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The 2020 Broker-Dealer Presidents Poll: A Complex Picture

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During the coronavirus, the key message from many industry experts to advisors is very straight-forword. “This is the time you want to strengthen your [client] relationships,” said retirement specialist Ed Slott, president of Ed Slott and Co., during a recent online event. “This is the time you’ll be judged by how you reacted to [clients’] concerns [and] their anxieties.”

By extension, of course, broker-dealers and other industry players have a similar mandate. “The COVID-19 pandemic has required that we, and the world, navigate an extraordinarily complex and rapidly changing environment,” according to Waddell & Reed CEO Philip J. Sanders, and that’s meant quickly implementing business continuity (or work from home) plans and more.

Meanwhile, the compliance date for the Securities and Exchange Commission’s Regulation Best Interest is around the corner, June 30. The markets remain vulnerable to swings due to the COVID-19, its economic fallout, the oil-price drop and other factors. And the industry awaits news from the government on the planned Schwab-TD Ameritrade merger.

Amidst this combination of complex issues, the presidents of nearly 40 broker-dealers took the time to share their opinions on the trends affecting the industry and where it’s headed in 2020, including:

• M&A/consolidation • Reg BI/compliance • Technology challenges • Fee compression • Rising costs • Robo rivals • Market volatility • Working remotely • Privacy/cybersecurity • State fiduciary rules • Diversity • Sexual harassment

Speaking about some of these issues in late April, LPL Financial President & CEO Dan Arnold explained: “These structural trends are creating opportunities to evolve certain aspects of how we work and serve our advisors, which we are incorporating into our plans.”

The executive put a positive spin on the broader situation, too. “As we look ahead, regardless of the shape of the recovery, we see an even greater need for our solutions and are better positioned than ever,” he added.

But Raymond James Chairman and CEO Paul Reilly warns that at least in the near term, “similar to the rest of the economy, you should expect significant near-term headwinds for our business,” he told analysts in late April.

For instance, traditional recruiting efforts “will be impacted by the travel restrictions and even the comfort levels of in-person meetings,” Arnold added.

In other words, it’s complicated.

M&A Trends

Executives at most independent BDs, 97%, see more consolidation ahead. And the minority, 6%, view such deals as negative for the industry; that figure jumps to 14%, though, when they’re asked specifically about the Schwab-TD Ameritrade merger.

The main forces driving these transactions are higher regulatory and technology costs, as well as lower fees and commissions.

On May 11, Advisor Group issued an update on its plans for the former Ladenburg Thalmann broker-dealers, which it recently acquired. Three of these five BDs — Investacorp, Securities Service Network and KMS Financial Services — are set to merge with Securities America.

“From the outset, we have been clear that no former Ladenburg firms would be combined with the four original Advisor Group firms,” according to Advisor Group CEO Jamie Price. The aim is to move one BD at a time into Securities America through November.

Overall, the four Advisor Group BDs — FSC Securities, Royal Alliance Associates, SagePoint Financial and Woodbury Financial — and the remaining ex-Ladenburg BDs — Securities America and Triad Advisors — should have over 11,000 advisors and some $450 billion in assets.

Meanwhile, LPL Financial just said it would buy Lucia Securities, which works with $1.5 billion. The giant IBD acquired Allen & Company, its roughly 30 advisors and $3 billion in client assets last year.

“M&A continues to stay on our strategic radar,” according to LPL’s Arnold. The IBD sees “opportunities” particularly with small BDs and with RIAs. The current climate, he adds, points to ”continued consolidation within that segment of the marketplace.”

About 80%, or four out of five, IBD leaders see more market volatility ahead tied to coronavirus. LPL, Raymond James and others have cancelled national conferences, but they hope to resume in-person visits with recruiting prospects when more of the economy opens up.

Compliance, Other Pressures

Broker-dealer executives are feeling quite negative about compliance and related pressures impacting their financial performance. When asked what most keeps them up at night, more than one-third say it’s the need to do and spend more on regulatory matters. They felt similarly in last year’s poll. Looking at what is behind headaches for their advisors, both compliance demands and business growth top the list (for about one-third of the BDs each).

When asked which specific regulatory matters most lead to worry, most executives say privacy and cybersecurity. This is the top concern for 65% of them vs. 53% for Reg BI.

Some two out of five, or 41%, see 12b-1 fees and revenue sharing tied to mutual funds as a headache. And just about 30% see cash management or bank “sweep” programs as a regulatory burden.

