The nation's top 25 independent-contractor broker-dealers reported a staggering 26.6% increase in gross revenue last year to $13.52 billion, from $10.68 billion in 2006.
Last year's growth far outpaced that of 2006, when the top 25 independent broker-dealers reported an increase in gross revenue of 16.6% over the prior year. And though many executives at the biggest firms say they are confident that gains will continue in 2008, others aren't so sure.
They expect recruiting to be a struggle in an environment where the economic news has been bad, clients are worried and the fallout from the subprime mortgage crisis continues to rattle Wall Street.
What's more, because of its decade-long growth, the independent-contractor-broker-dealer market is glutted with recruiters chasing after a limited pool of top advisers, many noted. Some wonder if the business climate will become as bad as during the first years of the decade, when the technology bubble burst.
"It's the toughest market since 2001," said Don Beary, chairman of VSR Financial Services Inc. of Overland Park, Kan. "Growth will slow this year."
And even growth can come at a price, one consultant said.
"A lot of firms grew last year, but many broker-dealers missed their recruiting numbers," said Philip Palaveev, senior consultant with Moss Adams LLP of Seattle.
"It's because they recruit from each other. It's a zero-sum game," Mr. Palaveev said.
"If you look back at 2001 to 2002, it's not a pretty picture," he said. Gross revenue on average for independent broker-dealers at that time declined about 20%, Mr. Palaveev said.
"If the markets head south like that, that's significant," he said. "Recruiting in '01 and '02 was not good."
The market for stocks has been down and up, recently rebounding from lows at the start of the year. Year-to-date through last Monday morning, the Standard & Poor's 500 stock index had fallen 6.2%, while the Dow Jones Industrial Average had dropped 3.7%.
"There're signs, over the last four to six weeks, that we're starting to grow again," Mr. Beary said.
This year's list of
InvestmentNews top 25 independent broker-dealers closely resembles last year's, except for two changes.
LPL Financial of Boston, the largest firm at $3.03 billion in gross revenue, breaks out as separate business units two of its acquisitions from last year, Mutual Service Corp. of West Palm Beach, Fla. and Waterstone Financial Group of Itasca, Ill. And Waddell & Reed Inc. of Overland Park, Kan., reported its financial results to the publication for the first time.
Executives at the largest firms sounded confident in the face of the stormy market.
STRONG RECRUITING
"Our recruiting through the first quarter has just exploded," said Bill Morrissey, executive vice president of branch office development with LPL Financial. In the first three months of this year, LPL saw twice as many recruiting leads as it did over the same time period in 2007, he said.
"I couldn't be more optimistic about the future," said William C. Van Law III, senior vice president and national director of business development with
Raymond James Financial Services Inc. of St. Petersburg, Fla. "The market environment slows movement [of recruits] in the short run, but it also uncovers a variety of different concerns."
One such concern involves the collapse of the market for auction rate preferred securities. Independent-firm executives said the failure of some wirehouses to inform their representatives' clients about the market's lockup has created discontent among wirehouse advisers and reps.
Another cause of discontent among wirehouse brokers is the falling prices of their companies' shares. Wirehouse reps receive deferred compensation — or "golden handcuffs" — in the form of company stock, and prices of those shares have plummeted anywhere from 50% to 70% from their recent highs, lessoning the value of those packages, executives noted.
"That's just one component of inertia" that often prevents reps from changing broker-dealers, said John G. Peluso Jr., chief executive of Wachovia Securities Financial Network LLC of Richmond, Va. "But when one link in the handcuff begins to weaken, that's good for financial adviser recruiting."
One executive noted that large independent firms are in a much better position to weather a drastic storm than they have been in the past. "It's a different world now," said Larry Roth, chief executive of the
AIG Advisor Group, a subsidiary of American International Group Inc. of New York. "We're more diversified. Plus, the products for investors are much better."
Industry recruiters and consultants, however, see a less rosy picture.
"Recruitingwise, it's going to be a very challenging year," said Jodie Papike, vice president with Cross-Search, a recruiter in Jamul, Calif. "Firms without a clear value proposition will struggle in '08."
Some of the hurdles are constants, one consultant noted. "There's a small pool of experienced reps, with lots of firms going after them," said Dennis Gallant, president of Gallant Distribution Consulting of Sherborn, Mass. "A lot of reps will simply wait out the storm. And independent firms now also have to compete with [registered investment advisers], and those firms have ramped up the grab for breakaway brokers," Mr. Gallant said.
Another recruiter noted that since many reps are more oriented to advice and
financial planning than ever, they are spending more time with clients. "There's less opportunity to be changing broker-dealers when working so closely with clients," said John Hurley, managing director with Suasion Resources Inc., a Roseland, N.J.-based consulting firm for financial services companies.
E-mail Bruce Kelly at [email protected].
