RIAs and small B-Ds have advantages over bigger firms

BNY exec says major Wall Street players continue to bear the brunt of economic and regulatory changes

Jun 6, 2014 @ 12:05 pm

By Mason Braswell

ria, broker-dealer, economy, regulation
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Brian Shea, president of investment services at BNY Mellon and chairman of Pershing

In the advice business, it's better to be David than Goliath in the current environment of regulatory and environmental uncertainty

Registered investment advisers and mid-size broker-dealers stand to benefit as new regulations, low interest rates and a slow-growth economy continue to drive layoffs and consolidation in the industry, said Brian Shea, president of investment services at BNY Mellon Corp.

“Economic and regulatory change is already creating structural change in our industry and it's likely to accelerate,” he said at an annual industry conference sponsored by Pershing, a BNY Mellon subsidiary.

“Take advantage of it. Think big. Be bold.”

The number of broker-dealers has decreased by 12% since 2009 as around 600 firms left the industry or consolidated, Mr. Shea said, citing data from the Securities Industry and Financial Markets Association.

Moreover, profitability of the top 25 broker-dealers, which typically face higher regulatory costs and fixed costs such as clearing and custody, has fallen by 75% over the same period, Mr. Shea told the audience of several hundred Pershing investment advisory and broker-dealer clients on Friday.

Standard and Poor's Financial Services estimates that the Dodd-Frank Act could reduce pretax profit for the eight largest financial institutions by a total of $22 billion to $34 billion annually. Of Dodd-Frank's nearly 400 rules, only around half, or 52%, have been implemented, according to Mr. Shea.

While smaller firms have not been immune to increased pressure on margins, those with outsourced custody, clearing and other services have more flexibility and have been better able to make changes and recover, he added.

They've also been able to avoid being designated as a “systemically important” financial institution. Those “too big to fail” banks have had to bear the brunt of regulatory reform and will continue to face increased capital requirements.

As the definition of systemically important institutions continues to expand to include insurance companies, asset managers and industry utilities such as exchanges, it will drive cutbacks more broadly in the industry and provide hiring opportunities for investment advisers, Mr. Shea added.

“Over time, this is certain to drive more structural change across the industry broadly,” he said. “As large financial institutions shrink their work force, you have an opportunity to attract talented advisers, traders and investment managers to your firms.”

Smaller firms will have to choose carefully when making investments in hiring and technology, Mr. Shea said. They need to be sure they are specializing and choosing where they invest or what type of client or business they want to serve. For costly services or weaknesses, firms can outsource or partner with complimentary service providers.

“All of us need to embrace technology,” he said, “and change our service models or we run the risk of being disrupted next.”

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