Why the Number of BDs Could Drop 20% in 5 Years

Still, the number of individuals registered solely with BDs (311,469) greatly surpasses the number of individuals registered solely with the SEC and the states (89,223), according to FINRA's snapshot.

The drop in BD firms comes as “no surprise” to Chip Roame, head of Tiburon Strategic Advisors. The end result, he predicted, is that the number of BD firms will be down 15% to 20% in the next five years.

“The shift from the BD model to the RIA model continues, as evidenced by the 5.4% decline in the number of BDs over the past five years,” Roame told ThinkAdvisor. “This is no surprise, as clients, financial advisors, firms and the media all seem to favor the RIA model.”

The 9.7% decline in the number of large firms, conversely, is “a bit surprising,” Roame said, but only until one looks at the data.

“The five-year decline in a market of 149 firms is just 14 firms,” he observed. “And yes, in both the captive advisor market and in the independent advisor market, a few larger firms have been merged away. The 6.1% decline in the number of small BDs is also not surprising, as many of these are finding it more difficult to compete on compliance, technology and marketing.”

For Roame, the most interesting fact in the new report is the 9.4% increase in midsize firms.

“This is likely the result of those midsize BDs acquiring some of those smaller BDs,” he suggested. “I expect this trend to continue, and then subsequently, large BDs will then buy these midsize BDs.

"I expect Stifel, Raymond James and other firms in the captive advisor market to continue to acquire, and I expect LPL, Cetera, Oasic and other firms in the independent advisor market to continue to acquire,” Roame said.

The View From the Ground

Louis Diamond, the recently appointed chief executive officer of the recruiting and strategy firm Diamond Consultants, said the data in the latest FINRA snapshot report matches what he is seeing in practice.

“The ongoing 10% drop in the number of large broker-dealers since 2022 aligns with what we’re seeing on the ground,” Diamond told ThinkAdvisor. “There’s been a marked trend of consolidation driven by most of the insurance broker-dealers exiting the independent broker-dealer space, the intense requirement for scale, and challenges of the ‘smaller’ large BDs to compete against the top five firms.”

Additionally, Diamond said, many larger broker-dealers are either merging to stay competitive or evolving their offerings in response to their aging advisor populations and the value proposition brought to the table by registered investment advisors.

In that sense, Diamond added, the notable growth in RIA professionals reported recently by the SEC is no big surprise.

“The RIA space surpassing 15,000 registrants is absolutely consistent with what we’re seeing,” Diamond said. “The momentum toward independence hasn’t slowed. It’s accelerated.”

The reasons why? Advisors continue to seek greater control, better economics, and the ability to deliver non-conflicted advice.

“Notably, we’re also seeing more M&A activity and professionalization within the RIA space, making it a more viable destination for larger, sophisticated teams than ever before,” Diamond said. “What's especially interesting is that even though we keep seeing a record number of M&A transactions, the number of SEC-registered firms continues to remain consistent or grow.”

This shows that more and more wirehouse advisors and IBD practices are flocking to the RIA world and away from the BD space, Diamond suggested.

“This dynamic is welcome news for the major acquirers since the next wave of RIA owners constantly stocks the pond,” he noted. “Will these trends continue? Yes, and it will likely accelerate. Between aging advisor demographics, shifting client expectations, and the rise of integrated platforms that de-risk independence, forward-thinking BDs and W-2 platforms that lean into flexibility and advisor empowerment will still hold strong appeal for certain segments.”

Effect on Clients

Knut Rostad, the president of the Institute for the Fiduciary Standard, said the data in the FINRA report likewise matches what he sees in daily practice.

“The broad movement from commission-based business models to asset-based is an important trend for the financial advisor industry,” Rostad told ThinkAdvisor. “However, the overall impact on the loyalty and quality of advice that consumers receive has been more muted in practice.”

A key factor in this outcome, Rostad said, has been the rise of dual registrants who can provide services on both a fee-based and a commissioned basis.

“On paper, the dual-registrant approach seems like a win for consumers, but in practice, the broker-dealer sales culture often still ends up winning out,” Rostad said. “There’s an important difference between a product-sales culture as opposed to a professional advice culture.”

Another factor to consider, Rostad said, is the high level of business model ambiguity and a “profound lack of clarity” among the investing public with respect to the rules and standards that different types of financial professionals are held to.

“Even though we’ve been moving away from commissions and towards asset-based compensation, the level of understanding among the investing public has not really improved,” Rostad said. “In fact, I worry that the current anti-regulatory environment at the federal level is set to make this even worse. So, I don’t really see the report as evidence that consumers are getting better advice, unfortunately.”

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