First, the bad news. Revenue for the country’s 50 largest independent broker-dealers fell by a greater degree — 2.46% from the prior year — than the 1.38% hit it took at the end of the Great Recession.

That the decline came in a year with strong investment markets is even more striking. However, nestled in the data provided by IBDs and analyzed by Financial Planning for the 32nd annual FP50 is a nearly mirror-perfect cause for optimism. While overall revenue dropped for 75% of the top firms, fee revenue rose for even more of them — 80%.

“It’s truly a structural shift that has occurred,” says Robert Moore, CEO of Cetera Financial Group, the largest network of IBDs, with seven firms that collectively manage $224.5 billion in brokerage and advisory assets for clients (six are big enough to qualify for the FP50).

FP 50 2017
Left to right: Bill Morrissey, divisional president of business development of LPL Financial; Jeff Rosenthal, CEO of Triad Advisors; Amy Webber, CEO of Cambridge Investment Research; Robert Moore, CEO of Cetera Financial Group; and Wayne Bloom, CEO of Commonwealth Financial Network. (Illustration by Robert Carter)

Digging into the numbers reveals that an important shift is underway, with far-reaching consequences. If current trends continue, the IBDs that are poised to do best in years to come will increasingly resemble their RIA competitors by ratcheting up their evolution away from commissions and toward fees. There are several reasons.

For one, the regulatory hammer that finally dropped on IBDs last year with the Department of Labor’s fiduciary rule — which looks unlikely to go away — is largely predicated on the idea that commissions present far greater conflicts of interests between advisers and their clients than do fees.

For these and other reasons, the revenue mix “has been shifting toward advisory for the past five-plus years,” Moore says.

Read more: Interactive chart for the FP50: Independent broker-dealer data.

Take a look at the commission data for 2016 to see by just how much. Commission revenue fell for all but six of the top firms and, for many, by well in excess of 10%.

‘THE END OF EASY MONEY’
“It’s the beginning of the end of easy money,” predicts Craig Israelsen, a professor of financial planning at Utah Valley University and Financial Planning contributing writer who’s analyzed the FP50 rankings for nearly 20 years.

Advisers and firms will find it increasingly difficult to sell products for steep commissions that are often obscured from client view, Israelsen thinks, while producing income trails that continue for years.

In the future, “you are going to have to work for it, boys and girls,” he warns. Translation: Holistic financial advice will increasingly supplant product sales masquerading under that name. The quality of that advice may vary, given that many IBD advisers receive more training in sales than they do in planning.

Amy Webber, CEO of No. 8 firm Cambridge Investment Research, calls the change “inevitable.”

“We have rebranded ourselves as a financial solutions firm, as opposed to a BD,” she says. “It’s very hard to market if you lead as a broker-dealer.”

Moore lays the blame on IBDs themselves for doing a poor job delivering “client-centric” service.

“What is lacking is the amount of energy being dedicated to the actual client experience,” says Moore, who’s been vocal about wanting to see Cetera transform the way it delivers financial advice to clients.

But, for now, he adds, “We are not forging a pathway for them to feel that much better about their relationship to us collectively.”

Indeed, the numbers seem to buttress that assessment, given that all top IBDs continue to rely heavily on commission products sales.

REVENUE PRESSURES
Nearly a quarter of No. 1 LPL Financial’s $3.98 billion in revenue in 2016, for example, came from annuity sales — not a metric likely to be found at an RIA.

And the firm’s overall commission revenue, at $1.68 billion, substantially outweighs its $1.29 billion in revenue from fees.

Nationwide, concern over conflicts of interest has fueled a political push to reduce the temptations of commission sales.

Quote
“It’s truly a structural shift that has occurred,” says Robert Moore, CEO of Cetera Financial Group.

In 2015, the White House reported that Americans lose about $17 billion annually in their retirement accounts to conflicted advice.

That was followed last year by the Labor Department’s fiduciary rule, which is intended to compel advisers to put their clients’ financial interests before their own when advising on those accounts.

