How IBDs can maintain long-term viability

How IBDs can maintain long-term viability in an era of consolidation

April 12, 2022 8:29 PM

The story of the last decade in the U.S. broker-dealer market has been one of consolidation.

According to research from Cerulli Associates, the number of wealth management oriented BDs has declined from 1,284 in 2010 to 923 in 2020. The top 25 BDs control more than 68% of total assets under management across all of wealth management, and advisors at the top five BDs manage an average of $159 million — 81% higher than the average advisor across segments.

While some are simply dropping their BD registrations in favor of operating as registered investment advisors, many are simply getting swallowed up by larger firms like LPL, Advisor Group and Cetera. A restrictive regulatory environment, increasing technology costs and a shift in consumer preferences for advisory services instead of traditional brokerage-based services are all contributing to the ongoing trend, Cerulli’s report noted.

“The increased scale of firms in the marketplace continues to benefit many advisors, as firms are able to make more significant investments in the technology and support services that are so critical to advisor productivity and a high-quality client experience,” Michael Rose, an associate director at Cerulli, said in a statement. “As the industry increasingly moves toward a fee-based model, BDs that can attract and retain established advisors through the supremacy of their platforms and service offerings while developing the next generation of talent will be best positioned for growth."

Marc Butler, the president and chief operating officer at wealthtech company Skience, has seen the impacts of the trend in real time. Mergers, acquisitions and firms going out of business decreased the number of entries in his contact list by 32% from 2006 to 2020, he said.

“This is a scale game for most businesses, and small BDs couldn’t make it on their own,” Butler said.

There is also the impact of an increasingly aging advisor population, many of whom founded a company and ran it 30 years before finding an exit. “Frankly, there’s not as many firms starting up, and many of the [new] firms are starting as RIAs rather than BDs,” Butler added.

While there are some advantages to consolidation and it could result in better outcomes for the investing public, there are always going to be some independent BDs that aspire to stay open for the long haul. For those firms, Butler has four pieces of advice for a firm to maintain its viability as a business.

Leadership with guts to make difficult decisions

BDs must realize that what made them successful in previous decades isn’t going to work in the future. Oftentimes this can come down to making tough decisions about people in senior leadership roles, Butler said.

For example, a person who successfully guided a firm’s technology strategy through the 1990s or 2000s may not have good knowledge of modern software development practice to lead the firm into the next generation. Or a chief marketing officer may not be versed in digital strategies that form the backbone of advertising.

“Some people can evolve their skills, but it’s up to the leaders [to be] asking themselves, ‘have they evolved or are they living with a toolkit that's circa 2005?’” Butler said.

Have a multi-year business strategy

Firms that want to exist over the long term must have a clearly defined strategy that can be communicated across the company and easily executed, Butler said.

Leadership needs to think through growth plans for new products, attracting new advisors and bringing aboard new clients. “This translates into a three-year financial plan,” Butler said. “A lot of firms are operating by the seat of their pants.

“The firms that aren’t with us anymore, part of the challenge is they were not able to do this effectively,” he said.

Differentiation

The most successful IBDs are the ones that can clearly express to both financial advisors and investors what sets the firm apart and what unique value they bring to the table.

While some firms are looking to be all things to all investors, successful IBDs have a defined value proposition or market niche, something advocated by groups like the XY Planning Network.

However, many firms struggle with this, Butler said. Their websites and other digital presences lack any tangible evidence of what sets the firm apart from other wealth management practices out there. Meanwhile, the firms with consistent, year-over-year growth are good at connecting investors with an advisor who can meet their unique needs.

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“Your value proposition isn’t what you think of yourself. It’s what the outside world thinks of you,” Butler said.

A technology plan

The swiftly evolving nature of technology can make having a plan seem a bit like trying to predict the future. Remember when many people were absolutely convinced that digital eye glasses were the wearables of the future?

Instead of guessing what big tech is coming next, firms can instead start with a “bottom-up” approach of trying to truly understand what technology clients need from their wealth management firm. Do leaders know what clients are struggling with, or what advisors are saying about the tech stack the BD provides them?

“Every firm says they have great technology, but when you talk to advisors, they’ll tell you something different,” Butler said.

After determining what technology investors or advisors need, a successful digital strategy goes beyond just buying into the solution. Firms should have a plan for integration, adoption and workflows, Butler said.

“Those that have thought about it, planned and executed on that plan, those are the firms that have done it well,” he said. “A lot of firms are trying to plug in point solutions without really understanding the experience they are delivering.”