One of the biggest names in the financial planning industry is getting out of the independent-contractor brokerage business, saying the channel faces steep hurdles that limit profitability.
Edelman Financial Group Inc. said this morning it was closing down its independent-rep business in order to focus on wealth management and financial planning. Ric Edelman, the firm's largest shareholder and co-chief executive, has twice been ranked the top independent investment adviser in the country by Barron's Magazine.
“Everyone will draw their own conclusions, but I consider the independent-broker-dealer channel severely flawed and question the sustainability of many of the players in the space,” Mr. Edelman said. “The economics are very challenging in today's environment.”
Mr. Edelman has long ties to the independent-contractor-rep business. He had the largest practice with Royal Alliance Associates Inc. before leaving it in 2005 to join Sanders Morris Harris Group Inc. of Houston. Over time, he became the largest shareholder and earlier this year that firm was rechristened the Edelman Financial Group.
The cut affects 15 practices with about 75 registered reps, Mr. Edelman said. Those reps have until the end of March to find a new home. Mr. Edelman said that the firm was “encouraging” some of those independent reps to stay, but as investment advisers.
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The move completes cutting business lines at the firm, which in the past included investment banking and capital market operations, he said.
Mr. Edelman said the independent-rep business was negligible at the firm. Independent brokers account for less than 1% of the company's revenue, which totaled $169 million last year.
Even as Edelman Financial Group moves to exit the business, many leading investors, including private-equity funds, see value in and are scooping up independent brokerages.
Industry observers have noted that broker-dealers are particularly sensitive to interest rates. If interest rates can rise off record lows, indie broker-dealers would see the renewal of a now moribund profit center.
Mr. Edelman said that the hurdles facing independent broker-dealers are high. They include competition for advisers, regulatory demands on managing and supervising those practices, and technology demands and requirements. “Those all make it very difficult to manage the business successfully without scale,” he said. “We have better things to do with our resources than play in that game.”
