Destination Unknown: The 2017 Broker-Dealer Presidents Poll

Even with the tremendous level of complexity and ambiguity tied to the Department of Labor’s fiduciary rule, broker-dealer leaders remain cautiously upbeat about the business model and its future. Our yearly survey of independent broker-dealer presidents shows the industry is at a crossroads. Regardless of what happens ultimately with the DOL’s delayed fiduciary rule, most BDs are moving to comply with it. As one executive said, “Even if it never gets implemented, it has changed the industry forever.”

(Click here to see the full 2017 Reference Guide,  which ranks the top broker-dealers by revenue, reps, production and other metrics, as reported by the firms themselves.)

 All 45 broker-dealer presidents completing the seventh annual poll said the IBD model will remain viable, up from about 98% a year ago.

Why the optimism? Demand. The top concern of investors, according to one leader, is continued access to high-quality advice. Driving this demand is the fact that so many investors “are not prepared for retirement,” another executive said.

What’s Next?

Though BD presidents are upbeat when it comes to the survival of the IBD model, most see significant change ahead, with more consolidation likely. Some 40% see most IBDs facing higher costs but being able to survive, down from about 45% a year ago.

Which firms are most vulnerable? “Mid-size and smaller firms [say they] … expect consolidation,” said Chip Roame, head of Tiburon Strategic Advisors, a financial services consulting and research firm. “That is what I would expect, too.”

Industry statistics tracked by the Financial Industry Regulatory Authority show that the overall number of broker-dealers is on a steady decline. Five years ago, the group had 4,290 member firms. At the end of 2016, that was down to 3,835; it stood at 3,813 as of this April.

The number of registered representatives working for and with these BDs has moved up and down during the same period — going up from about 630,400 in 2012 to roughly 636,700 in 2014 and then dropping down to some 633,800 in April 2017.

In terms of the impact the DOL rule could have on the size of each IBD’s force of registered reps, a good majority of executives polled, 53%, see no big shift on the horizon. That’s up from about 37% who had this outlook in 2016. Still, nearly 27% forecast losing some reps to DOL-associated shifts, up from 12% a year earlier.

When it comes to which industry group IBD leaders see as the best advocate for their views, the Financial Services Institute tops the chart for 88% of those polled in 2017. “FSI rules for IBDs,” Roame explained, “and … it is the de facto IBD trade group.”

FSI came to life in 2004. Today, its membership includes more than 100 independent financial services firms and their 160,000-plus affiliated financial advisors. The group says these advisors comprise the majority of the nation’s producing registered representatives.

Regulatory Reactions

It’s a confusing time for compliance departments, with executives stating that both the costs and details of new rules are burdensome.

“Despite the DOL delay, IBD leaders continue to worry about their preparedness for the fiduciary movement that is coming. More believe it will alter the structure of the industry and their advisors … even though the rule is in doubt,” said Tim Welsh, head of the consulting group Nexus Strategy.

“Logically, one would think it would be the opposite — with new political forces aligned against it. Very few don’t believe it will come to fruition, and the majority are being prudent by planning for it,” Welsh explained.

But while the majority of IBD executives say they are going ahead with changes despite the DOL delay, a good number of the 40% monitoring development may not announce real changes if the rule is abolished, Roame argued. “And I bet some of the 50% [who say their firms are moving ahead] quietly unwind those changes already announced,” he said.

Business Blues

When naming the top challenge their businesses face in the short run, 71% of IBD presidents point to uncertainty around the DOL rule. Less than 20% view retention and recruiting as their biggest worries.

“Recruiting this year has been largely in a holding pattern as advisors take a wait-and-see approach,” said recruiter Jon Henschen, though some BD presidents say they are gaining recruits due to changes associated with the new fiduciary standard.

Some firms have seen advisors walk out the door due to their noncommittal approach to the BICE, DOL’s best interest contract exemption, for instance. “Legal risk is one of the largest concerns I hear from broker-dealer management regarding BICE,” Henschen explained.

Plus, he said, IBDs are benefitting from the movement of reps from the wirehouses. “Relying on a big name for your marketing is waning because that name can often come back to bite you,” said the recruiter. Plus, the wirehouse culture “is getting increasingly burdensome for advisors,” he said.