On the rise: Largest B-Ds float a come-back after the storm

The independent broker-dealer industry came roaring back in 2010, with the 25 biggest firms collectively reporting a 16.9% increase in total revenue, compared with the year before.

Such double-digit gains in fees and commissions are a welcome relief to an industry that was beaten up by the stock market free fall between September 2008 and March 2009.

In 2008, the top independent broker-dealers collectively saw gross revenue drop 13.3%. In 2009, revenue showed a modest gain of 2.6%.

Brokerage firms in 2010 had plenty of help from the stock market. Last year, the Dow Jones Industrial Average was up 11% and the S&P 500 was up 12.8%.

In total, the biggest 25 independent broker-dealers reported $14.1 billion in gross revenue in 2010, up from $12 billion in 2009.

With firms once again thinking about growth strategies, 2011 could outpace last year.

“It seems like 2011 looks to be a better year than 2010,” said Dennis Gallant, principal with Gallant Distribution Consulting. “Firms are engaged in growing and thinking longer-term. They’re adding resources. It’s a positive trend that looks to continue into 2011.”

(For more information on the 25 largest independent broker-dealers, view the new B-D Rankings here.

Mr. Gallant added: “All firms are thinking strategically,” but broker-dealers are still being cautious about ramping up too quickly. “Firms are being selective and prudent in how they’re growing staff.”

“I think this is a good year,” said Donald Froude, president of Ameriprise Financial Inc.’s personal-advisers group. “Yes, there are a lot of questions out there — Japan, the Middle East and domestic issues — but I think overall, the economy is better, job numbers are better. People are optimistic about the future.”

“The memory of 2008 and 2009 is still burned into investors’ minds, but it’s not as fresh as it was,” he said. “Some Ameriprise clients recently have told me their portfolios are back to where they were before the crash. And people have reduced their levels of debt, too. I really like where we’re going.”

The fiscal year for Raymond James Financial Services Inc. begins Oct. 1, and 2011 is looking up, said Chester B. Helck, chief operating officer for Raymond James Financial Inc., the parent company. “We’re already halfway through fiscal 2011, and it’s turning out to be a pretty good year, compared to previous years,” he said. “We’re up around double-digit percentage points over last year, and that’s largely the result of having record client assets at the firm. The markets have come back to levels above a couple of years ago.”

Firms such as Raymond James that had success in recruiting during the downturn are also benefiting from those reps’ and advisers’ bringing their old clients’ assets to the firm, Mr. Helck said. Other executives echoed that comment.

Last year’s strong stock market, however, wasn’t enough to buoy the entire industry; some firms failed to survive. Two of the fastest-growing firms of the past decade, GunnAllen Financial Inc. and QA3 Financial Corp., failed over the past year and both are under bankruptcy protection.

The biggest broker-dealers owned by insurance companies did not fare as well as large firms that focus more on wealth management and charge a fee for financial advice.

For example, gross revenue at the three largest independent broker-dealers, LPL Financial LLC, Ameriprise Financial Services Inc. and Raymond James Financial Services Inc. outpaced the industry average. LPL Financial saw a 23.4% increase in gross revenue in 2010, compared with a year earlier. Ameriprise and Raymond James both saw increases in gross revenue of 22.5%.

Gross revenue for the largest independent broker-dealers owned by insurance companies was not up as much. Lincoln Financial Network and Axa Advisors LLC saw increases in their gross revenue of 1.3% and 9.5%, respectively.

A spokesman for Lincoln Financial, Jeff Van Pelt, declined to comment. Christine Nigro, the president of Axa Advisors, however, said cautious clients were one reason for the firm’s less-than-average increase in gross revenue,

“Our advisers’ focus on wealth management and relationships led to strong client retention and prevented a lot of sharp sell-offs, so we wouldn’t expect to see as sharp of an upswing” in gross revenue as other broker-dealers, Ms. Nigro said.

“Our client profile is different than that of brokerage-based broker-dealers. Insurance company clients tend to be conservative investors, and we are still in a relatively volatile market,” she said.

Of course, the trend did not hold for all independent broker-dealers owned by an insurance company. Northwestern Mutual saw its gross revenue increase 19% last year.

Reps and advisers affiliated with insurance-company-owned broker-dealers are often more dependent on selling insurance products that generate commissions, such as variable annuities, and are slower to react to changing market conditions, executives and analysts said.

“Think of a true independent adviser,” Mr. Gallant said. “During the market downturn, he took the bull by the horns and made changes in the client’s portfolio and engaged clients. I’m not sure the insurance firms and insurance-oriented reps in those firms made those types of changes. They may have been slower to make changes.”

“If you throw in all the insurance agents [with broker-dealers], those guys are very product-focused,” Mr. Gallant said. “Also, the more pure brokerages were recruiting during the downturn, and that added revenue.”

For more on the independent broker-dealer industry, please visit the InvestmentNews B-D Data Center.

E-mail Bruce Kelly at [email protected].