For the nation's biggest independent broker-dealers, the path to growth has 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.The question these firms now face is: Was 2012 an inflection point or simply an aberration?

The leveling off may have roots in the recent downturn. In the 2009 FP50, median revenue plunged 14%, then gained 13.2% the following year. Despite last year's slowdown, though, many observers say they expect revenue growth this year.


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 prior year. 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.

And take note of one codicil to the rankings. Several large networks of independent broker-dealers report finances separately for each of their component firms. However, if those network numbers were consolidated, Advisor Group (owned by AIG) would take the No. 4 spot, Cetera would be No. 5, National Planning Holdings No. 6 and Ladenburg Thalmann would fall behind Commonwealth and AXA at No. 9.



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 Financial Services President 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.

"My sense is last year was a good year for organic growth," says Palaveev, who is at work on a report on the subject and puts revenue growth for the channel at 11% to 12% this year.

Schwartz, Cambridge's CEO, estimates industrywide growth rates for 2013 will range from 8% to 12%, and forecasts his own firm will post even better numbers: "We are up over 20% in the first quarter," he says.

One indication of the focus on organic growth is the fact that many top independent broker-dealers recently have introduced internship, mentoring or training programs.

Perhaps the most developed is that of Ameriprise, which Williams says is bringing in 400 to 500 new advisors every year through multiple training offerings, including its Ameriprise University program. "If we can recruit in a lot of novices who are really well trained, it's a great succession strategy," he says, pointing to another benefit of a strong internal pipeline of young advisors. "This is critical to my five-year to 10-year growth strategy," he says.

The financial crisis lit a fire under the program, he says. As Ameriprise advisors watched their revenues decline in 2008 and 2009, they began to rethink their business models. Suddenly, hiring graduates straight out of college looked more appealing. After a few independent regional efforts, Ameriprise formalized the program at the national level about 18 months ago.

Other firms have also been working to develop internal talent. Cambridge plans to launch a national internship program next year; last year, it initiated a summer internship program. The firm anticipates having 21 college students participate this summer, drawn from a field of more than 400 applicants, says Cambridge's president, Amy Webber.

Advisor Group is running a mentor group specifically to groom new women advisors. Cetera says it is in the early stages of building an internal training program of its own. And Raymond James has introduced a mentorship program in which younger advisors can work with senior ones. The program has proved so popular, Curtis says, that "one of the constraints is that there are only so many new mentors."



Other firms are taking different paths to growth. LPL has chosen to grow mainly through acquisition. And Commonwealth, with a focus on high-producing advisors, only recruits planners with significant revenue streams, says Joseph Deitch, Commonwealth's founder and chairman. "We are not looking for resources to train neophytes," Deitch says.

Although LPL doesn't track the number of young, unlicensed advisors entering its firms, it does devote significant resources to helping younger advisors buy practices from older ones - a variation on internal development.

"We are the eHarmony of advisors and sellers at LPL," says Derek Bruton, LPL's managing director and national sales manager. "LPL provides the capital for the buyer to acquire those businesses and structures a phaseout for the seller. I don't know of any other firm that provides all those resources, plus the capital to sell those firms."

That points to a more basic form of internal growth: helping advisors grow their existing businesses. Especially given the challenges in recruiting, many firms are making this a heavy focus. Three years ago, the average advisor at Ameriprise was bringing in $280,000 in gross dealer concessions - a commonly used measure that reflects the commission-based revenue each advisor delivers to the firm. That number has risen to $460,000, Williams says.

Commonwealth says for its advisors, that figure increased to more than $400,000 in 2012 from an average of $357,000 in 2010. Raymond James says its average advisor is on track to bring in $382,000 this year, versus $357,000 in 2011.

The story is a bit different at top-ranked LPL. To achieve rapid expansion over the past several years, LPL has brought in more advisors in the $150,000 range on gross dealer concessions, according to several experts. For LPL's advisors, concessions were flat at $220,000 between 2011 and 2012, the firm says.

