IBD Elite 2024: The myth of big versus small

In a time of rapid consolidation and accelerating dominance by the giants of wealth management's independent brokerage channel, the so-called small or midsize firms seem quaint. When growing colossi are gobbling up fauna, nobody wants to be the tiny fish in the sea.

But the riches of the ocean of an estimated $45 trillion in industry client assets explain why many of those littler swimmers are eating quite well. In fact, one of the larger examples of them, Kestra Holdings, presents an "ecosystem that provides a great solution for an independent wealth practice on all stages of their customer journey" across a brokerage, several registered investment advisory firms, an M&A and succession business, an asset management and research arm, and a trust company, noted Kestra Financial President Stephen Langlois.

"I don't care for the term 'midsize,' but that's probably where we are," he said. "We have the economics that allow us to provide the service, the support, the technology that really helps these advisors and enables them to be successful."

Austin, Texas-based Kestra illuminates one of the biggest myths about the fragmentation between big and small independent brokerages, and wealth management firms in general: that any but the largest companies are likely to go extinct. And since many of those firms are managing billions of dollars, they're not really all that miniature. 

For the 39th annual edition of the IBD Elite study of the largest independent brokerages in wealth management, Financial Planning spoke with five experts who pointed out that the small and midsize firms do have a place in a highly competitive channel. Those companies are also evolving to meet the demands of financial advisors, and their clients in some ways more quickly and effectively than the largest conglomerates, and the giants themselves can cite ways that they curate a small-firm experience to advisory teams that have their own RIA or join a branch.

"I don't think it's quite as simplistic as large and small," said Rita Robbins of New York-based Affiliated Advisors, which has around 100 advisors managing nearly $5 billion in client assets as an office of supervisory jurisdiction that uses the giant firm Osaic as its brokerage. "It's, 'How do I get the resources and the pricing power? How do I get the resources of a large firm but still have highly personalized help, assistance, guidance? How do I tap into everything that's available to me?' It's really challenging to just be on the other side of an 800 number at times."

READ MORE: Find a printable PDF of this year's annual IBD Elite rankings here. Follow this link to see the data in an interactive table. And click here to read last year's feature.

Sena Kwon/Arizent

By the numbers

The annual revenue reported by firms to FP as part of the survey shows the channel's massive expansion and consolidation, as well as the enduring presence of small and midsize firms. For starters, the channel's yearly business has more than tripled between 2007 and 2023 to $43.64 billion — which is more than three times as much revenue as the entire National Football League generated last year. 

This segment of wealth management is turning more top-heavy: over that span, the share of that revenue stemming from the 10 largest firms each year — a group that, today, includes LPL Financial, Ameriprise, Osaic, Cetera Financial Group, Raymond James Financial Services, Northwestern Mutual and Commonwealth Financial Network — has enlarged to 88% from only 54%. 

A check of the top 40 firms in the rankings just 10 years earlier, in 2013, reveals that at least 20 independent brokerages, or half of that group a decade ago, have merged into larger firms or otherwise switched their FINRA-registered side of the business to that of a larger player. A shining example: Last year's group of the top 15 firms included two, Securian Financial Services and Avantax, that were acquired by Cetera; a third, Atria Wealth Solutions, is now folding into LPL; and a fourth, Lincoln Financial Network, was rolled into Osaic earlier this year. Looking back 10 or 20 years on the names of firms in the independent brokerage channel can often feel like reading hieroglyphics in an ancient cave.

Yet the firms outside that list of the top 10 — companies such as Kestra, Lincoln Investment Planning, Independent Financial Group, United Planners Financial Services of America, PlanMember Securities — racked up $5.2 billion in revenue last year among them. Three out of that group of small and midsize firms — Arkadios Capital, Level Four Financial, LaSalle St. Securities — expanded by so much in 2023 that they were in the top 10 firms in revenue growth for the entire channel last year. And other smaller players — either among independent brokerages, hybrid wealth management firms or RIAs — are doing just fine vying with the giants for advisors and clients.

Atlanta-based RIA Advisory Services Network has picked up about $5 billion in client assets in the past five years, while its footprint of advisors using its advisor platform enlarged to 220. They maintain the option of affiliating their brokerage business with an external firm, Calton & Associates. 

Advisory Services, led by co-founder Tom Prescott, doesn't get fazed when reading stats such as the metric in FINRA's latest snapshot report noting that 82% of the industry's registered representatives work for firms with at least 500 reps, he said.

"At $8 billion, we are still small compared to the big firms," Prescott said. "Anything that's available, for the most part, at a big firm is available at a small firm."

READ MORE: The 15 largest independent brokerages in wealth management

Sena Kwon/Arizent

Going it alone?

Companies like Arkadios, Level Four and Tampa, Florida-based Independent Financial Partners have completed a more challenging example of a so-called breakaway move from bigger firms that has meant not only using standalone RIAs but operating their own independent brokerages. The firms are proving their appeal, with some advisors opting for the smaller players in recent years. Arkadios and Level Four routinely unveil incoming teams fleeing from big firms.

