Independent broker-dealer revenue on the decline

Firms participating in Investment News' annual IBD survey posted their first average year-over-year drop in revenue since the 2008 credit crisis
APR 22, 2017

InvestmentNews' research team examined how 57 independent broker-dealers, who have participated in our in-depth survey every year since 2011, have fared through a shifting financial advisory landscape. In 2016, independent broker-dealers saw revenues decline for the first time since the industry's recovery following the Great Recession. As Bruce Kelly reports, the top 25 largest firms reported a year-over-year decline of -1.3%. By comparison, of the total 57 firms who have participated in our survey every year since 2011 — a list that includes the vast majority of the biggest firms in the industry — firms posted a similar average year-over-year decline of -1.7%. However, it's clear that the largest and most successful firms are carrying an outsize portion of success, as median firm revenue retreated by approximately -4%. (More: InvestmentNews Broker-dealer Data Center for full data and profiles) We illustrate here the industry's path through the lens of these 57 firms, detailing how the typical firm in the group fared in terms of performance over the past six years.

Total Revenue
Note: Values are medians; = 57 Independent Broker-Dealers who provided data for all years.

Double-digit, year-over-year percent increases in revenue, once common among the largest firms in the industry, are now a rare commodity. As of late, that trend has not only slowed, but also reversed — typical revenue declined for the majority of firms in 2016, to $149 million, from a median $157 million in 2015. Despite the recent swoon, firms have grown at a five-year compound annual rate of 3.9%.

Total Operating Expenses
Note: Values are medians; = 57 Independent Broker-Dealers who provided data for all years

Meanwhile, operating costs have not only outpaced revenue growth — increasing at nearly twice the annual rate over the same five-year period (6.5%) at the typical firm among our cohort — they also exploded in growth in 2016, with firms posting a 17.1% year-over-year increase as a result of increased costs related to technology, compliance and training in preparation for the Labor Department's now in-flux fiduciary rule.

Sources of Revenue

While the delayed DOL rule has created an operational headache for the IBD industry, changes in sources of revenue make the direction in which the industry is moving abundantly clear. Just six years ago, firms relied on commissions to generate 71% of their revenue. In 2016, that shrunk to 58%.

FEE-BASED TREND

Fee-based income, meanwhile, has risen from 25% of all revenue to just over one-third (34%) of firms' total revenues. "Other" revenue has made up the shortfall, increasing from 5% of total revenue in 2011 to 9% in 2016. That revenue often includes financial planning fees, flat fees, revenue from dually registered advisers, rep fees and event income. (More: How independent broker-dealers can help advisers win new clients) The trend toward fee-based sources of revenue among our sample belies the perceived oppositional stance of the industry, and suggests that when it comes to opinions that the DOL favors one source of revenue (fee-based) over another (commissions) in retirement accounts, IBDs and their reps have long had a read on the market and have been transitioning toward that business model, albeit at their own pace. More evidence pointing to this is the explosive growth in corporate RIAs: Among our 57 firms, their corporate RIAs have grown at a massive five-year compound annual growth rate of 31%, nearly tripling in size in that time, holding 2.9 times more assets at year end 2016 than they did at year end 2012.

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