10 developments to watch in the independent broker-dealer industry in 2015

Advisers and their independent broker-dealers saw movement last year in regulation, investment products, business strategies, retirement vehicles and more. Here are 10 of the hottest topics, which are sure to continue to evolve as the year unfolds.

LPL strapped with compliance charges
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LPL Financial, the leading independent broker-dealer with more than 14,000 reps and advisers, had a brutal 2014 as it continued to iron out its compliance issues.

In October, LPL Financial Holdings Inc., parent of the IBD, said it expected to incur up to $23 million in charges — $18 million more than previously anticipated — to resolve yet-to-be-disclosed regulatory matters such as fines and restitutions. That was in addition to the $20.1 million in fines, settlements and restitutions LPL had to pay the Financial Industry Regulatory Authority Inc. and state regulators from 2011 to last July, according to the firm’s BrokerCheck profile and reports in InvestmentNews.

The products vexing LPL are nontraded real estate investment trusts and variable annuities.

— By Bruce Kelly

Finra examines alternative products
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When exotic investment products don’t correlate with a market that’s going up, the Financial Industry Regulatory Authority Inc. pays attention.

This year, for the first time, the industry-funded broker-dealer regulator made an examination priority so-called smart beta exchange-traded funds linked to alternatively weighted market indexes. And it again put increasingly popular alternative mutual funds on the list.

“Finra is concerned that registered representatives and customers will not understand how the funds will respond to various market conditions,” the regulator said in its Jan. 6 priorities letter.

— By Mark Schoeff Jr.

Illinois enacts auto-IRAs, nation watches
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Earlier this month, Illinois became the first state to enact automatic individual retirement accounts for private sector employees, making it a Petri dish that the rest of the country will observe.

Auto-IRA legislation has failed to gain momentum in Washington.

“I don’t see the federal government acting until a decent number of states have adopted this concept,” said Brian Graff, chief executive of the American Society of Pension Professionals and Actuaries.

Congressional Republicans resist anything that looks like a mandate for small businesses.

“Even if there’s an opt-out or no cost to the employer, I don’t see it happening in this Congress,” Mr. Graff said.

The Illinois law requires employers without a retirement plan for workers to set up an auto-IRA administered by the state. California, Connecticut, Maryland, Minnesota, Vermont and others are studying retirement security.

— By Mark Schoeff Jr.

Succession, acquisitions drive moves
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Scott Curtis, president of Raymond James Financial Services Inc., said that recent consolidation has some advisers feeling uprooted after their firm is acquired.

“They feel the firm they are affiliated with has changed, and they’re looking for an organization that has demonstrated a fair amount of stability over a long period,” Mr. Curtis said.

Jodie Papike, who recruits for independent broker-dealers, said she expects more advisers to be eyeing a move as they seek a place to ultimately sell their book.

For now, however, more people want to buy rather than to sell a practice, according to Matt Chisholm, head of business consulting at National Financial, the broker-dealer clearing unit of Fidelity Investments.

“Very often we have a number of firms coming to us, and there’s more demand for new practices than there are exiting advisers,” he said.

— By Mason Braswell

Protecting against hacks gets costly
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The biggest driver behind an increase in compliance costs this year might not stem from any new rule. Instead, what’s most likely to keep firms on their toes and upgrading data security systems is the rising threat of a cyberattack.

“Financial fraud, wire fraud and identity theft are all manifesting themselves in a number of different ways,” said Matthew Chisholm, head of business consulting at National Financial, the broker-dealer clearing unit of Fidelity Investments. “That … is one of the bigger drivers that will increase the costs of compliance.”

Brokers also will be watching other potentially expensive regulatory changes, including a rule requiring background checks on hires, a reproposed uniform fiduciary standard from the Department of Labor and the Financial Industry Regulatory Authority Inc.’s Comprehensive Automated Risk Data System proposal.

To stay ahead, brokers should be developing their own mini-CARDS program by using firm data to segment and keep track of their advisers, Mr. Chisholm said.

— By Mason Braswell

Using teams, salary to attract young hires
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As another year brings closer the much-discussed wave of retiring advisers, IBDs are finding innovative ways to hire and train the next generation.

For example, Gitterman & Associates chief executive Jeffrey Gitterman makes what he calls “one and one” hires: an older adviser who is looking to part with his or her book of business in the coming years and a millennial who can begin to work under the veteran with the aim of eventually taking over.

Gitterman, an affiliate of Triad Advisors Inc., also sponsors an internship program for college graduates.

It starts young hires in salaried positions, beginning at about $40,000 a year for the first couple of years before they build a book.

— By Mason Braswell

Private placements still draw scrutiny
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Independent broker-dealers will continue to face regulatory scrutiny over the sale of private placements — exclusive offerings for their wealthiest clients.

“Private placements continue to raise concerns and will be an area of focus in 2015,” the Financial Industry Regulatory Authority Inc. said this month in its annual exam priorities letter.

Private placements offer scant disclosure to advisers and investors, and often are shrouded in mystery. Some IBDs that sold three private placements (DBSI real estate deals, Medical Capital Holdings notes and Provident Royalties preferred shares) before the 2008 market crash closed down. The deals turned out to be Ponzi schemes, and about two dozen firms shuttered after being crushed by legal costs arising from investor complaints.

— By Bruce Kelly

DOL fiduciary duty — now or never
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A Department of Labor proposal that would strengthen fiduciary rules for advice to retirement plans risks dying if it doesn’t get moving this year. A fiduciary rule also is stalled at the SEC.

The DOL rule, originally proposed in 2010 but withdrawn after fierce opposition from the financial industry, could be sent to the Office of Management and Budget as early as this month. After an OMB review, it can be released for comment.

The flash point will be how the proposal addresses commission-based compensation for sales of individual retirement accounts.

“The big issue for the year is going to be that regulation,” said Brian Graff, CEO of the American Society of Pension Professionals & Actuaries.

— By Mark Schoeff Jr.

FSI wants independent contractor fixed
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An interest group representing independent broker-dealers will try to protect advisers from IRS examiners who think they look more like employees of bigger firms.

Brokers can fall into a gray area when determining who is an independent contractor. Bigger broker-dealers exercise control over them in compliance matters — a situation some say makes them misclassified employees.

If the employee label is attached to independents, the larger broker-dealer would be on the hook for benefits and taxes.

“We’d like a permanent fix,” said David Bellaire, general counsel at the Financial Services Institute.

A debate in Congress over broad tax reform this year could give FSI a chance to slip its issue into the mix.

— By Mark Schoeff Jr.

Finra will continue to play CARDS
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Finra will continue its march toward a massive data collection mechanism, but the slog most likely won’t end this year.

Last fall, the Financial Industry Regulatory Authority Inc. released the second iteration of the proposal, called the Comprehensive Automated Risk Data System. It is designed to enable the regulator to capture and review reams of product sales data to detect potential investor harm.

“It’s a regulatory priority for Finra, and they will move forward with it,” said Emily Gordy, a partner at Shulman Rogers and a former Finra executive.

But the industry-funded broker-dealer regulator will have to battle stiff industry resistance.

— By Mark Schoeff Jr.

Related Topics: Financial Industry Regulatory Authority, Financial Services Institute Inc. (FSI), LPL Financial