This year should have been worse for broker-dealers

Every December, InvestmentNews looks back at the most important developments of the previous 12 months. From ETFs to ESG to TINA, we’ve got all the acronyms covered — and a whole lot more.

For the retail broker-dealer industry and its hundreds of thousands of brokers and financial advisers, the past two years could be summed up as: It was the best of times, and — oy vey — 2022 could have been a lot worse.

After a record-breaking year for revenues and profits in 2021 across the retail brokerage industry, broker-dealers look as if they weathered the broad stock market’s struggles of the past 12 months far better than they have in past market swings.

The brokerage industry is notorious for booms and busts, with the latter often ending in spectacular flameouts and crashes of firms that sold too many questionable and at times, bewildering products, from dubious medical receivable private placements to complex credit default swaps. One of the big themes in 2022 was how well the broad retail wealth management industry has insulated itself from the downside of the bust part of the cycle.

No doubt about it, 2022 was a turbulent year for the stock market. As of Dec. 14, the S&P 500 stock index year-to-date was down 16.17% after posting a total annual return, including dividends, of 28.7% a year earlier. At its nadir this year, the S&P 500 had declined more than 25%.

But broker-dealers, as measured by projected average annual revenue per financial adviser, this year managed to stand up under the weight of declining markets. Broker-dealers saw much of that cushion come from the industry’s long-term switch to fee-based business, which is more stable than relying on commissions, and from rising interest rates. Those help firms’ profit margins because broker-dealers make money on clients’ cash holdings.

As InvestmentNews noted in August, Wells Fargo Advisors reported that annualized revenue per adviser at midyear actually increased 3.6% when compared to a year earlier, to $1.21 million. LPL Financial reported annualized revenue per financial adviser at the end of June of $308,000, down 5.5% from the end of last year, when it was $326,000. That stability in the face of wide market swings looks to have held in the second half of the year.

But retail broker-dealers also made strides on a variety of fronts in 2022, although recruiting financial advisers over the first nine months of the year slowed down compared to the prior year, according to InvestmentNews data.

Several years ago, the majority of the warehouses, namely Merrill Lynch, Morgan Stanley and UBS, pulled back from extensive recruiting of financial advisers from competing firms because it’s expensive and time-consuming, choosing instead to focus on internal growth. Those firms, home to the most profitable financial advisers in the industry, are returning to the recruiting and hiring market, picking their targeted advisers carefully.

Finally, 2022 saw independent broker-dealers begin to compete with aggregators of registered investment advisers, with several IBDs making investments in giant branch offices of advisers already registered with the firm. For independent broker-dealers, which have always preached a hands-off relationship with financial advisers, this would have been unthinkable before the Covid-19 pandemic.

To read more articles in this series:

• Was 2022 the best year ever for exchange-traded funds?
• The ESG rule, the SEC and sustainability
• Fintech challenged by market forces
• Ta-ta, TINA! The year in retirement investing
• Diversity imperatives snapped into focus
• ESG got caught between party lines