These are heady times for the independent-broker-dealer industry, which came roaring back to life in 2013 and is poised for another strong year, despite the broad market's recent volatility.
Overall, 2013 saw a return to double-digit revenue growth on average for the largest 25 independent broker-dealers, after a weak 2012. Collectively, the largest 25 IBDs recorded a 13.2% year-over-year increase in revenue, reporting $18.46 billion in 2013 versus $16.31 billion the prior year, according to this year's InvestmentNews survey.
That strong performance, boosted by the S&P 500's 2013 return of 29.6% and a flood of commission dollars from record sales of nontraded real estate investment trusts, was in stark contrast to an anemic 2012, when the top 25 firms managed to eke out only a 3.8% year-over-year increase in revenue.
Indeed, last year's performance was much more in line with the robust revenue growth of the top 25 firms in recent years. In 2010 and 2011, respectively, the industry's revenues increased 16.9% and 12.3% over the previous year.
“There were two reasons for last year's results,” said Eric Schwartz, chief executive of Cambridge Investment Research, which saw revenue growth of 24.5%. “The stock market was up 30%, and there was an unusually high percentage of dollars in alternatives and REITs being sold. Remember, a number of REITs had public listings, and clients reinvested back into other REITs.”
2014 LOOKING GOOD
And industry executives are already sanguine about the prospects for 2014, primarily because fees for assets under management are booked at the end of the prior quarter. With the broad market posting gains for the prior three months on Dec. 31 and March 31, it would take a major market correction by the ends of the second and third quarters to undermine the revenue already booked for the first six months of the calendar year.
“The big bump in year-over-year growth was due to assets under management,” said John Rooney, managing principal with Commonwealth Financial Network, which relies heavily on fee revenue and posted 15.5% annualized growth in 2013. “We're up this year so far on broker-generated revenue, and it's up another big number.”
“January  was by far our best month,” he said. “Last October was actually $500,000 better, but to have a January as big as it was, was key, because the first quarter is tough and momentum tends to build through the year. Our broker-generated revenue in March was [up] 26% over March 2013.”
The good tidings seem to resonate across most top IBDs.
“We've had a very good start to the year, and the expectation is that that will continue,” said Scott Curtis, president of Raymond James Financial Services Inc., which closes its fiscal year in September and saw total revenue increase in fiscal 2013 by 11.9% over fiscal 2012.
“We had very good momentum going into the end of the fiscal year, and that carried over into the quarter ending in December and the first quarter of the calendar year,” Mr. Curtis said. “We have a strong pipeline of advisers and potential recruits. RJFS experienced a 14.1% growth in recruited historical gross revenue for fiscal year 2013 versus a year earlier. That means that the folks we recruited in fiscal 2013 represented total production of 14.1% higher than in fiscal 2012.”
RECORD REIT SALES
Sales of nontraded REITs reached a record $20 billion last year. Sales this year also appear buoyant, in large part because, again, numerous nontraded REITs are planning liquidity events — an exchange-listing or a merger — in 2014.
While some executives downplayed the overall contribution of nontraded-REIT sales to the booming revenues of the independent broker-dealer industry in 2013, there is no doubt that firms benefited. With bond yields still hovering near record lows, clients are buying nontraded REITs in search of the steady annual returns of 6% to 7% that many of the REITs are producing.
Nontraded-REIT sales at Royal Alliance Associates Inc. almost tripled last year, totaling $31.2 million in 2013 versus $11.5 million a year earlier.
Likewise, commissions from sales of alternative investments, including nontraded REITs, at LPL Financial, the industry's largest broker-dealer and a bellwether, reached $251.1 million last year, up from $143 million a year earlier, for an increase of 75.6%.
The outlook for nontraded REITs and business development companies, sold almost exclusively by independent broker-dealers, remains strong, according to investment bank Robert A. Stanger & Co. Inc. That underpins the notion that 2014 could be another year of double-digit growth for the industry.
Nontraded REITs raised $4.1 billion in the first quarter, up 5.6% from a year earlier, according to Stanger. Meanwhile, nontraded-BDC sales topped $1.4 billion, 53% more than the $938 million raised a year earlier. First-quarter 2014 saw almost $3 billion in liquidity events, Stanger said. That pace could reach over $10 billion in the first half.
VA DOWNTREND SEEN
Variable annuities, another staple of many IBDs, didn't have supersized sales growth last year. While nontraded-REIT sales almost doubled, to nearly $20 billion, VA sales were relatively flat. According to Morningstar Inc., new sales of variable annuities at IBDs were $48.3 billion in 2013, versus $40 billion in 2012.
“Variable annuity sales are down as an overall percentage of our business,” said Barry Knight, president of Next Financial Group Inc., whose total revenue rose 7.7% in 2013 from 2012.
VAs have recently scaled back on insurance benefits, making the product less attractive. Meanwhile, advisers are reluctant to roll over a VA into a new product via a 1035 exchange, executives said.
“It's now 20% of our revenues, when it used to be 30% to 40%,” Mr. Knight said. “Advisers have moved assets into fee-based accounts or third-party money managers.”