Independent Broker Dealers: The Reinvention of an Independent Model
In a rapidly changing landscape, IBDs have been working hard to evolve their business models and position the firms – and their advisors – for a new chapter of success
It’s not surprising that the RIA space often garners the lion’s share of attention both in the media and with advisors considering their next chapter. Who can dismiss the excitement around the ongoing growth fueled by what seems to be a constant flow of big teams breaking away from the brokerage world to build their own independent firms as either hybrid or fee-only RIAs?
While the momentum towards independence seems to have been focused on the RIA world over the past several years, one might wonder what’s going on in the Independent Broker Dealer space.
And, interestingly enough, during what may have seemed to be a “quiet” time for IBDs (despite mass consolidation), the reality is that these firms have been working stealthily in the background, making significant changes to their operating models and strategies.
IBDs: Then vs. Now
Historically, IBDs were the obvious choice for advisors interested in independence but who lacked the desire to build an RIA infrastructure from scratch. The turnkey platform, compliance, technology, in-house support, ability to conduct both advisory and brokerage business under one umbrella and appealing transition economics were all features that resonated with this group.
Then, in the last few years we’ve seen an absolute proliferation of RIA service providers, 1099 RIA platforms, consultancies, capital partners and outsourcing partners—each making the operation of an existing RIA firm or the launch of a de novo entity significantly easier and more turnkey. The growth of this cottage industry, coupled with some of the perceived benefits of operating an RIA – like stronger long-term economics, customized technology and an overall higher degree of freedom, flexibility and control – put the IBDs on notice. That is, the old school playbook would need to be amended to retain a competitive edge in the fierce recruiting wars and to retain their current slate of advisors.
In response, IBDs have taken steps to evolve their business models. And with the recent run of consolidation, the largest and most well-known IBDs are demonstrating staying power and the ability to use their scale, resources, capital and recruiting aptitude to reenter the conversation as legitimate competitors to the RIA space.
There are 5 changes that IBDs have made which are resonating most with advisors:
- Better economics
IBDs largely make money by capturing override revenue on total production, assessing administrative and platform fees on advisory assets, ticket charges and, of course, net interest margin and revenue sharing arrangements with product providers. While IBDs add immense value to their affiliated advisors, there has always been a delta between the economics of operating on an IBD platform vs. in the RIA space—where advisors capture a 100% payout and often avoid the costly administrative and platform fees. Of late, we’ve seen the IBDs lower their admin and platform fees considerably, rollout a large swath of no- transaction fee (NTF) funds-thus closing the gap between the net economics of operating an RIA and running a practice at an IBD. Stemming from the DoL rule some BDs have even gone so far as to “bundle” all of their internal charges into one easy to understand number for advisors (to include grid override, admin fees, platform fees and ticket charges).
- The ability to start an RIA and work with multiple custodians
Most IBDs are self-clearing or use a third-party clearing platform such as Fidelity or Pershing. When an advisor joins an IBD, he is agreeing to “remain on platform” for custody/clearing, compliance, investment solutions and products. While many IBDs still operate in this fashion, a few have become willing to allow larger-scale practices to launch their own hybrid RIA, and to custody with one of the major institutional custodians such as Schwab, Pershing Advisor Solutions, TD Ameritrade or Fidelity Institutional. By granting this exception, IBDs can present themselves as a more flexible, cost-efficient and adaptive partner than ever before and in many cases prevent attrition to the RIA channel.
- Third-party technology
Lifelong independent advisors and breakaway wirehouse teams are accustomed to using proprietary technology stacks made available to them by their broker-dealer or firm. To many, these technology platforms represent ”good enough” solutions and remove the burden from the advisor of having to make costly and time-consuming technology decisions. That said, a major catalyst for the growth of the RIA channel has been the ability to pick and choose best-in-class technology vendors that all seamlessly integrate with their RIA custodian and each other. In varying degrees, IBDs have opened up their proprietary systems to third-party performance reporting, financial planning, risk and CRM providers so interested advisors can create their own custom technology stack in conjunction with what the IBD makes available. The beauty of this is that as technology changes, an advisor can remain nimble and opt for different solutions that likely evolve faster than an IBDs own in-house systems that are built for the hundreds or thousands of affiliated advisors.
- Transition to fee-only without repapering
IBDs hold an advisor’s brokerage license and offer an all-in-one platform for both advisory and transactional business. For advisors who operate a hybrid business model an IBD might make sense, but with the rapid shift toward advisory revenue at the expense of commissions, many IBD or wirehouse practices no longer require a broker dealer. Fee-only advisors can drop their FINRA licenses completely, save on BD fees and FINRA oversight, market themselves as fiduciaries, and operate with additional freedoms. Historically, practices that opted into the fee-only world could only consider leaving the BD world behind. Now though, most IBDs are open to allowing advisors who want to migrate to a fee-only construct to do so—thus eliminating the need to repaper, transition or go through any real change.
- In-house succession planning and lending facilities
With the average age of an advisor well into his 50s and most practices lacking a succession plan, the industry as a whole – especially the IBD channel with its many solo practitioners – has been struggling with how to make business continuity and proactive planning more accessible and less intimidating. Usually, IBD advisors find a succession plan within their current BD so they can avoid repapering and going through change at a time when they are trying to slow down. With that in mind, many of the well-capitalized broker dealers have created in-house succession planning groups, internal matchmaking sites and even lending solutions for practice acquirers at competitive interest rates—making the possibility of an internal sale that much more likely. For advisors looking to grow via acquisition, these new capabilities offer an immense value-add.
Yet the recent “race to zero” in the RIA custodial world on trading commissions presents a challenge to the IBD space, putting the cost-to-value equation in question. And, it remains to be seen how firms will react.
While advisors have always seen value in what an IBD can offer, many left the IBD world when the cost of affiliation outweighed the value derived relative to other IBDs or the RIA channel. Today, with some of these major strategy shifts, IBDs are proving to be more agile and adaptable to advisor demands and industry trends—and once again, represent a solid option for advisors considering independence.