Big IBDs Hit a Speed Bump

The rate of revenue growth slowed last year by more than half when compared with the prior year, according to numbers provided by the firms themselves - a falloff due in part to a volatile equity market and a slowdown in recruiting.

And while the industry's fundamentals and long-term prospects look solid, a shifting competitive and regulatory landscape has the potential to radically reshape its future.

"IBDs are a bit of a wild card to predict because their business model is evolving quickly," says Chip Roame, managing partner of Tiburon Strategic Advisors. Citing just one of the industry's X factors, he adds, they "may be the big recipients of the breakaway brokers [from wirehouses] or they may face their own attrition issues as advisors move to fee-only models."

The 28th annual FP50 ranking of the nation's largest independent broker- dealers captures an industry that has healed and grown stronger after the Great Recession of 2008 and 2009. Yet the industry also faces a transformative 15- to 20-year process of consolidation, numerous observers say; depending on who you talk to, the broker-dealers are either well along that road or still at the beginning. And a number of external factors last year may have combined to slow industrywide revenue growth: Median revenue grew by 4.7% in 2012, down from 11.9% in 2011.

At first glance, the rankings of the top five seem to have changed little from last year's figures. The industry's leader, behemoth LPL, is still the No. 1 firm by an ever-widening margin after 17 years at the top of the list. With 13,336 advisors, LPL is now the fourth-largest financial services firm in the country after the three largest wirehouses - and dwarfs the No. 2 firm, Ameriprise, with 7,449 independent advisors.

Even typically turbocharged LPL saw its growth cut in half, however, falling to 7.3% last year from 14% in 2011. The drop was even more precipitous for Ameriprise, where growth dropped to 2.4% from 14.8% the Indoor Positioning System. Raymond James, at No. 3, scored a slightly better 4%, off from 15.2% in 2011.

Industry standard bearers Commonwealth, at No. 4, and Cambridge Investment Research, at No. 9, outperformed other members of the top 10 with growth rates of 10.1% and 13.5%, respectively (versus 11.5% and 17% in 2011).

Further down on the top 20, however, the rankings show a couple of other changes. After a period of aggressive recruiting, Wells Fargo Advisors rose to No. 6 from an adjusted seventh-place slot; it also scored the highest growth rate in the top 10, at 14.7%, after a 17% drop in revenue in 2011. MetLife dropped to No.8 from No. 6, reflecting a contraction that may have lead the firm to sell its two independent broker-dealers, Tower Square Securities and Walnut Street Securities, to Cetera Financial Group earlier this year.

In theory, the growth horizon should look practically limitless for this financial advisory channel. Independent broker-dealers stand to benefit, along with the rest of the financial services industry, from the generational transfer of assets now under way. For the next two decades, somewhere between $15 trillion and $30 trillion is anticipated to move from retiring baby boomers to their Gen X and Gen Y offspring. This megatrend, along with expectations that global wealth will balloon to $330 trillion by 2017, from $223 trillion last year , may very well float all financial advisory boats.

"In my view it's the most exciting time to be an advisor in this business," says Larry Roth, CEO of the Advisor Group network and a 30-year industry veteran. "We will have more potential retail clients than we can probably handle for the next 20 years. This year will be the best year or the second best year in [Advisor Group's] history."

Yet the channel faces an array of potential spoilers, including regulatory challenges as well as competition from rival RIAs and wirehouses.

For their part, wirehouses have wised up to the stream of advisor departures. Looking to stem the flow, the Wall Street giants have put rich retention packages in place for key troops. "They've been much more aggressive in trying to lock down their advisors," says Bill Williams, executive vice president of Ameriprise Franchise Group, which oversees the company's independent advisory business.

The wirehouses are also dangling fat transition packages - typically three to three-and-a-half times trailing 12-month revenue - to lure in top fee-based teams, according to Mindy Diamond of advisor recruiting firm Diamond Consultants. She says an advisor who is willing to work in an environment that is less than fully independent might logically think: "Why not go to the wirehouse world, where there's much more support, more technology and a big fat transition package?"

At the other end of the spectrum, the broker-dealers must counter the appeal of the RIA space - particularly if regulators fail to monitor that space as fully as they currently oversee wirehouses and independent broker-dealers. That regulatory differential is actually exacerbating the competition for talent, executives say.

"RIAs are regulated infinitesimally compared to B-Ds," says Cambridge Investment Research CEO Eric Schwartz. "If [regulators] make it harder and harder to do commission-based business, those changes could be a huge blow to the independent B-D space."

Raymond James CEO Scott Curtis agrees. "We need to close that gap," Curtis says. "Those differences are pretty stark and pretty wide. ... [Advisors] all ought to be operating under the same standard of care."

In just one indicator of the current uneven playing field, Curtis points out that blogs and marketing materials, while heavily regulated at independent broker-dealers, escape compliance oversight at RIAs. "That is a big difference," he says.

Traditionally, one of the most important ways to grow revenues has been to add advisors to a firm. Many independent broker-dealers, especially the largest ones, have done so by either acquiring other firms or recruiting advisors. But recruiting in particular has become more difficult, experts say.

"Overall, we are seeing a trend of slowing recruiting," says Phil Palaveev, founder of Seattle-based practice consulting firm Ensemble Practice. "The IBD industry has consolidated dramatically and the remaining firms are very strong. Those are not B-Ds that lose advisors very easily." As competition for talent increases, independent broker-dealers are focusing on internal growth more intensely than ever. In fact, organic growth may be the new, unsung success story.