Regulation and Compliance > Federal Regulation > DOL

Destination Unknown: The 2017 Broker-Dealer Presidents Poll

Your article was successfully shared with the contacts you provided.

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.

How confident are you that the independent broker-dealer model will remain viable?

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.Impact of the DOL fiduciary rule on the IBD industry

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.

Impact of DOL fiduciary rule on IBD rep force

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.

FSI leading representative of IBD interests in Washington

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.

BD response to DOL rule delay

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.

Short-term IBD challenges

“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.

IBD leaders describe these specific concerns as particularly challenging for their advisors: keeping their technology up to date, adjusting their businesses to comply with the DOL rule and other new regulations, and dealing with both pricing pressure and mounting fee compression.

In terms of the longer-term issues confronting their businesses, a large share of the IBD presidents polled — 47% — again identify the DOL rule, and over 24% state they see rising compliance costs as the greatest challenge.

Long-term IBD challenges

This mindset “is a red flag” for the industry, Welsh said. When compliance is more important than technology and recruiting, there are “implications of [IBDs and reps] focusing on the wrong things for their long-term growth and sustainability,” he explained.

This is not to say that BD executives do not fully appreciate the depth (and variety) of issues they face over the next three to five years. In fact, the broker-dealer presidents participating in this year’s poll mention these specific long-term challenges for their businesses: over-regulation, changing advisor demographics, business growth, adoption of an advice and planning business model, maintaining margins, managing risk in a low-rate environment and advisor succession.

Advisor Anxiety

As for the top short-term challenges of their reps, finding the best new clients was cited by one-third of presidents. This task will be increasingly difficult, Henschen said, because DOL may lead to “much greater competition for wealthy clients.” Meanwhile, the middle class could “be abandoned or robo-advisory will try to fill the void — but the problem here is the advisory model rarely resonated with this segment as they favored commission products,” the recruiter explained.

Other issues facing advisors over the next 18 months are those related to regulatory changes and fee or pricing pressure, the BD presidents said. Some specifically named “changes in compensation due to DOL,” “adjusting business to comply with new regulations” and “regulatory distraction” as top concerns for their indie reps.

Short-term BD rep challenges
Long-term BD rep challenges

IBD executives said their advisors’ top long-term issues are picking an optimal business model, 40%, and setting up a succession plan, 31%.

“What is the optimal business model will be the million-dollar question going forward,” Henschen said. He believes that “everyone will be going more fee based, so one niche that used to be unique — fee-only RIAs preaching the fiduciary standard — won’t be so special anymore.”

This trend also means more price compression. “When everyone is clamoring into fee based, fees can only go down,” the recruiter explained.

Drilling down to concerns other than compliance, IBD leaders see their advisors are most uneasy about these issues, which they expect will affect their practices over the next three to five years: the hiring and development of successors, working with a new generation of investors and keeping up with technology.

VIPs & Next Steps

IBD leadersIn addition, IBD presidents participating in this year’s poll have voiced their backing for industry leaders worthy of recognition in the future. With the growing focus and fear of regulation, strong support for FSI’s Dale Brown should come as no surprise. And given the size and scope of LPL Financial’s operations, it is not unexpected that two of its former leaders prove popular, too.

IBD executives also didn’t hold back on their action plans. A good number said they intend to take the following steps (and others) to improve their home office operations and better serve indie advisors over the next 12 months: introduce more technology initiatives and upgrades; support different advice-based business models; hire more staff; implement a new advisor engagement model; add goals-based planning and related tools; invest more in risk and service functions; add an electronic business model; move to lower- and lowest-cost share classes “which will limit product choice and flexibility of advisor-pricing options”; and adopt a CRM technology program.

When stating which business functions they plan to spend more on in the year ahead, responses were fairly uniform: compliance and technology. Very few specified what they will cut back on, though a few mentioned administration, marketing and general operations.

BDs’ long to-do list reflects the multiple headwinds they face. As one president summed up: “There’s no question that the current environment is one of escalating complexities and costs, driven through a combination of fast-changing regulatory, technology, demographic and consumer trends.”