How rising interest rates cushioned IBDs in a stormy 2022

Meanwhile, over the past decade, the top 25 firms have essentially doubled the amount of revenue they generate.

Rising interest rates may hurt consumers by increasing the cost of borrowing on credit cards or mortgages, but they provide a lifeline for independent broker-dealers, or IBDs, especially in chaotic markets.

The S&P 500 stock index had a terrible year in 2022, falling 18%. In the past, that would have spelled doom for the top lines of the 25 largest independent broker-dealers, so called because they pay financial advisors as independent contractors rather than as employees.

But not in 2022: The 25 largest IBDs actually reported $35.7 billion in total revenue, a 6.1% increase when compared to 2021, according to data from InvestmentNews Research. And the largest contributor to that growth was not revenue from commissions or fees but rather a category labeled “other,” which is primarily generated from rising interest rates and interest-rate spreads.

Indeed, other revenue at the top 25 firms reached $5.1 billion last year, a 38.5% increase from the prior year. Meanwhile, commission revenue reported by the firms declined roughly 5%, while fee revenue increased by the same amount.

There’s no doubt that rising interest rates buoyed LPL Financial, the industry’s largest firm with more than 21,000 financial advisors and often a bellwether of sorts for the other large firms.

“The combination of organic growth, rising interest rates and expense discipline led to [earnings per share] prior to intangibles and acquisition costs of $4.21, the highest in our history,” LPL chief financial officer Matthew Audette said in February during a conference call with analysts to discuss fourth-quarter 2022 earnings.

A RESILIENT INDUSTRY

It’s also noteworthy that over the past decade, the top 25 firms tracked by InvestmentNews have essentially doubled the amount of revenue they generate. That demonstrates an extremely resilient IBD industry, even though many on Wall Street have written IBDs off in favor of smaller but more profitable registered investment advisor firms, which in the past 10 years have seen unprecedented investment from private equity managers looking to build super regional RIA networks.

In 2013, the top 25 independent broker-dealers reported $18.5 billion in revenue, with the majority of that coming from commissions, or one-time sales of investment products. The industry has slowly and steadily shifted from focusing on one-time sales to concentrating instead on recommending and selling investment products that generate annual fees.

But the recent sharp rise in interest rates can’t be overlooked. Since January 2022, the fed funds rate has risen from essentially zero to 4.65% in March. This means broker-dealers are profiting from cash held in client accounts, margin loans used to buy more securities and banking activity in general.

“The day the Fed changes interest rates, that goes right to the bottom line,” said Larry Roth, the former CEO of both Cetera Financial Group and AIG Advisor Group, now simply Advisor Group. “And the big firms like LPL, Raymond James and Commonwealth, they’ve finally reached scale. That means they can capture the upside and benefit from rising rates even when there are headwinds of a market that’s down almost 20%.”

An appetite for recruiting also helps to bolster firms in tough markets like last year’s. Traditionally strong recruiters of financial advisors, such as LPL Financial and Raymond James Financial Services Inc., reported increases in total revenue last year of 11.4% and 13.3%, respectively, according to InvestmentNews data.

In 2023, the industry will be watching closely the inner workings of Advisor Group, the broker-dealer network of more than 10,000 financial advisors. The firm announced a rebranding last Wednesday that will merge its eight affiliated broker-dealers under a yet-to-be-chosen new name, in a process that will take two years.

While the mergers and acquisitions market for RIAs has been white-hot for several years now, with chatter at industry conferences about how high valuations for such firms can really go, broker-dealer M&A remains vibrant, although there are increasingly fewer sizable targets left for large firms to acquire.

Advisor Group last June said that it was buying American Portfolios Financial Services Inc., a large independent broker-dealer based in Long Island, New York, with 850 financial advisors and close to $40 billion in assets. That announcement came just weeks after Advisor Group said it was acquiring a bank-focused broker-dealer, Infinex Investments Inc., with 750 financial advisors who control more than $30 billion in client assets.

BRANCHING OUT

Not to be outdone, Advisor Group rival Cetera Financial Group said in January it was buying the wealth business of insurer Securian Financial Group, which includes more than 1,000 advisors who oversee $24.8 billion in assets under management and $47.4 billion in assets under administration. And in April, a smaller broker-dealer network, Atria Wealth Solutions, said it was buying Grove Point Financial, the former independent broker-dealer H. Beck Inc., a wealth management firm with $15 billion in assets and roughly 400 advisors, from Kestra Holdings.

Independent broker-dealers this year will continue to buy and invest in large branches before those branches can be purchased by other investors, including private equity managers. For example, LPL Financial in November said it was buying one of its own giant branch offices, Financial Resources Group Investment Services, which houses bank brokers overseeing $40 billion in assets.

Advisor Group, Cetera and Atria are all owned by private equity managers.

