Independent broker-dealers are in the spotlight.
Advisor Group just announced that Reverence Capital Partners is buying a majority stake in the IBD network; reports circulated that an earlier suitor had offered it more than $2 billion.
Advisory work appears to be the darling of investors, with this news being followed by talk that Goldman Sachs is trying to buy United Capital. What’s attractive to private equity and other investors?
LPL Financial improved its net income 84% in 2018 (vs. 2017) to nearly $440 million, with gross profits rising 25% to almost $2 billion. Raymond James boosted net income 35% in its latest fiscal year to almost $660 million.
But with success comes the need to produce better and better results, do more/spend more and the like. As BNY Mellon Pershing Advisory Solutions CEO Mark Tibergien explained in his April column for this publication, “The Growth Dilemma”: “‘When you stop growing, you start dying.’ For many advisory firms, this pithy saying [from writer William Burroughs] has become reality. While market lift may be giving the illusion of double-digit growth, real growth from new clients or new assets for the average firm is under 5%.”
Indeed. Total brokerage and advisory assets at LPL, for instance, grew just 2% last year to $628 billion. Revenue, though, jumped 21% to about $5.2 billion; expenses rose 18% to roughly $4.5 billion.
As LPL explained in an investor presentation, its core general and administrative spending could be $850 million to $875 million in 2019, up 4–7% from 2018. Technology spending alone — growing about 20% a year — should eat up $135 million.
These business demands, along with bumpy markets and the expected Securities and Exchange Commission’s Regulation Best Interest (set to be released in the next month or two), are straining IBD managers and advisors, who have to keep up with all this change while serving clients. To better grasp the significance of these issues, we polled about 40 executives, who gave their frank views on what troubles them most today.
When it comes to the biggest industry headaches, compliance tops the list. More than half, 52%, of IBD leaders say that the need to do more and spend more on regulatory issues and compliance is the No. 1 concern that keeps them up at night. Plus, a bigger majority of them — 79% — believe that dealing with compliance demands prevents their affiliated advisors from having a good night’s rest.
Concerns over compliance spending exist across the industry. Of 800 global financial-services firms, 66% told Thomson Reuters last year that they expected the cost of senior compliance staff to increase, up from 60% in 2017. In addition, almost two thirds (61%) anticipated their total compliance budgets to be somewhat or significantly larger than in the prior year (up from 53%).
A big part of current compliance concerns — beyond Reg BI, which aims to stop commission-based brokers from putting their interests ahead of clients’ interests — is cybersecurity. Almost all BD leaders, 98%, polled say this is their No. 1 tech-related worry. It’s followed by the need to educate advisors and clients on the use of technology, 72%, and the ability to integrate BD technology with that of other organizations, 56%.
Kestra Financial, for instance, just began working with cybersecurity-software maker Entreda, so that any and all risks get shared with the IBD’s home office. The aim of the tie-up is “to complement, not replace, existing antivirus, anti-malware or encryption software,” according to the 1,800-advisor strong broker-dealer. “Through its implementation, the technology team has identified and addressed more than 2,000 unique vulnerabilities.”
Other concerns for IBD execs include losing top-performing advisors to RIAs and others, coping with fee compression and industry consolidation, and helping registered reps better serve investors. To address these issues, lots of firms are hiring and/or tinkering with leadership.
Ladenburg Thalmann, which owns Securities America, Triad Advisors, Investacorp, Securities Service Network and KMS, recently added David Ballard to its leadership team to focus on operations and technology, for example.
Ballard’s resume includes time with Docupace Technologies, Cetera Advisor Group (when it was owned by AIG), SunAmerica Mutual Funds and AIG Retirement Services. And Raymond James just promoted Kim Jenson from COO of its employee channel to COO for its broader Private Client Group; she was recruited from UBS in 2017 as a 30-year industry veteran.
Regulation & Compliance
The Financial Industry Regulatory Authority issued its risk monitoring and exam priorities for 2019 in January, highlighting new matters as well as ongoing issues like cybersecurity and firms’ hiring of brokers with former infractions.
“There is no one-size-fits-all approach to cybersecurity, so FINRA has made a priority of providing firms with reports and other tools to help them determine the right set of practices for their individual business,” Steven Polansky, senior director, member supervision in FINRA’s Washington, D.C., office, said late last year when the group released its cyber report.
In early May, FINRA proposed a plan to restrict BDs that hire brokers with a history of misconduct, including a requirement that such firms have a fund to cover unpaid arbitration awards. (The group is seeking comment on the proposal, Rule 4111, through July 1).
As for the SEC’s Reg BI plan, broker-dealer leaders seem to have mixed feelings. While more than two-thirds, or 68%, say the regulation will cause confusion and challenges, only about a third, 36%, say it will significantly affect business.
Meanwhile, BD execs hope individual states that have worked to enact their own rules — New Jersey, New York, Maryland and Nevada — will hold off until the SEC finalizes its fiduciary-related proposal. “There’s a lot of concern with what’s happening and all those changes,” said Raymond James Chairman and CEO Paul Reilly.