The Department of Labor’s new conflict-of-interest rule will have a huge effect on advisors and asset managers. And among those to be most severely hit are boutique broker-dealers.
So concludes Cerulli Associates, a Boston-based research and consulting company, in a new report, “U.S. Broker/Dealer Marketplace 2016: Retooling for a New Competitive Landscape.”
Examining broker-dealers with financial advisors serving retail investors, the study offers a 10-year forecast of broker-dealers channels, including their market sizing, strategic directions, challenges and opportunities.
According to Cerulli, small broker-dealers face the greatest financial risk under the Labor Department fiduciary rule. Unable to bear the new rule's increased compliance costs, many will seek to merge with larger companies that enjoy economies of scale.
The result will be a further consolidation of assets under management. Broker-dealers with less than $10 billion in assets under management, Cerulli reports, account for more than 80 percent of broker-dealer sales volume, but less than 10 percent of advisor-managed assets.
“It is likely that some of these boutique firms will be unable to support new regulatory costs, resulting in an increase in firm consolidations,” says Cerulli Associate Director Kenton Shirk in a news release. “Smaller broker-dealers may be acquired by larger ones, or choose to combine operations, or affiliate as an office of supervisory jurisdiction with an independent firm to realize cost synergies.”
Reducing costs and business risks, and the more efficient use of time and resources, remain advisors’ chief areas of focus as they prepare for implementation of the Labor Department's fiduciary rule, to be phased in between April 10, 2017, and Jan. 1, 2018. To meet these objectives, most broker-dealer-affiliated advisors Cerulli surveyed said they plan to adopt productivity-enhancing technologies. Many also plan to shift their compensation structures from commission-only to commission-plus-fees or fee-only revenue, as the rule favors fee-based practices.
For many, the greater focus initially will be on cost reduction. The reason: Migrating from commissions to fees, without negatively affecting company revenue, is a longer-term project.
“As technology use continues to shape the advisor landscape, it is becoming a significant factor for advisors choosing a new (broker-dealer),” says Shirk. “Advisors recognize its large impact on productivity and client experience, and (broker-dealers) should make technology a strategic priority.
“The largest and well-capitalized (broker-dealers) are best equipped financially to deliver strong technology experiences, whereas smaller firms may struggle to compete given associated costs,” he adds.
Merrill Lynch and Morgan Stanley are essentially tied as the largest broker/dealer networks.
Total individual retirement account assets grew at an average annual rate of 5.7 percent over the past eight years.
Broker-dealers with less than $5 billion in assets account for 84 percent of overall broker-dealer volume and 4 percent of advisor-managed assets.
In 2015, the independent registered investment advisor channel grew assets faster than all other advisor channels (6.2 percent growth versus an average of 0.9 percent for all channels).
After eight years of decline, total advisor headcount increased 1 percent in both 2014 and 2015. The 15-largest broker-dealer networks control 39.5 percent of advisor headcount.
Over the past four years, retail direct companies have outpaced the asset growth of retail financial advisors.
More than one third (38.1 percent) of advisors plan to retire in the next decade.
Independent, privately owned broker-dealers, generally founded by a former advisor, represent 52.5 percent of all independent broker-dealers.
Insurance broker-dealers have historically enjoyed the greatest return on asset rates across the industry. But Cerulli expects revenue declines to continue if “insurers prove unable to get ahead of, or at least offset, multiple secular trends.”
Based on historical experience, Cerulli projects that 6.4 percent of advisors will change companies in 2016, with nearly 13,000 staying in their current channel and 7,000-plus switching to a new channel.