Here’s a not uncommon scenario for independent advisors: Without warning, you discover that your independent broker-dealer has been unceremoniously dumped by its owners, often times a distant corporate parent.
The home office trading and operational staff you’ve relied on over the years to help serve your clients and accounts and to fix problems has been pink slipped.
Before you know it, the designated successor firm is touting its flawless platform and recounting the glorious synergies between the two stellar organizations. Once the specifics of the deal to stay are announced, usually you have only a few months to make your decision before the scheduled transfer of accounts.
Typically, 30 days prior to the merger, the new firm will notify clients directly that their accounts are being transferred over to the new firm. Departing advisors will need to leave beforehand to prevent any client confusion.
It’s a tough spot to be in, because you don’t really have enough time to thoroughly evaluate the prospective firm as well as the myriad of other IBD and RIA options. Also, your clients are depending on you to get it right.
What’s your strategy to forestall finding yourself in this predicament in the first place? Let’s look at some of the wreckage in the IBD world during the past two years.
In 2018, John Hancock handed off its 1,800 advisor network to Royal Alliance. Allianz is in the process of transitioning its 640 advisor group at Questar to Woodbury Financial Services.
Last year, Jackson National Life dumped its four broker-dealers comprised of 3,200 advisors and sold them to LPL Finanicial. Securian Financial Services unloaded its 700 advisors at H.Beck to Kestra Financial.
The razor-thin margins of the IBD business and the ever escalating overhead are prompting many firms to jettison their retail operations.
IBD Consolidation Is Happening, Big Time
According to the 2017 Fidelity Wealth Management Report, the number of IBDs has declined 28%, with 904 open for business in 2015, compared to 1,255 such firms that were up and running in 2005.
Some Cerulli Research data clarify what’s driving this trend: The return on equity of IBDs was 96 basis points in 2011. It dropped to only 76 basis points in 2016.
A veritable witches brew of factors is responsible. These include burgeoning technology and compliance costs as well as regulation, specifically the Department of Labor fiduciary standard, which likely was the nail in the coffin for many smaller firms.
Who wants to be in a business of shrinking margins and ballooning overhead?
As additional mergers take place among IBDs, more advisors will find themselves in this predicament. How can advisors in a contracting industry safeguard the practices that they’ve worked so hard to build?
1. Choose a firm wisely.
You should determine if the BD’s profits contribute a meaningful amount of money to the parent company’s bottom line? Is the BD a core business or an easily disposable side show?