It remains to be seen which growth strategy will offer the best payoff. Might Commonwealth suffer if it can't find sufficient high-performing advisors to feed its growth goals - especially in the absence of an internal grooming program? Will LPL be able to develop new advisors' practices enough to keep margins robust? The answers to these questions (and others) will determine which firms become market leaders in the future and which ones lag.

In what could be a sign of trouble at LPL, former advisors at the firm as well as recruiters report growing dissatisfaction. While LPL continues to add to its ranks - advisor headcount grew 3.8% in 2012, and also rose in the first quarter over the year-ago period - recruiters and executives at rival firms say they have seen a marked increase in inquiries from LPL advisors looking to leave. Several advisors who have left LPL say they've done so because of a reduction in the quality of service from the home office.

"The level of service was not what we were used to or had expected," says David O'Block, a founding partner at Equity Advisor Group in Murrysville, Pa., who left LPL for Cambridge in November.

He says he found LPL's technology "user-hostile," its compliance staff "adversarial" and its overall operations muddled. "The left hand [at LPL] didn't know what the right hand was doing," he complains.

In response, an LPL spokesman pointed to the firm's success in attracting an industry-leading number of new advisors: 505 net new advisors for 2012. "We typically attract a higher-level producer than those who leave LPL Financial, as evidenced in part by our advisor production retention, which was 95% in 2012," the spokesman says.

He also dismissed comments from rival firms: "In an era of increased industry consolidation and uncertainty, it's natural to hear competitors engage in negative speculation about the leader in the space. We don't pay attention to such speculation."


Another sign of change in the independent broker-dealer space is the increasing similarity between the top players and their RIA counterparts. For the first time last year, fee revenue exceeded commission revenue for Ameriprise and Wells Fargo. Cambridge and Commonwealth also routinely bring in more fees than commissions.

In fact, the median percentage of revenue accounted for by fees has increased to 26% from 21% across the FP50 between 2010 and 2012. Given the growing popularity of the fee-based or fee-only models, this trend is likely to continue.

And certainly, given the intense competition for advisors, firms in each channel are constantly stretching the lengths they will go to serve them. Commonwealth, for example, bills itself as "a de facto technology company" as much as a B-D, Deitch says. At Cetera, where advisors used to control all aspects of the client relationship themselves, "now we are getting more and more in the business of helping them serve their clients from a technology standpoint," says Brett Harrison, president of Cetera Advisors - one of four Cetera Financial Group independent broker-dealers on this year's list.

On the RIA side, in contrast, dual registration is proving to be the most popular business model, as more newly minted RIAs decide it makes sense to retain commission income, even as a small percentage of their revenue streams.

"The line between [independent] B-Ds and the largest RIAs is blurring, in the sense that the business of a B-D supporting advisors and the business of a large RIA supporting advisors are becoming surprisingly similar," says Palaveev, the practice consulting firm executive.

Pay a visit to the largest and best firms in both channels, he says, and "I guarantee you, we would not be able to tell which has a B-D. There are differences in the way they are regulated and in the way they operate, but those differences don't define the practice."

He has hosted development retreats for advisors who only discover, days into the gathering, that a percentage of them have B-D relationships while the others do not. In many cases, the perceived differences boil down to emotion. "It really comes from a tribal prejudice," Palaveev says. "Half of it comes from a self-serving desire to proclaim, 'We are better.'"


Some experts, like Diamond, think of the independent broker-dealer space as a transitional spot for advisors. The advisors who become disenchanted with independence might be better off back at wirehouses, she thinks. Others who set out to build their own practices may be happy only with the full customization afforded by the RIA framework. Yet another group will choose to affiliate with emerging aggregators like Focus Financial and HighTower Advisors, which offer up yet more diverse flavors of independence.

But as long as there are advisors who want a modified form of independence along with the support a larger firm, the independent broker-dealer will continue to thrive, she says.

The beauty of today," Diamond adds, "is that there are so many solutions that all an advisor has to do is raise a hand and say, 'I'm frustrated.'Chances are very good that there will be a solution that meets his needs."


Ann Marsh is a senior editor and the West Coast bureau chief of Financial Planning.

The percentage of Raymond James Financial Services accounts with more than $100,000 is 33%. The charts accompanying the print version of the FP50 annual survey said the percentage was 82%.

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