Weak Independent Broker-Dealer Revenue in 2015 Not Expected to Change in 2016
From the Desk of Jim Eccleston at Eccleston Law LLC:
While 2015 proved to be the worst year for independent broker dealers in the last six years, industry professionals are warning that 2016 will not prove any less difficult. Former chairman of First Allied and The Legend Group, Joel Marks told InvestmentNews that, “if 2015 was bad, 2016 is worse. I think it’s going to be a challenging year.”
In 2015 the industry revenues increased just 3.2% for the 25 leading independent broker-dealer, marking the worst reports since the credit crisis in 2009. Since then the top 25 firms have reported year-over-year double digit revenue growths in every year except 2012. The next 25 leading firms, ranked 26-50 had even more unsettling reports, declining 1.2% in 2015.
Experts cite several factors in determining the performance of independent B-Ds. First the stock market seemed panicked in 2015 and investors were unnerved. The S&P and its dividends rose by a meager 1.4%. Additionally the Department of Labor’s new fiduciary rule has had a major impact on firm revenue, especially for smaller B-Ds with tighter revenue margins. The rule will fundamentally change regulation in the industry and firms are forced to devote more resources to adapting to the new requirements. Finally, the decline in the sales of high-commission alternative investments has added pressure to firms’ bottom line.
Of all the factors contributing to declining revenue, the decline in commission revenue has been the most detrimental and widespread. Commission revenue for the top 25 firms dropped 1.6% from 2014 to 2015 and 33 out of the top 50 reported a decline in commission revenue. Non-traded REITs have been a major source of revenue for B-Ds in the past five or six years, but in 2015 they dropped 33% according to figures from Robert A. Stanger & Co. Inc. From another perspective it’s clear that REIT declines are a major factor in the industry. The top performing B-D in 2015 was Raymond James with revenues up 10.7%. Raymond James does not sell REITs due to their lack of transparency, illiquidity, and front-end commissions. Thus, while other firms struggled to maintain revenue in the wake of the declining REIT sales, Raymond James was unscathed.
The DOL fiduciary rule also has led to major changes in the independent B-D industry. In the wake of the announcement of the rule, B-Ds have been preparing for the implementation and that means that business has suffered. Many of the firms have made cuts to prepare for the financial burdens of the regulation, but many also are at their tipping point. Firms are facing “fee pressure” in anticipation of the new rule. LPL has already cut prices on some of its model wealth portfolios.
The effects of downward fee pressure will run to the firms instead of the advisors. This will lead to the opportunity for large firms to recruit advisers from smaller firms and possibly even to acquire smaller firms who cannot handle the pressure of the new rule together with declining net sales flows. Larry Pipike of Cross-Search recruiting firm said, “the growth in the IBD space over the next couple of years will come from the cannibalization of the weaker firms by the big firms.” Eric Schwartz, chairman and CEO of Cambridge Investment research said, “For consolidation, the DOL is the big hammer” and he continued by saying, “I still believe that there will be five to ten large firms left eventually controlling the space. The DOL and pricing pressure downwards on fees will accelerate that. Any firm that does over $500 million in annual revenue has a chance at being a survivor.” The future for all B-Ds is uncertain and the environment certainly will be changing in the next few years.
The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.
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