Page 14 - Investment Advisor April 2021

INDUSTRY INSIGHTS

By Timothy Welsh

The Curious Plight of the Independent

Broker-Dealer

Change is afoot in the IBD space, and “RIA-ifying” appears to be the

chosen path.

ith the emergence of the
financial planning pro-
W fession over 50 years ago
came its companion: the independent
broker-dealer. At the time, it was a
quite an innovative approach for a
financial professional to combine
insurance and securities to help shape
a client’s financial future.
In the late 1960s, you were either
an insurance agent or a stockbroker,
not both. To accommodate this finan-
cial planning movement, however, early
innovators in the form of a handful of
Midwestern insurance companies cre-
ated product platforms for independent
advisor contractors to operate their
businesses in this manner. Then along
came the lucrative mutual fund and sim-
ilarly packaged products, and it was off packaged products, some of which were To compete effectively in the 2020s
to the races for independent advisors Ponzi schemes in REIT disguise, stain- and beyond, this battered sector must
and their broker-dealers. ing the reputation of the industry and deal with low-cost, huge-reach competi-
In the go-go years of the 1980s and putting some firms under. tors, such as Vanguard, plus the online
1990s, non-Wall Street broker-dealers Despite these inherent problems and discounters offering direct, low-cost
and insurance companies’ products bad PR, the IBD model was still so retail wealth management services. At
finally had a distribution channel of successful that it led to the creation of the same time, they had to leverage
their own that they could compensate an entire financial services sector with their back-office operations in the form
and control to drive outsized profits. more than 100,000 advisors, reaching its of RIA custodial platforms to support
As a result, life was golden in IBD land, pinnacle in the early 2000s. professional, fee-based, human advice
attracting all sorts of outside private competitors, which sapped what little
equity investments and M&A to keep the CONSOLIDATION CRAZE profitability was left.
party going. Since then, the IBD space has been The result? Industry consolidation over
The hidden challenge for IBDs with in steady decline as technology, low- the past decade has become the answer.
this model, however, lay in its sales- cost product innovation, new operat- This is exactly what has been play-
commission-driven structure, which not ing models and a regulatory crackdown ing out on the big screen with more
only tied advisors by regulation to their in the form of FINRA and state secu- gargantuan deals, many of which have
broker-dealers despite being “indepen- rity agency fines combined to have a been driven by private equity investors’
dent,” but also opened the industry to decimating effect on this once-dazzling inevitable need to exit, along with the eelnosiva/stock.adobe.com
nefarious activities led by bad actors financial services segment. The industry realization by many insurance company
and fraudsters. These questionable shrank 25% in the last decade alone, owners that mutual funds don’t have the
characters introduced highly profitable according to Cerulli. juice they had in the past.

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