After a fruitful 2014, recruiting at independent broker-dealers has hit a wall, according to industry recruiters and executives at those firms.
Increasing competition from fee-only custodians, a bull market in stocks and better succession plans are all frustrating firms eager to add to their ranks, recruiters say.
Independent broker-dealers recruited only $426 million from three teams in the first quarter this year, according to announcements from about 20 independent-broker dealers tracked by InvestmentNews' Advisers on the Move database. That compares with $1.23 billion and five teams recruited by independent firms in the year-ago quarter.
“Last year was a really good year for a lot of major independent broker-dealers, with a lot of change in the marketplace that spurred some movement,” said Jodie Papike, executive vice president at Cross-Search, a third-party recruiting firm focused on independent advisers. “Without a lot of negativity [this year], firms have sort of stalled a little bit in recruiting.”
Recruiters debated whether the issues holding back recruiting will be short-lived or signal a long-term drought.
“Without a lot of negativity [this year], firms have sort of stalled a little bit in recruiting.”— Jodie Papike, executive vice president at Cross-Search
The continuing strength of the market is helping to satisfy advisers who otherwise might have been looking for a move but that could change, especially if the industry undergoes major consolidation in the year ahead, Ms. Papike said.
“Whenever markets are good and clients are happy, the pain points advisers tend to feel lessen a bit,” she said. “That can change very quickly if there continues to be any kind of consolidation or changes taking place at the big firms.”
Some changes that were expected to produce movement haven't been the catalysts recruiters were hoping for. The ongoing expiration of retention deals given to wirehouse advisers during the major consolidation in 2008 and 2009, for example, has not translated into more deals for the independent channel, Ms. Papike said.
Moreover, some large teams that are going independent are opting for the registered investment adviser model. The large custodians have become a more serious force in the marketplace, according to Eric Schwartz, chief executive of Cambridge Investment Research Inc.
“There's competition from fee-only custodians, plus fewer reps willing to move,” he noted.
And while recruiters were eager to see what would happen after the major acquisition last year of Cetera Financial Group Inc. by RCS Capital Corp., there hasn't been any major exodus from the firm, according to John Rooney, managing principal at Commonwealth Financial Network.
“We're all waiting to see what happens with the Cetera group of broker-dealers,” he said. “We've seen that our most successful inroads are through companies that are experiencing significant shifts in their business models or their ownership structure or organization.”
UPPING THE ANTE
Mr. Rooney described recruiting for his firm as steady but “off a little,” given a lack of “trigger” events.
The mismatch of supply and demand is putting pressure on firms to up the ante with more lucrative recruiting deals, according to Mr. Schwartz.
“There are an unlimited number of [independent broker-dealers] wanting reps to join and a limited supply of those reps,” he said. “Ten years ago, independent broker-dealers were paying 2% upfront money for a rep to move; now it's 10%, 20%, 30% or 40%.”
At the same time, independent broker-dealers are boosting their succession planning programs to hold onto baby-boomer brokers who otherwise might have made a move or sold their book to another firm when they retired, according to Daniel Schwamb, head of recruiting at NFP Advisor Services Group.
“In some cases it's true, and in some cases it's not. But perception is everything.”— Jon Henschen, president of Henschen & Associates
“We've made a significant investment in our own succession plan department,” he said. “In many cases we finance the transaction or arrange the financing of the transaction” when an adviser is looking to sell his or her book.
Still, not all firms are seeing a downturn. And recruiters were hopeful that moves would pick back up. Mr. Rooney of Commonwealth said new issues were emerging that have made brokers more willing to consider switching firms.
Compliance at some firms, for instance, has become stricter about certain sales practices, including restricting the amounts of certain products that brokers can sell, such as triple-net-lease real estate investment trusts or business development companies, he explained.
In other cases, brokers at smaller firms have become more concerned about whether their firm could be acquired or whether it would survive a large arbitration award, according to Jon Henschen, president of Henschen & Associates.
“Reps are increasingly convinced that the current regulatory environment is difficult for smaller broker-dealers,” he said. “In some cases it's true, and in some cases it's not. But perception is everything.”