Big BDs Keep Getting Bigger as Small Firms Merge or Exit

For more than 10 years, Cerulli has seen a steady decline in the number of retail-oriented broker-dealer firms, the research firm said in a new Cerulli Edge report on U.S. advisor trends.

Over the past 10-year period ending in 2019, the number of retail-oriented BD firms with wealth management as their core business declined from 1,358 to 956 — an annualized decline of 3.4%, Cerulli said.

The percentage of BD advisors affiliated with these firms increased from 58% to 72%, while the share of BD industry assets among these firms grew from 83% to 90%, according to Cerulli.

“Most of the decline in the number of broker-dealers has been kind of the smaller broker-dealers that have been, I think, giving up their broker-dealer registrations in a variety of manners,” Michael Rose, associated director of wealth management research at Cerulli, told ThinkAdvisor on Tuesday.

Some of them are dropping their BD registration entirely and becoming independent RIA firms, while sometimes they become affiliated with an independent BD, he said. Sometimes BDs go the Office of Supervisory Jurisdiction (OSJ) route with a BD, he added.

(The number of all BDs, regardless of their size and core business, was 3,517 in 2019, according to the Financial Regulatory Authority’s 2020 industry snapshot, down from 3,607 in 2018.)

The Drive to Increase Scale

The consolidation is being driven, in part, by mergers and acquisitions and a desire among BDs to increase scale in response to evolving industry dynamics, Rose said.

BDs need to invest significant amounts of capital to operate and maintain brokerage and advisory platforms and increasingly sophisticated advisor-facing technology tools, in addition to other areas of their business, while facing increasing competitive threats, according to Cerulli.

“Greater scale enables firms to increase these relatively fixed investments, and returns on those investments can increase significantly when they support a larger number of advisors and assets under management,” Rose said.

“Additionally, investments made in these areas can significantly increase the appeal of a BD firm to prospective advisors, better positioning firms to increase market share,” he said.

Several recent M&A transactions have been driven largely by the desire to increase scale, Rose told ThinkAdvisor, pointing as an example to Advisor Group’s acquisition of Ladenburg Thalmann in February 2020. According to Cerulli estimates, those firms were the 13th and 17th largest BD networks by AUM, respectively, while the new combined entity is among the top 10.

Rose also pointed to LPL Financial’s recent decision to buy Waddell & Reed’s wealth management business from Macquarie Asset Management for $300 million. That is “resulting in the addition” of more than 900 advisors to LPL’s platform, he noted.

The Importance of Tech

In one of Cerulli’s most recent surveys, technology was tied for the top spot among the factors most frequently cited by advisors as influencing their decision to join a BD, the firm said in the report.

Advisors have also indicated they plan to expand their use of advisor technology across the board, including client portals, e-signature, customer relationship management, and financial planning software, according to Cerulli.

The perceived importance of technology among advisors is likely to increase as a result of the COVID-19 pandemic, Cerulli said.

Successful M&A in the wealth management sector, meanwhile, extends beyond just announcing and closing on an acquisition or merger. The success of any transaction is significantly affected by the extent to which the acquiring BD can retain the advisors that are acquired as part of a transaction, Cerulli pointed out.

That provides a “competitive edge to larger BD firms with greater scale, and more robust technology and platforms, which are vital to advisor satisfaction and retention during their migration to the acquiring firm,” Rose said.

Advisor support, firm culture and restrictions on how advisors operate their businesses are also crucial to advisor satisfaction and are not directly related to the size of a given firm, according to Cerulli. M&A opportunities are, therefore, not limited to large BDs.

“Those large BDs that do embark on M&A will be wise to thoroughly consider all of these factors objectively, from the perspective of advisors, as part of their due diligence efforts,” Rose suggested.

Given all of the factors at play and the “relative dearth of new entrants into the space,” Cerulli expects to see consolidation in the industry continue going forward, it said.

“The factors that are driving and motivating consolidation in the industry, we think, are still going to exist for the foreseeable future,” with more large transactions and more smaller BDs giving up their registrations, Rose told ThinkAdvisor.