CEO Bill Hamm led Independent Financial away from LPL in 2019. The high-profile exit resulted initially in the loss of hundreds of advisors moving to other LPL branches yet ultimately has stabilized into a group of 260 advisors with $14 billion in client assets, he noted. 

The firm is now climbing the ranks as Hamm's family-owned-and-operated company pitches advisors on the ease of getting their problems solved via a quick call to the corporate headquarters. And it also pitches an economic case. The firm's lower offers of recruitment transition assistance, compared to the giants', bring smaller taxable income and greater value for the long term because Independent Financial doesn't charge a fee for using outside custodians, he said.

Referring to analyst notes several years ago that forecast the supposedly negative impact of the loss of Independent Financial on LPL's profits, Hamm noted that the share price of his publicly traded former firm has soared by more than 170% in the past five years and quipped, "So much for our leaving hitting the bottom line." LPL and the other giants have "been after our folks for the last five years" with minimal disruption to the firm's business, he said.

"They're good for certain advisors; we're good for certain advisors," Hamm said. "When I talk about LPL, I'm basically talking about all the big boys, because they're all doing the same thing."

The giants do carry significant advantages, though, based on the resources that they can deploy toward M&A, recruiting bonuses, technology and other services, according to recruiter Jodie Papike, CEO of independent advisor and executive placement firm Cross-Search. "Without that level of capital, you can't grow the way the giants are growing," she said.

At the same time, the smaller players can remain competitive through active recruiting outreach, access to different RIA or compensation structures and certain products, and any number of factors that may emerge "when you get into the nooks and crannies and puzzles" of the business, Papike said. Bigger firms are "not going to bend off their entire model to satisfy that advisor, whereas the smaller or midsize firms can be more nimble," she added.

To be sure, those firms are confronting challenges relating to capital and the rising cost in areas such as technology and compliance that are coinciding with ample private equity investment in the industry at ever-higher valuations that can lead to offers that are too good to refuse. 

Kestra spun off one of its subsidiaries, a Rockville, Maryland-based brokerage and RIA named Grove Point Financial, in a deal with Atria last year after Grove Point "was just not a strategic fit for us," Langlois said. The company doesn't publicly discuss any potential suitors approaching Kestra or its capital backer, global private equity firm Warburg Pincus, Langlois said, and he declined to comment in an interview when asked if Kestra and its 1,700 advisors with $117 billion in client assets will ever fold into a larger firm someday.

Many smaller firms are "one bad regulatory event from going out of business," which is "the reason you see a lot of movement" in the ranks of midsize firms in recent years, Langlois said.

"We love the position that we're in," he said. "This is a complicated business. It has a lot of risk, and it gets more expensive to run it every single day."

READ MORE: Independence? It depends

Sena Kwon/Arizent

The subtleties between 'big' and 'small'

Simultaneously, the branches of the bigger firms are arguing they can help advisors navigate the complex industry better while providing the same sense of community, familiarity and flexibility of smaller firms. 

Through its resources combined with those available through Osaic, Affiliated has completed 20 M&A transactions comprising more than half a billion dollars in client assets over the past four years, launched many outsourced services for its advisors such as marketing, certified public accountants and event planning, and ensured there is "constant communication and peer-to-peer learning with our advisors," Robbins said. 

"Everything you could possibly think of, we've already vetted," she said. "It's a really large firm, but we distill it down into a really individual experience for our advisors."

The smaller firms counter that leaving the big platforms can offer advisors a quicker turnaround on any requests to the corporate office compared to the larger companies, where "your input isn't asked for or really wanted in a lot of cases, and I know that," Hamm said. 

Independent Financial "may be a small firm, but we have big partners" in the form of the custodial divisions of Charles Schwab, Fidelity Investments and BNY Pershing, he said. Publicly traded and private equity-backed firms must look out for their investors. 

"Their first fiduciary responsibility is to their shareholders or to their owners, and sometimes that clashes with the needs of advisors and clients," Hamm added.

Furthermore, the ongoing move toward RIAs and away from commissionable brokerage business means that "the broker-dealer role becomes less important," according to Prescott of Advisory Services. Since advisors "look at their clients as their clients," more of them are seeing that the largest acquirers in the industry are getting bigger and posing the risk that one wealth management company could be sold out from under them without "passing that economy of scale" down to their advisory teams, he said.

"We're all in this business to be profitable, but, at the end of the day, who's serving whom?" Prescott said. "The more nimble smaller or medium-size firms think along those same terms, whereas the larger firms do not."

Others point out that the smaller players often have founders that are approaching retirement, and the need for a succession plan from an inevitable private equity or publicly traded investor. Some advisors want the scale, resources and economics of the biggest firms, while the smaller ones are "doing incredibly well recruiting-wise" by catering to a different group, Papike said.

"There has to be a place for smaller and midsize firms. Smaller and midsize firms can offer something that the large, dominant players can't, and that is flexibility and intimacy," she said. "There are plenty of advisors that have a business model that, for whatever reason, is not a good fit for a big firm."