In terms of the cost of compliance issues, LPL said it had first-quarter regulatory charges of $6.2 million; these costs totalled $30.6 million for the past four quarters.

Raymond James, for instance, reached a settlement with the SEC in September and agreed to pay $15 million over advisory fees on inactive client accounts and excess commissions for brokerage-client investments in certain unit investment trusts.

Recently, the SEC has been reminding BDs about what they can and can’t do when it comes to using the terms “advisor” and “adviser.”

In its latest guidance, the agency said it “presumes that the use of the terms ‘adviser’ or ‘advisor’ in a name or title by a broker-dealer that is not also registered as an investment adviser is a violation of the requirement to disclose the broker-dealer’s capacity under” Reg BI’s Disclosure Obligation.

Still, the SEC “did not expressly prohibit the use of these names and titles by broker-dealers.” When a BD uses the terms in its name or title in the context of providing investment advice to a retail client without also being an RIA, however, it will be presumed to violate Reg BI’s disclosure obligation in most cases, it says.

Broker-dealers with an affiliated RIA are prohibited from using the names, but a broker-dealer that is also a state-registered advisor can use them.

As for the Financial Industry Regulatory Authority’s crackdown on advisors with patterns of misconduct and the broker-dealers that hire them, this regulatory group recently filed with the SEC to clamp down on “the risk of potential customer harm that may persist where a firm or broker has a significant history of past misconduct.”

The FINRA plan would, for instance, let a hearing officer impose conditions or restrictions on the activities of a respondent member firm or respondent broker, and require a respondent broker’s member firm to adopt heightened supervisory procedures for such brokers, in some cases.

The regulatory group also wants to require member firms to adopt heightened supervisory procedures for statutorily disqualified brokers during the period their eligibility request is under review.

BD execs, though, overwhelmingly say that dealing with reps with troubled regulatory records, or so-called “bad brokers,” does not keep them up at night, 88%; nor does the regulation of digital assets, 94%.

Regulatory Readiness

Looking at Reg BI readiness, almost all broker-dealer leaders polled by this publication say they are somewhat or very prepared for the regulation, 97%.

Many view these changes as entailing significant shifts in the industry, 37%.

Others are split over whether Reg BI likely will produce some compliance challenges and confusion, 31.5%, or have only limited impact on the broker-dealer’s compliance programs and costs, 31.5%.

For BDs with advisors in the Bay State, the new fiduciary rules that took effect March 6 will start to be enforced Sept. 1. They require broker-dealers and their agents to provide investment advice and recommendations “without regard to the interests of anyone but the customer.”

The Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 is seen as positive or neutral for investors by 97% of BD leaders. Most execs surveyed, 71%, don’t see it as overburdensome.

It’s been praised for pushing back the age (to 72) for required minimum distributions and criticized for eliminating the “stretch IRA” that allowed for lifetime IRA distribution to heirs.

Returning to the topic of compliance, BD execs say they plan to boost spending on compliance this year, 95%. It’s the top spending priority vs. technology and platforms, 85%, and RIA/fee-based programs, 82%.

Other important areas likely to require more financial resources than last year include business-growth/coaching, 73%; mergers and acquisitions/recruiting/succession planning, 71%; and new services, 44%. Bitcoin/cryptocurrencies efforts are not expected to see higher spending.

Even with higher spending and great compliance burdens, a whopping 91% of broker-dealer leaders remain confident in the outlook for the business.

Diversity & Inclusion

Most advisors and other members of the industry, 85%, said firms should have clear codes of conduct for events, do more to promote women and take other steps for greater diversity and inclusion in the wake of lewd comments made by investment advisor Ken Fisher at an industry event last fall.

In IA’s more recent poll, the majority of BD leaders, 83%, said they have codes of conduct for events to prevent harassment.

Plus, nearly 70% say their firms do not have mandatory arbitration for sexual harassment claims; in other words, their employees have not been denied the right to sue over such behavior.

Most BDs polled, 63% say at most one advisor out of five at their firms is female. However, a good number, 22%, indicate that roughly one third of their advisors are women. In addition, 60% aim to have about one-fifth to one-half of their total headcount be women by 2025.

As for advisors of color, this figure remains less than 1 in 20 advisors for most firms surveyed, 51%. Still, 40% of BDs polled want this figure to be closer to 1 in 10 by 2025, and 17%, say it should be greater than that level.