The 2019 Broker-Dealers of the Year winners met recently in Chicago to share their views on the latest competitive, regulatory and other issues.
This year, for instance, the BD leaders described the importance of innovation, the ins and outs of the Securities and Exchange Commission’s Regulation Best Interest, the future of the advisory business and more.
The leaders first focused on competitive pressures in the industry, a topic they were eager to discuss.
Today, the number of broker-dealers is down to about 3,600 vs. some 4,600 in 2010. There is pricing pressure, as well as the competitive threat posed by robos and other options. What is your BD’s top challenge or concern — or put another way, what most keeps you up at night?
Ralph DeVito, The Investment Center: It’s all the regulation. They can’t go backwards and make new rules on us. That makes it very difficult to get your business in alignment with what they want us to do.
As far as the competitiveness — we’re all independents in this room, and we’re probably the last four. That’s a joke. [But] we all remember when there were hundreds of us, … and now there’s almost nobody.
There’s a ton of competitive pressure from just pricing. I mean I’m sure the pressure that [larger BDs] are getting is different. But overall, it’s hard to keep up, especially when you talk about all these rollups, which are difficult for smaller IBDs.
The rollups are kind of good in a way, because the big players are taking all these [registered] reps. And the last 10 reps that I’ve talked to in the office want to leave [their current firm] and come to us because we’re all about personal service. We’re one on one, hands-on all the time. They want to be able to talk to people and feel like they’re [treated like a real] person, but it’s challenging now.
But the biggest [issue] is regulation. Robo doesn’t seem to bother me much. We have our robo solutions, and our robo solutions are a little bit more hands-on than just being client direct.
Lon Dolber, American Portfolios: I worry about what’s going to change the business. How are the financial-services business and the delivery of financial services going to change? That keeps me up at night. Where’s the business going longer term?
Amy Webber, Cambridge: Like American Portfolios, we are in a different situation from a size perspective. Yes, regulation does seem to be driving the changes.
What we think about on a regular basis really is what the business is going to look like [as a result] — or how does that [change] combine with what we think the business should look like [in the future], taking into consideration all of the signals that we see and are trying to get out in front of.
Advisors don’t change quickly. For the last few years, we’ve talked a lot with them about the need to transform their psychology. Now it’s time to reinvent their business practices — not what’s in their heart — but the tactical components of what they have to do to make sure they don’t get on the wrong side of the regulation, the rule-making by enforcement, by still doing business the old way. That combination [is what we think about].
We’re not really threatened by robo, because I think of [that trend] as something that’s replaced the do-it-yourselfers that we’ve had for 50 years. But what our advisors need to do is to figure out how to combine the human component with the digital component into their practices, and that’s not easy.
We all talk a lot about millennials, next generation and generation now as we call it, because the oldest millennial is 39. They’re not all 18 and living in their parents’ basement. They’re here today, and we have to deal with that.
How do we make sure that our advisors, who maybe aren’t 39, are positioning their firms to stay alive and thrive in the future, to capitalize on what they’ve built thus far but then reinvent and transform it?
We have to do the heavy lifting. We have to try to see the future, think about what that’s going to look like and then bring to the table all of the ideas, best practices, technology and compliance to keep them out of trouble. That’s our job.
Dolber: I was reading a Bloomberg article, and a young financial advisor’s motto is “I’m not your parents’ financial advisor.” Think about that statement!
Webber: [Those are the advisors that] will likely win that business when the younger generation inherits the wealth.
We’ve been talking about this wealth transfer for so long that a lot of our advisors aren’t even sure that it’s going to happen and that they will [likely] lose the business.
So, all of the statistics that we’ve told them about — that 80% of the wealth is going to go to someone else, not the parents’ advisor, not the spouse’s advisor, etc. — they’ve gotten almost numb to it [and think]: “It hasn’t happened yet. We’ve been talking about it for 15 years. It’s not going to happen. I’ve got this.”
But we’re seeing it happen already. It’s a real rude awakening.
DeVito: They need to talk to some kids. My son graduated from college and is an investment banker. He looks at me and goes, “Why does anybody need you? Why does anybody need an advisor when I could do it all myself.”
I try to explain to him, “Yeah you’re making a pretty decent living right now. But five or 10 years out, when you’re really making some money and then you’re married, have three kids and need insurance, everything is more complicated. I don’t know if you want to do that online by yourself.” But [advisors] haven’t talked to my son … to win him over.
Webber: That’s exactly right. And how do we combine, not disintermediate the human component [from the technology], but weave it all together and give those clients, like your son, the technology tools that he needs to get the basics and then the more complex? That is the value proposition.
David Stringer, Prospera: It’s about combining the advisor with technology at the end of the day. But when I think about the competition or the competitive challenges we have to deal with, regulation is the biggest piece.
Rulemaking by enforcement — because it feels like this externalization of fees is underway right now, where the 12b-1 is taboo and we’ve got to make it an advisory fee — this seems like what’s driving the advisory business.
The Protocol for Broker Recruiting is another challenge. All these firms backing away from it and trying to make it hard for an advisor to leave [a firm]. Another challenge is technology and staying competitive.
Webber: Our industry struggles, and we’ve talked about this for years, but there still isn’t a common data format. We spend millions and millions of dollars having to sort through all of that [data] ourselves because a common data format doesn’t exist.
Dolber: I told the regulators data standardization will set you free. It’s true. We have 20 data loaders. We actually go out and load all of our data [into our system] and normalize it.
It’s very expensive because there’s no common [format] — data from the clearing firms tends to be a little bit common, but everything else is all over the map. You’ve got to filter it, and that’s a lot of work.
We have data loaders, and we do [this work] at odd hours, because the data has to be ready for business [in the morning]. It’s quite complex. I don’t see that being done easily by small firms; they may need more [help from] the clearing firms.
Now, if the regulators would understand that they could create more scale and also more safety for the investing public because big data is the answer; but they need to force a common structure. There’s no standard for financial-services data in the United States. It’s all over the map.
Webber: Another threat that’s somewhat connected but different is that we’re independent, privately controlled [firms], and that’s at risk on a fairly regular basis.
We want our companies to be here long after those of us that are in our chairs today are gone. But we’re competing against an environment that is dominated by short-term thinkers.
When you’re out there competing for the short term, think of it somewhat like junk bonds vs quality bonds, right? When you’re competing for the short term, you can throw money in different directions and sacrifice long-term profitability for short-term revenue growth.
And the competitive deals and decisions that we see going on out there worry me sometimes. Perhaps the value proposition that we have so fiercely protected is a dying breed.
Dolber: That’s a good point. Our [BD] conference in October is coming up. What am I going to talk about? Why are you all here? Why do we come together?
I get calls all the time to sell the company. I don’t sell because, like you said, I want to build something that lasts beyond me.
I don’t want to see the company destroyed or merged. I want to see it survive. So I’m going to ask that question at my national convention: Why are you here? Can we talk about that?
DeVito: Can we survive past the next 15 years? Fifteen years ago, all the insurance companies were in the business
Webber: Now it’s private equity.
Stringer: It’s all short-term capital.
[Editor's note: An earlier version of this Q&A incorrectly attributed Ralph DeVito's remarks about his son and the son's view of advisors to another executive.]