A TOO-LATE MOVE
The Trump administration’s decision to delay the rule’s implementation came too late for many IBDs since they had spent millions to restructure their businesses to comply.

These expenses, combined with the precipitous decline in the sale of many high-commission alternative investments due to the regulatory pressures, factored into the revenue declines.

The sale of nontraded REITs, for example, which used to reliably generate upfront commissions of about 12% or more for many advisers and firms, dropped 75% to just $4.5 billion last year, from $19.6 billion in 2013, according to the investment bank and consulting firm Robert A. Stanger & Co.

Historically, the IBD channel has been the all-but-exclusive distributor of these products.

Other factors behind the revenue slide cited by IBD leaders include the continued rise of automatic-trading solutions, or robo advice tools, that charge investors bottom-of-the-barrel commissions.

AMERIPRISE RISES
Early signs of decumulation, the long-anticipated wave of baby boomers withdrawing assets in retirement and passing them on to heirs as they die, also may be playing a role.

Around 10,000 boomers are reaching retirement age every day, according to the Social Security Administration. Related to decumulation is the unknown amount of cash that some IBD leaders think boomers may have idling on the sidelines to avoid any market correction before they retire.

Quote
“It’s very hard to market if you lead as a broker-dealer,” says Amy Webber, CEO of Cambridge Investment Research.

Forces like these may be having a disproportionate impact on LPL, the longtime industry leader, which has occupied the top spot on the FP50 for decades.

In what would be a historic change, the No. 2 firm, Ameriprise, in on track to displace LPL on next year’s list, given that it’s making a faster transition toward an RIA model based on its fee-commission revenue split.

At nearly $2 billion, Ameriprise’s fee revenue is already 50% larger than its commission revenue, at $1.3 billion. As a result, its 3% jump in fee revenue last year offset a 5% drop in commission business, pulling overall revenue growth into the black, if barely, at 0.7%.

By contrast, LPL’s fees fell by 4.3%, which only slightly lessened the blow of a 12.4% drop on its commission side.

LPL calls its fee drop somewhat misleading: As advisers move off of its corporate platform to become hybrids, the firm is not able to count their hybrid advisory fees as revenue. Instead, these fees fall under the “other revenue” category, LPL said. That increased 7.7% last year.

Overall, 15 firms on the FP50 posted declines in fee revenue.

Of the top 10 firms, Cetera Advisor Networks posted the only decline, aside from LPL’s, at 7.9%, in a year when its parent company emerged from bankruptcy.

LPL Divisional President of Business Development Bill Morrissey says the top line doesn’t tell the whole story for the market leader.

"We measure success by our ability to increase asset capture and gross profits," says Bill Morrissey, president of LPL's business development division.
LPL Divisional President of Business Development Bill Morrissey's firm has remained atop the FP50 for decades.

“I think we enjoyed a great year last year,” Morrissey insists, despite “headwinds” impacting all firms. “It was a record year in many respects.”

Indeed, LPL offset its losses by increasing its brokerage and advisory assets to $509 billion from $475 billion, upping profitability through cost-cutting and adding 323 net new advisers in its best recruiting year ever, he says.

However, the magnitude of declines across the FP50 — among the largest ever — surprised many IBD leaders interviewed for this story, as well as Aite Group analyst Bill Butterfield.

“It’s hard to judge if this is the wave of the future or a bump along the road,” Butterfield says.

Moore and others are optimistic, however, that the industry will deliver a better showing in next year’s FP50, despite its lack of client-centric service.

“There is a bias toward improving revenue slightly because there are continuing to be more assets coming into the system more broadly,” Moore says.

Read more: Printable PDF of all FP50 rankings

'NOT A BLIP'
“But,” he adds, tempering his optimism, “it’s not a blip in that we do not see a circumstance where alternative investments and variable annuities go back to the pre-2013 levels.”

Other IBD executives hope clarity around the fiduciary rule could fuel a recovery.

