Cambridge Investment Research bags mid-sized broker-dealer

Broker Dealer Financial Services, an IBD with 150 reps and advisers, and $3.5 billion in assets, will become a Cambridge OSJ

Aug 20, 2018 @ 5:18 pm

By Bruce Kelly

The consolidation of the brokerage industry continues, and in the latest deal Cambridge Investment Research Inc., one of the largest independent contractor firms, said on Monday it had acquired Broker Dealer Financial Services Corp., a mid-sized firm with about 150 reps and advisers, $3.5 billion in assets and $20 million in annual revenues.

Broker Dealer Financial Services, or BDFS, will become an enterprise branch, called a "super OSJ" for office of supervisory jurisdiction, of Cambridge, according to a letter sent Monday to Cambridge's 3,956 reps and advisers from the firm's senior management. Both firms are based in Iowa.

Terms of the deal were not disclosed.

Independent brokers have seen margins compress steadily since the credit crisis, as record-low interest rates ate into their bottom lines. New regulations have hampered the sale of high commission products such as nontraded real estate investment trusts and variable annuities, further increasing the pressure on firm finances.

The number of IBDs has declined 28%, with 904 open for business in 2015, compared to 1,255 such firms that were up and running in 2005, according to a report last year from Fidelity Clearing & Custody Solutions. And with increased regulation pressuring profits, broker-dealer operating margins dropped from 12% in 2006 to just 3% in 2016, according to the report.

Eric Schwartz, the founder and executive chairman of the board at Cambridge, told InvestmentNews last year that Cambridge had been taking calls from such small or mid-sized firms, which were looking to sell due to rising costs and the need to comply with regulations such as the Department of Labor's fiduciary rule, which is now defunct.

Still, rising compliance costs are making life difficult for smaller broker-dealers, noted Jodie Papike, president of Cross-Search, a recruiting firm.

"It continues to be an issue for a firm that size to deal with regulation and compliance and have such small margins," said Ms. Papike. "The need for scale continues to drive this. Broker-dealers are looking to offload those costs. It's difficult for the small or mid-sized broker-dealers to deal with costs associated with compliance."

"I thought the geography made sense, with many BDFS advisers concentrated in part of the state where Cambridge is," said Jonathan Henschen, an industry recruiter.

Founded in 1979, BDFS has a business and revenue mix that tilts towards transactions rather than fees, the opposite of Cambridge. About two-thirds of BDFS' revenue comes from transactions, or advisers selling products, according to the letter from Cambridge to its advisers. In comparison, 56.7% of Cambridge's total revenue last year of $811.4 million came from fees, according to InvestmentNews data.

"The reps at BDFS have tended to do more stocks and bonds and alternative investments," which generate commissions, Mr. Henschen noted. "Cambridge likes fee-based business. So, the product mix might be an issue."

The deal is expected to close by the end of October. The new super OSJ branch will be led by Christina DeShaw, president and CEO of BDFS and one of its current owners.

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