Indie stars dim on small B-D future

Oct 16, 2011 @ 12:01 am

By Bruce Kelly

This year has meant big changes for some superstar financial advisers, with the latest, Ric Edelman, expressing his deep displeasure with the economics of the independent-brokerage business.

The Edelman Financial Group, of which Mr. Edelman is co-chief executive and the largest shareholder, said last week that it is shutting down its small independent-representative business and will focus on wealth management and its high-net-worth businesses.

At the end of June, the firm had $18.8 billion in assets.

Other industry leaders, including Ron Carson and Adam Bold, this year have also changed their businesses dramatically.

Mr. Carson broke away from his longtime broker-dealer, LPL Financial LLC, and Mr. Bold sold a controlling stake in his advisory firm, The Mutual Fund Store LLC, to a private-equity fund.

In an interview last week, Mr. Edelman was clear about his disenchantment with the independent-brokerage business.

“Everyone will draw their own conclusions, but I consider the independent-broker-dealer channel severely flawed and question the sustainability of many of the players in the space. The economics are very challenging in today's environment,” Mr. Edelman said.

“This has nothing to do with advisers or their style of business. This has to do entirely with the channel itself,” Mr. Edelman said.

“The economic structure of the independent-rep business makes it very difficult to operate a business profitably unless you have hundreds, if not thousands, of reps in the channel,” he said.


He has deep roots in the independent-contractor-brokerage business. Mr. Edelman had the largest practice with Royal Alliance Associates Inc. before leaving in 2005 to join Sanders Morris Harris Group Inc.

Over time, Mr. Edelman, who twice was ranked as the nation's top independent adviser by Barron's, became Sanders' largest shareholder, and this year, that firm was rechristened The Edelman Financial Group.

Mr. Edelman's most recent decision affects 15 practices with about 75 registered reps, he said. Those reps have until the end of March to find a new home.

The firm is “encouraging” some independent reps to stay, but as investment advisers, Mr. Edelman said.

The Edelman Financial Group may purchase a majority stake in some of the practices that use its broker-dealer.

The move completes cutting business lines at the firm, which in the past included investment-banking and capital markets operations, Mr. Edelman said.

He said that the independent-rep business was negligible at the firm, with independent brokers accounting for less than 1% of the company's revenue, which totaled $169 million last year.

The hurdles that independent broker-dealers face are high, Mr. Edelman said.

They include competition for advisers, regulatory demands on managing and supervising those practices, and technology demands and requirements.

“Those all make it very difficult to manage the business successfully without scale,” Mr. Edelman said. “We have better things to do with our resources than play in that game.”

In May, disenchantment with the economics of being an affiliate of a broker-dealer was part of the reason Mr. Carson, LPL Financial's top rep, launched his own registered investment advisory firm, CWM LLC, as well as his own self-clearing broker-dealer.

“They have a good, but not great, system,” he said in April when asked about LPL's platform, which he nevertheless selected as the custodian for his new registered investment advisory firm's assets.

Mr. Carson, whose firm has more than $3 billion in assets, didn't return phone calls seeking comment for this story.

In July, Mr. Bold said he was selling a controlling stake in The Mutual Fund Store, which has $6.4 billion in assets, after adamantly telling a number of reporters that the firm wasn't for sale.

He and his management team remain at The Mutual Fund Store, which is seeking to expand.

Mr. Bold didn't return phone calls seeking comment for this story, but on July 29, he told the Kansas City Business Journal: “I believe there is opportunity here for another parabolic leg up, but for us to achieve that, it was going to take more capital and a lot of expertise. That is what Warburg [Pincus LLC] will provide us.”


When advisers, large or small, make such changes, it indicates a desire either to increase or hang on to revenue, advisers and industry observers said.

Jim Weil, a partner with Financial Strategy Network LLC, this month said that his firm, which has $550 million in assets under management, was severing its affiliation with its broker-dealer, Raymond James Financial Services Inc., and using Pershing Advisor Solutions LLC as its custodian.

“This was a difficult decision because Raymond James has been a terrific partner and supporter of us during our early growth phase,” Mr. Weil said

“But broker-dealers are better geared to individual producers instead of enterprises like we started, and they are generally not structured well to support the way in which RIAs, which is what we've become, conduct their businesses,” he said. “So we had to make this change as a way to serve our clients more effectively, run our business more efficiently and build enterprise value.”

Although he declined to comment specifically about Mr. Edelman, Mr. Carson or Mr. Bold, Mr. Weil said that his firm's decision was based on an analysis of the firm and how it could grow.

“I think advisers who want to perpetuate their business, provide continuity to clients and monetize their equity and have real value — that business model is not the broker-dealer world,” Mr. Weil said.


Broker-dealers “keep a piece of the revenue,” he said. “You need to have control over your own business.”

Mr. Weil declined to say how much more revenue he expects his firm to capture, but he stressed that having more control over technology is an equally important part of the decision.

“Businesses that are $250 million and more in assets are going to change,” he said.

“They want to look more like an enterprise than an individual practice. They want to move toward a model where they keep more of the revenue and can effectively use and scale technology.”

The firm isn't cutting ties with the brokerage industry entirely and is now affiliated with broker-dealer Comprehensive Asset Management and Servicing Inc.

Less than 10% of Mr. Weil's firm's revenue comes from commissions from brokerage products such as annuities and Section 529 college savings plans, he said.

Email Bruce Kelly at


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