Increasing costs hitting financial advice industry 

Rising costs of acquisitions, higher salaries for employees, and competitive recruiting bonuses for financial advisors, along with the record spike in interest rates, are making it more costly to run large wealth management enterprises. Some are wondering whether that will result in either layoffs at large financial services firms or more consolidation at firms that have been recently acquired by large buyers like private equity shops.  

There are plenty of signs of concern for the broad financial advice industry, which employs roughly 320,000 financial advisors through a variety of businesses, from small registered investment advisors to giant broker-dealers.  

At the start of November, the Charles Schwab Corp. said it had finished cutting as much as 6% of its 35,900-member workforce amid efforts to curb costs as it continues to integrate TD Ameritrade. That’s roughly 2,100 employees, with many noting that Schwab is in a unique position to cut jobs after the acquisition of its leading rival.  

“With the Schwab deal for TD, Schwab bought those assets and got rid of the costs,” said one industry executive, who asked not to be named.  

Citigroup’s managers and consultants working on CEO Jane Fraser’s reorganization have discussed job cuts of at least 10% in several of the bank’s major businesses, CNBC reported this month, citing people with knowledge of the process.  

Meanwhile, Focus Financial Partners Inc., a leading buyer and aggregator of RIAs for almost 20 years, announced in November the reshuffling of a handful of its senior executives. At the same time, the firm, which was acquired for $7 billion earlier this year by Clayton Dubilier & Rice and Stone Point Capital, left the door open in its press release to an internal reorganization of its dozens of individual RIAs, which have operated autonomously until now.  

“These appointments reflect Focus’ strategic evolution as a private company toward a more cohesive organization that seeks a common purpose and higher levels of collaboration, and that operates with greater levels of efficiency for the benefit of its partner firms and the clients they serve,” the company said in the statement.  

Industry executives and consultants noted that the current environment for broker-dealers and RIAs is far from a level playing field when it comes to cost, particularly when it comes to compliance and technology. Firms are making investments in those areas to drive efficiencies, all with the goal of providing financial advisors with more time and resources to bring more clients aboard.  

“Cost pressures are particularly pronounced in the insurance company-owned broker-dealer space,” said Brian Dunham, wealth management leader at KPMG. “The insurance company broker-dealer part of the industry was built decades ago to distribute product, and that kind of business is under pressure from regulators. Those firms now want to present themselves as full-service wealth managers, like their competition.”  

Insurance companies have been dumping their broker-dealers since the credit crisis. Just this year, Cetera Financial Group said it was acquiring the wealth management business of Securian Financial, an insurer based in Minnesota.  

“And the RIA aggregators are saying to advisors, ‘If you join our platform, we can take on compliance and lower the cost profile while you spend time growing the business,’” Dunham added.  

And expenses are increasing for firms. LPL Financial Holdings Inc., long an industry bellwether, said in October that its core general and administrative expenses had risen 15% year-over-year to $342 million during the third quarter.  

But adding new business can drive expenses. LPL Financial and Prudential Financial Inc. said over the summer that Prudential will move the retail brokerage and investment advisory assets of 2,600 financial advisors from Prudential Advisors’ current custodian, Fidelity’s National Financial Services, to LPL Financial. Matt Audette, LPL’s chief financial officer, said during a conference call with analysts in October that the estimated expense to onboard those financial advisors is $125 million.  

“Part of this is G&A expenses, part is related to interest on debt, and part is related to the big RIA consolidators spending tens or hundreds of millions of dollars buying firms but not having taken costs of those acquisitions out yet,” said Larry Roth, managing partner of RLR Strategic Partners. “Big firms are looking inward and asking, ‘Are we running an efficient business, or are there places where we are redundant?’”  

“But they are not stressing out about it,” Roth said. “They’re considering whether it’s time to look at a rationalization plan.  

“That means looking at the organizational design and cost structure of the firms they acquired,” he added. “It might be time to take costs out of business. That could be from head count reductions. For example, if an RIA aggregator bought 20 firms, and each has its own chief investment officer, that means you probably have too many talented people running large-cap growth portfolios.”