Among them is Jeff Rosenthal, CEO of No. 29 Triad Advisors, one of five firms in the Ladenburg Thalmann network.

With clear regulatory direction, “I do think that this will be a blip and we will see some very successful and meaningful revenue gains over the next three to five years,” Rosenthal says.

“Advisers have spent more time determining the path along which their business will go when the regulation is in place, and less time being an adviser. In other words, being in front of their clients,” he says.

FIDUCIARY FACTOR
Wayne Bloom, CEO of No. 4-ranked Commonwealth Financial Network, agrees that the DoL foisted a huge distraction, both operationally and fiscally, on IBDs.

Commonwealth Financial Network CEO Wayne Bloom's firm ranked fourth in the 2017 FP50.

Commonwealth spent millions to come into fiduciary compliance, Bloom says. “That has not been money well spent. It’s been money spent to comply with the lowest common denominator.”

The firm has a strong standing to make this claim, given that its advisers bring in some of the highest revenue in the industry and mostly in fees.

The average Commonwealth adviser racks up $1.195 million annually, second only to Raymond James, with an average $1.224 million.

Commonwealth also is among the farthest along the conversion-to-fees continuum, with $277 million in commission revenue versus $645 million from fees.

A STRONG POSITION
That puts it in a strong position to weather the current downdraft in commissions. Its overall revenue rose 6% last year.

Bloom also points out that Commonwealth attracted an RIA firm, with zero brokerage business, to its platform for the first time last year. This is a move that could prove to be a bellwether as IBDs come to further resemble RIAs.

And it makes sense, Bloom says, especially given that “we’re just a big RIA.”

Few other FP50 firms, loyal to the range of investment choices they say the brokerage side of their business preserves for their clients, would make such a claim — although both Webber and Rosenthal say they think the IBD space is headed in that direction.

Cambridge Investment Research CEO Amy Webber says the firm no longer markets itself as a BD.

“I think what [Bloom] is describing is just going to increase,” Webber says.

The pace at which any fiduciary rule is adopted will, to a certain extent, mandate how rapidly Cambridge will follow Commonwealth in this shift, she says.

“We could jump from 62% fees to 85% in nine months if the DoL goes through,” Webber says, or, if it doesn’t, she predicts it could take two to three years to get to 85%.

In late 2015, LPL was the first IBD to announce it had dropped prices to comply with the fiduciary rule.

In about a year, Morrissey expects that LPL will be launching a new platform called Mutual Fund Only in partnership with 20 of the top mutual fund companies.

'LEVELIZING FEES'
To conform with the DoL mandate that BDs levelize their fees in qualified retirement accounts, clients using the new platform will pay an upfront load up to a maximum of 3.5% with a 25 basis point trail, he says.

“Given the unique features of this platform, it is truly a first in the industry,” Morrissey says.

If that’s the case, then it’s probably safe to say that Morrissey and other IBD leaders would be dismayed to hear how Professor Israelsen thinks his students would react to those prices.

“They would just bust up laughing, like, ‘You must think we are absolute idiots,’ ” Israelsen says. “The idea of an adviser getting 100 basis points makes them puke.”

All of his students believe that they should be paying no more than a few basis points to invest, he says, in line with the cost of a Vanguard fund or Schwab’s dirt-cheap robo.

In response, an LPL spokesman says the students should look at LPL’s adviser-enabled robo solution, Guided Wealth Portfolios, which has total fees of about 150 basis points.

This, of course, is still well above 100 basis points.

LACKING A FULL GRASP
Cetera’s Moore says the students may not fully grasp all that goes into full planning engagement, which can command a higher number.

“There is nothing comprehensive about a digital solution,” Moore says. “Anyone making the quantum jump to, ‘That’s all anyone should pay for advice’ — they have no idea what they are talking about.”

On the other hand, Israelsen is well aware that LPL and Cetera’s firms still collectively derive nearly half of their revenue from commissions — a metric not generally associated with top-quality holistic planning advice.

So maybe Israelsen’s students are in on the joke after all.

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