Inside John Hancock's big IBD bet

Others may see a clouded outlook for the turbulent independent broker-dealer market, but John Hancock Financial Network is making a big bet on a bright future.

"In five years the IBD space will look totally different than it does today, and we want to be part of that opportunity," says Brian Heapps, president of John Hancock Financial Network.

The regulatory burden of the Department of Labor's fiduciary rule, the continual decline of commission-based business, the accelerating need for scale and state of the art technology, an aging adviser population and the oncoming wave of millennial clients are all converging to transform the IBD business "very quickly," Heapps says.

But Heapps is betting that Hancock's IBD, Signator Investors, can be a player in an altered marketplace. Backed by Hancock's well-capitalized parent, Canadian-based Manulife Financial, the firm can offer advisers ample compliance resources, practice management efficiency, a white-label robo platform (courtesy of Envestnet) and a pipeline of desirable insurance products, he says.

"The IBD of the future is going to have to have a different relationship with advisers," Heapps says. "We want to stay ahead of the competition."

STAYING RELEVANT IN A POST-DOL WORLD

To remain relevant in a post-DoL world, IBDs "will have to go all in on technology," says industry consultant Tim Welsh, president of Nexus Strategy.

"Client experience, adviser productivity and business process automation platforms will all be needed to attract new clients and remain profitable in a lower fee, more competitive and complex operating environment," Welsh says.

Being able to serve smaller accounts will also be critical, adds Jay Hummel, managing director of strategic initiatives and thought leadership for Envestnet.

“IBDs will need technology which makes it efficient for them to serve small- to medium-sized accounts," says Hummel. "In many cases they may need outside parties to support their due diligence and product selection process.” He adds that home offices will also need to ensure consistent client experiences across different advisory groups and operational systems, to better “streamline compliance with the new DoL regulations such as the BICE implementation.”

NEW STRATEGIES; NO LOOPHOLES

In addition, IBD’s can no longer rely on "selling their way out of their problems," Welsh says. "This time it is different. All of the industry's high commission, revenue sharing and selling strategy loopholes are being closed."

As for Hancock/Signator's strategy, Welsh says he thinks they have a fighting chance.

"I think there will be room for a few players of scale that can make the big technology investments, and thus be able to swallow up small to mid-size firms, further providing scale to succeed," he explains. "But they have to be able to execute on their strategies. If you don't pay close attention to details and invest accordingly, you can flame out dramatically going down this slippery slope, as we saw with Nicholas Schorsch and RCS."

Read more: RCS Capital to Sever All Ties with Schorsch in Bankruptcy

Heapps and Chris Maryanopolis, president of Signator, say they're up for the challenge.

PULLING THE TRIGGER

Indeed, Hancock pulled the trigger on the first phase of its aggressive IBD strategy in May, acquiring 883 registered reps and advisers from Transamerica Financial Advisors as it purchased approximately $25 billion in client assets.

The blockbuster deal doubled Signator's assets to about $50 billion and the number of its advisers to around 2,200. The average production of the IBD's advisers rose from $125,000 to $175,000, according to Heapps. Terms of the deal were not disclosed.

GOING ALL IN, RIVALS PULL OUT

Underscoring the challenges that lay ahead for Hancock and Signator, other insurance company powerhouses are getting out of the IBD business while ManuLife is going all in.

American International Group sold its broker-dealer unit to Lightyear Capital and PSP Investments earlier in the year, and MetLife is selling its IBD to Massachusetts Mutual Life Insurance.

Increasing costs as a result of the DoL rule, thin margins, lagging productivity and increased competition from RIAs have all been cited as factors dampening enthusiasm for the IBD business.

ADAPTING TO BRAVE NEW WORLD

Adapting to a brave new IBD world is the key to success, say Heapps and Maryanopolis.

For starters, Heapps estimates IBDs will lose around 20% of their adviser force in the next several years. Baby boomer advisers will want help with succession planning and making their businesses more efficient and digitally up to date, Maryanopolis says.

The future of the IBD business, Heapps believes, will be a younger generation of savvy, well-supported advisers being able to "bridge the gap between aging advisers with boomer clients and the millennial children of those clients — who will be investing very differently."

What's more, he argues that because of Signator's insurance company parent, the IBD will also benefit from the ability of advisers to continue to sell some commission-based products as a result of exemptions in the DoL rule.
Meanwhile, Signator will be on the lookout for small and mid-sized IBD acquisitions, especially in Texas, California and Iowa, Heapps says.

"We're opportunistic, but we don't want to grow to be number one in size," he says. "We want to maintain a high-touch service model."