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May 01, 2012 at 10:09 AM
The things that advisors love about independent broker-dealers also give rise to the problems that make survival difficult in the channel, according to a Cerulli Associates report released Monday.
“Unfortunately for IBD firms, the very features that draw advisor interest in the channel create conditions that make profitability challenging in the best of times and nearly impossible when times are bad,” reports Cerulli, a Boston-based research firm with a focus on asset management, in its second-quarter 2012 “Focus on Independence Issue” in The Cerulli Edge: Advisor Edition.
Indie broker-dealers recoup only thin margins, which in turn are forcing a focus on true differentiation between firms. IBDs’ promises to advisors of generous payouts, flexibility and high service levels are putting added pressure on IBDs trying to win advisors to their particular model, the report says.
By its nature, the indie BD channel of more than 1,000 firms offers advisors freedom in how they can operate their practices—and each one of these firms creates hundreds of variations and nuances for the support they offer to advisors who affiliate with them, Cerulli notes.
The report lists six segments that are now operating within the indie BD space: 1) institutional BDs such as LPL and Cetera; 2) insurance legacy firms such as Princor and Proequities; 3) aggregators such as NFP Securities; 4) niche firms; 5) true IBDs such as Commonwealth Financial Network and Cadaret Grant; and 6) extremely small boutique firms, none of which were named.
“At the heart of the equation is the revenue split between the firms and the advisors and the explicit and implicit levels of service offered by the firms,” according to the report.
Cerulli projects continued growth of the IBD channel, but with a growing gap between big and little firms, according to Scott Smith, associate director. (Meanwhile, a recent Tiburon Strategic Advisors report predicts that several of the wirehouse brokerage firms will soon be entering the independent broker-dealer market.)
“The largest firms, which are able to truly capitalize on economies of scale, will be able to further develop industry benchmark platforms, allowing them to service a broad range of advisors. The smaller firms will likely be able to increase their share by better aligning home-office priorities with the advisor base,” Smith predicts in a statement.
