How brokers can navigate consolidation in the B-D industry

Advisers should take a deliberate approach to charting their future. Here's what to look for.
DEC 30, 2015
Financial advisers today face more uncertainty and potential headwinds than ever before — the Department of Labor's pending fiduciary ruling, rising technology and compliance costs, and increased regulatory scrutiny are just a few of the significant concerns. As a result of these and other issues, the broker-dealer industry is at a crossroads and is consolidating at an accelerated pace, unlike any period I have seen in my 30-plus years in the industry. No matter what stage of their career advisers are in — from just starting out to thinking about succession planning — now, more than ever, it is critical that they focus on how they can navigate to succeed in this new and consolidating landscape of broker-dealers. To understand how to navigate to what's next, advisers should first be aware of some of the factors driving all of this change. While it is true that the buying and selling of firms is not a new trend, it is something we have seen more and more of since the 2008 financial crisis. With the number of broker-dealers down about 12% compared with five years ago, the rate of consolidation has never been greater. The DOL's pending rule to raise investment advice standards for retirement accounts is certainly a catalyst for consolidation in the industry. The rule has the potential to change the way advice is delivered, and no matter how the rule shakes out in its final form, complying with it likely will increase firms' costs. And while the uncertainty and confusion caused by the DOL is prompting some advisers and firms to question whether they are affiliated with the right broker-dealer, it's not the only thing behind the trend. Advisers are also dealing with deteriorated margins as a result of low interest rates, as well as rising technology and compliance costs and a more complex regulatory environment. Armed with this understanding, financial advisers should take a deliberate approach to charting their future. To identify a strategy that will work for their businesses, staff and clients in the long term, advisers should evaluate their relationship with their broker-dealer with these three criteria in mind: The right size. In periods of uncertainty, look for strength in numbers. Larger broker-dealers have the resources and name recognition to stay relevant in any environment. Advisers looking for a long-term partner should focus their attention on firms that have the size, scale and financial stability to manage through changes created by the DOL or other industry shifts and trends. A good indicator: Check to see if the broker-dealer is advocating on behalf of its advisers in Washington. The right resources. As the adviser value proposition continues to shift away from portfolio construction to more robust financial planning services, having a partner that can provide advisers with the resources to efficiently and effectively serve their clients is essential. Firms that can provide advisers with more time to spend building relationships with their clients, or perspective clients, by outsourcing back-office administrative work or automating time-intensive tasks are likely to benefit in periods of consolidation. The right fit. While size and resources are important, the independence, choice and flexibility that best fit their business model are the most essential qualities advisers should evaluate when considering how they might be impacted by consolidation. For example, firms that provide advisers the flexibility to do both brokerage and advisory business have less risk of a larger impact from the looming DOL ruling. Independence means different things to different firms, so advisers should seek a culture that not only respects their independence, but is committed to doing everything possible to support it. Those firms truly dedicated to the independent model will be well prepared for industry shifts or further consolidation. Watching the industry quickly contract can be jarring for unprepared advisers. Advisers should evaluate their business priorities today to ensure they have the right partner and are positioned to benefit from the trend tomorrow. Bill Morrissey is a managing director and divisional president at LPL Financial.

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