Top 25 IBDs ranked by revenue

	Firm	2022 revenue	% change vs. 2021	% change vs. 2021	% change vs. 2021	2022 fee revenue	% change vs. 2021	2022 other revenue	% change vs. 2021
1	LPL Financial	$8,600,825,000	11.4%	$2,326,164,000	-2.2%	$3,875,154,000	9.9%	$2,489,791,000	37.0%
2	Ameriprise Financial Services	$6,193,740,493	2.4%	$1,257,650,662	-10.2%	$3,981,772,236	0.5%	$954,317,595	39.0%
3	Advisor Group	$4,230,665,487	6.4%	$1,615,637,526	-1.2%	$2,104,523,858	7.2%	$510,504,103	35.7%
4	Raymond James Financial Services Inc.	$3,590,389,752	13.3%	N/D	N/D	N/D	N/D	N/D	N/D
5	Northwestern Mutual	$2,203,629,000	10.0%	$466,699,000	-1.7%	$1,533,478,000	9.8%	$203,452,000	55.2%
6	Commonwealth Financial Network	$2,074,656,782	3.5%	$252,499,869	-6.4%	$1,531,829,554	0.1%	$290,327,359	41.7%
7	MML Investors Services	$1,573,800,000	-0.1%	$749,300,000	-10.3%	$816,900,000	12.0%	$7,600,000	-28.3%
8	Cambridge Investment Research Inc.	$1,466,778,216	7.1%	$360,489,779	-5.4%	$833,212,870	1.8%	$273,075,567	60.5%
9	Equitable Advisors	$1,244,544,639	-0.7%	$735,997,059	-6.0%	$425,359,215	5.1%	$83,188,365	27.4%
10	Kestra Financial Inc	$790,210,634	5.2%	$207,754,217	-7.6%	$518,540,841	7.7%	$63,915,576	42.8%
11	Atria Wealth Solutions	$608,842,807	-6.0%	$298,913,343	-15.7%	$246,059,736	0.3%	$63,869,729	32.9%
12	Securian Financial Services Inc.	$474,335,000	3.0%	$209,227,044	-0.9%	$206,754,449	5.8%	$58,353,508	8.0%
13	Lincoln Investment Planning	$398,227,000	-5.9%	$114,764,000	-0.9%	$273,067,000	-3.2%	$10,396,000	0.5%
14	Principal Securities Inc.	$366,575,698	-5.8%	$221,826,048	-13.9%	$133,765,841	2.8%	$10,983,809	727.5%
15	Park Avenue Securities	$318,049,916	-2.4%	$168,254,466	-10.0%	$149,795,449	11.6%	$0	N/A
16	Independent Financial Group	$267,102,000	3.8%	$115,090,000	-3.7%	$130,499,000	6.2%	$21,513,000	44.7%
17	Centaurus Financial Inc.	$202,464,888	8.0%	$134,052,002	5.4%	$68,412,886	13.5%	$0	N/A
18	J.W. Cole Financial Inc.	$191,865,025	2.3%	$89,418,579	-2.5%	$102,446,446	6.9%	$0	N/A
19	United Planners Financial Services	$179,436,707	1.1%	$53,929,747	-5.8%	$119,608,629	3.3%	$5,898,331	32.9%
20	PlanMember Securities Corp.	$141,000,000	-1.4%	$17,120,000	-29.6%	$121,759,000	2.6%	$2,121,000	N/A
21	Geneos Wealth Management Inc.	$131,415,250	-6.9%	$35,243,559	-14.5%	$90,960,295	-5.5%	$5,211,596	40.7%
22	Hornor Townsend & Kent	$129,237,616	-5.6%	$76,844,425	-10.0%	$49,775,679	-0.8%	$2,617,523.00	45.4%
23	The Leaders Group	$127,802,156	6.5%	$127,802,156	8.1%	$0	N/A	$0	N/A
24	Concourse Financial Group Securities Inc.	$120,017,637	-14.1%	$68,856,067	-16.2%	$44,924,339	-13.2%	$6,237,231	10.1%
25	Prospera Financial Services Inc.	$109,937,028	34.1%	$30,734,726	20.1%	$71,473,591	41.5%	$7,728,711	31.3%

Revenue figures are for firms’ year-end. N/D = not disclosed. N/A = not applicable or not available. Other revenue could include interest income, and financial planning, consulting, investment banking and other fees. Itemized revenue may not add up to totals due to rounding.
Source: InvestmentNews Research

INTIMATE LEVEL

Industry consolidation also happens on the much more intimate level of advisor to advisor, one executive noted.

“The big-picture discussion that is reassuring to us over the last decade or more is the perception of the demographic time bomb of aging advisors, the worries about large, en masse retirements and the anxiety that no one was training advisors to fill the void,” said John Rooney, managing principal at Commonwealth Financial Network. “Frankly we look at it in the opposite way, and this is adding to the benefit of our advisors who have large scalable practices that are designed to be perpetual.”

“We are seeing the decline of solo advisor practitioners who are aging out, and they are selling to those types of large practices,” Rooney said. “At the end of the day, this is a game of gathering assets under management. That’s the bellwether.”