right match from a successor. That’s where the dialogue starts and needs to stay—find the right partner, remove the risk, stabilize things for the [BD’s] advisors, and refocus on the advisors and growth.

Q: So what will happen?

A: It’s an interesting time with lots of change on the way. There will be accelerating consolidation. Much of the focus is on the larger BDs, but there are 4,500 of us and once you get below the top 50, there are many smaller broker-dealers

Q: What about the regulatory challenges?

A: Remember, in the previous big runup in regulation in 2003-2004 the market recovered quickly; this recovery will be slower than previous ones. We’ve only begun with Dodd-Frank; [the regulatory challenges] go beyond the SEC, to the Dept. of Labor and ERISA—it’s getting more expensive. Look at the changes mandated to Form ADV Part II, and to ERISA from the Department of Labor. One of the big ways the regulators are responding is to require deeper and more specific disclosures. That’s an expensive burden, and there will be unintended consequences. Some of those costs will be passed on in some way, of course.

On the fiduciary standard, I’m hoping that the SEC will [impose a fiduciary standard] that still allows middle-market clients to be served.

Q: How is Cetera positioned among these challenges?

A: Cetera has a unique value proposition in this marketplace. We have a broker-dealer focused on those smaller BDs—Financial Network.. For advisors looking for better technology and home office expertise but who don’t want to become just a number—you have MultiFinancial; remember, advisors want to affiliate with BDs that will be sustainable through crises. PrimeVest is focused exclusively on the financial institution market—they don’t do anything else but serve financial institutions.

We understand independence, and we realize there isn’t just one face of independence.

The scale of the big BD is important, but so is [preserving] uniqueness.

Another thing we’re doing, and we’re not alone in the industry but in the minority, we’re able to invest in the business. We hired 90 people in our home office [in 2010], in technology, in the service centers and for our wealth management team that helps advisors build their businesses. [In a follow-up communication, Brown said Cetera plans to add about another 50 people to its home-office headcount this year.]

Those are the areas that matter to an advisor, and that’s why we’re spending the money there. Most BDs not only can’t invest, but they’re contracting. When we became a privately held company, we got the commitment [to invest] from our partners.

Q: You’ve talked about technology and regulation, but isn’t this still a business where reps are mostly interested in the people they have to deal with at the home office?

A: It’s absolutely a people business, but with good risk oversight—that’s where you start: it’s a technology and people business. We’ve got a team that is unique: the people who were here have long roots in the pure independent BD business, but we’ve added to that core with people from the big custodians—Fidelity and Schwab; from the clearing organizations, like Pershing; and from the significant independents, like LPL, and from some of the largest money mangers, like Wilshire. We’ve touched on all the elements that advisors care about.

Research's managing editor, Janet Levaux, explored some of those recent hires at Cetera in a November 2010 AdvisorOne article.

In a separate article published in September 2010, Levaux interviewed Barnaby Grist of Cetera.