Numbers Game

Ranking how indie B-Ds have fared since the financial crisis

When compared to the S&P 500, some firms have brought in big returns

May 21, 2014 @ 1:04 pm

By Bruce Kelly , Denise Southwood and Matt Sirinides

Indie B-D stock prices vs. S&P indexes

Five years ago, the sky was falling on the independent broker-dealer industry. After the credit crisis and the stock market crash that followed the Lehman Brothers Holdings Inc. bankruptcy in September 2008, few investors likely would have had the conviction to place a bet on IBDs.

Indeed, dozens of privately held small to midsize independent broker-dealers closed their doors or merged with bigger firms in 2009 and 2010. They were done in by the high cost of litigation stemming from failed investments, the increased costs of compliance necessary to do business after the crash, or maintaining enough capital to pass muster with the regulators to keep their doors open. Thousands of registered representatives and advisers over that time were forced to scramble to find new homes.

And IBDs are routinely mocked as the poor cousin of the securities industry. Margins are thin, costs are high and independent reps, historically often tied to insurance companies, routinely generate one-quarter to one-half the revenue and sales as their wirehouse brethren.

But an investor in 2009 betting on publicly traded financial independent broker-dealers, or financial service companies with a large independent rep business, would have seen a significant payoff. Yes, the broad market has gone up almost in a straight line since it reached its low on March 9, 2009, with the S&P 500 returning a stunning 175.7% over that time.

But investors in publicly traded independent broker-dealers would have beaten the S&P 500 over that time. The stocks of Ameriprise Financial Inc. and Raymond James Financial Inc., respectively, have total returns of 589.5% and 245%. Shares of Ladenburg Thalmann Financial Services Inc., which started buying IBDs in 2007, are up 407%.

And latecomers LPL Financial and RCS Capital Inc. have also performed respectively since their initial public offerings, respectively, in 2010 and 2013. LPL's stock has a total return of 45.9% since its IPO, while RCS Capital's shares have returned 66.6%.

Five years ago, the world for independent broker-dealers was pretty dark. But Ameriprise Financial, Raymond James Financial and others are still around, their stocks have outperformed and their brokers are thriving.

Combined revenue of the top 25 IBDs vs. the S&P 500

The independent broker-dealer industry has clearly benefited from the strong performance of the S&P 500 Stock Index since the dog days of the financial crisis.

The combined revenues of the largest 25 such broker-dealers has climbed steadily over the past five years rising from $12 billion to almost $18.5 billion over that time, an increase of 54%. The performance of broker-dealers is closely pegged to the broad market, as an increasing amount of revenue at firms comes from fees from assets under management and assets under administration.

As noted, the S&P 500 has returned a whopping 175.7% since its low of March 9, 2009, easily outperforming the total return of the top 25 IBDs.

In chaotic years, however, the IBDs can beat the index. Take 2011, for example. Remember when the market swooned after Standard & Poor's that summer downgraded U.S. debt? The annualized return of the S&P 500 in 2011 was 2.07%. But the top IBDs' revenue increased 12.2% despite market turmoil.

That's because IBDs have turned into fee-collecting machines. Even when times are tough, they will generate revenues. And when times are good, they will generate a lot.

Combined total number of reps at the top 25 IBDs

Even though the IBD industry has boomed financially, it has not seen significant growth in the number of independent reps or advisers affiliated with such broker-dealers. While revenues have increased 54% for the industry over the past five years, the headcount of reps has increased just 4%.

That underwhelming growth only underscores the maturation of the IBD industry. Older reps who hung on during and after the financial crisis have gotten fatter. And it also spells out the clear opportunity for the Pied Piper who figures out how to attract young folks to the business.

For more details and data on the industry's largest independent broker-dealers, visit the InvestmentNews B-D Data Center.


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