It’s not easy to keep up with the rapidly changing panorama of financial services firms. As larger entities gobble up smaller ones, which are grappling with numerous challenges, the total number of broker-dealers registered with the Financial Industry Regulatory Authority continues to drop. It now stands at about 3,500 and is declining by about 100 per year.
The total number of registered representatives stands at about 624,500. About half of these professionals are registered with broker-dealers only, while others are dually registered (as registered reps and investment advisor representatives).
Many advisors are choosing to work under the umbrella of a registered investment advisor, and the number of RIAs is on the rise. It’s now at 13,500 and has been growing by about 400–500 firms a year, according to the Investment Adviser Association and National Regulatory Services.
To make sense of these significant industry trends and what they mean for financial advisors, we spoke with Louis and Mindy Diamond of Diamond Consultants.
Mindy founded the recruiting firm Diamond Consultants in 1998 and serves as its CEO. Louis, her son, was tapped as its president earlier this year and has been with the firm since 2016, after working in financial services for seven years. (One of their colleagues is Chief Operating Officer and General Counsel Howard Diamond, Mindy’s husband and Louis’ father.)
ThinkAdvisor: What are the biggest trends affecting broker-dealers today?
Louis Diamond: One trend we’ve seen is that firms with multiple affiliation models have become incredibly appealing to advisors.
This is because as advisors’ practices evolve in size and complexity, either as generations retire out or someone wants more control and freedom, they have the ability to go independent or change the amount of support they’re getting without having to transition away from their organization.
Mindy Diamond: Also what’s really changed in the industry is that the advisor mindset has shifted, meaning what advisors value today is very different than what it once was.
When I started the business almost 25 years ago, the top questions on most advisors’ minds at a broker-dealer were: What are the deals? What kind of deal is being offered by another firm or another model to advisors who join them?
Everyone wants to understand the economics, since the economics of a transition need to make sense. But the most important driving factor in advisor movement today is advisors wanting freedom, flexibility and control. Also, this is driving the way the industry has evolved — and newer models are being born.
The big firms are losing a lot of advisors, who can’t get what they want where they are. People are moving to the right side of the industry continuum, where newer models have been born to solve for exactly what advisors want — models that give advisors more freedom, flexibility and control.
What other thoughts do you have about the new models?
Louis: We look at our data and find that when wirehouse advisors move these days, many are moving to alternative models rather than to another wirehouse. We’re still seeing a decent amount of movement from wirehouse to wirehouse, and it’s picking back up from a low point of a couple of years ago.
But increasingly advisors are finding success and that they really resonate at boutique firms like Rockefeller Capital Management, First Republic Bank and even JPMorgan. Some of the “super-regionals,” like Raymond James or RBC, those types of firms seem to be resonating, too — ones that are smaller and more advisor friendly. They have cultures that advisors really like, and that gives advisors a sense of freedom and control that maybe they didn’t have at their old firm.
Mindy: We’re talking about the models that advisors view as the best of both worlds. On the one hand, they can go independent and build their own firm with maximum freedom and control there. But they also have to go through the headache of building a firm.
While plenty of advisors are entrepreneurial and want to do just that, there’s a large swath of the advisor population that wants more independence, more control and more freedom than they have at Merrill Lynch, Morgan Stanley or UBS, but going independent is a bridge too far.
The models of the firms that Louis just mentioned — the Rockefellers, the First Republics, the super-regional firms, boutique firms, etc. — provide them with the best of both worlds, a turnkey firm all under one roof with fully built infrastructure along with the additional freedom and control they could get if they were completely independent.
Do these trends surprise you or were there signs they were coming?
Louis: The pivot point we saw — in what advisors valued and how they were expressing these values by the firms they chose — was right after the financial crisis [of 2007–2008]. Before the crisis, our recruiting data showed that a quality wirehouse team would — 70% of the time — stay in that channel.
Post crisis, as advisors saw that these brands could work to their detriment, advisors overall just wanted more freedom and control over their businesses. We saw the pivot point for the opening of these regional firms to pick up market share.
The boutique space used to have Deutsche Bank, Credit Suisse, Lehman and Bear Stearns, and all those firms either went out of business or were sold to larger companies. The boutique space was kind of missing some really exciting higher-end options.
Fast forward to around 2017-2018, First Republic becomes a really viable home for top teams. Rockefeller also came along and has been doing this for a few years.
The financial crisis was the pivot point for when advisors gave themselves permission on behalf of their clients to consider going to either lesser-known firms or striking out on their own and building their own brand. Ultimately, they realized the clients’ relationship was with them and not with the organization or the name on the business card.
Mindy: Looking back, Hightower Advisors was a maverick in this space. When it was first born, it was a very different model than it is today. Today, Hightower is an established RIA business. At first, its target was disenfranchised wirehouse advisors who wanted a model of supported, quasi-independence with a partnership.
Before Elliot Weissbluth launched Hightower, he came to our office to pitch the model. I remember saying to him, “That is never going to fly. No wirehouse advisor is going to go to a firm they’ve never heard of.”
But he proved me wrong. This was the first firm, despite the lack of brand name recognition, to show that if advisors could get what they wanted — more freedom, flexibility, control and the ability to monetize the business — they’d be very happy to go and vote with their feet.
Even though Hightower represents a different model today, the model itself is probably one of the most popular models there is due to the notion of supported independence.
Also, in terms of the coronavirus pandemic’s effect, there is no question that the work-from-home initiative absolutely was a large factor in driving advisor movement. We’ve seen more movement of top teams in 2020, into 2021 and going forward, driven by a lot of disenfranchisement.
Again, people want more freedom and control, and don’t like the amount of bureaucracy they’ve been dealing with or don’t trust their leadership, etc. But [working from] home has given them the time and privacy to self-reflect and to do their due diligence in a way that they didn’t before.
It’s also driven home the notion that “I am not nearly as reliant on my branch manager or the infrastructure and support of my branch as I thought I was. Maybe I’m more likely to go independent. I need the big brand name or the big behemoth firm less than I thought I did.” All of those things are driving advisor movement.
What’s a more recent issue or trend affecting recruiting and advisor movement?
Louis: Deals are at a high point, especially for top teams. There’s never been more competition for the industry’s elite talent. The headline numbers that we’ve seen include the 300%-plus deals that have been in place for the last five or six years.
But a big difference today is that firms are now putting more of that deal [money] upfront than ever. Many are reimbursing an advisor for all or a portion of their unvested deferred compensation, which is really important to them. They’re making the goals in the deals a bit easier to hit.
Overall, it’s a really good time to be a seller or to be an advisor, because there’s more competition for their business than ever before. Firms that are serious about recruiting have really had to step up, both in terms of the deals on a percentage basis and with their structure in the value proposition.
Mindy: As advisors look past the wirehouses or the traditional broker-dealer options and look at options like Rockefeller, Sanctuary Wealth Partners or other models of quasi-independence, what’s on the table a lot of the time is equity.
We’ve got an advisor [client] now that is with a wirehouse and is looking at a quasi-independent boutique firm. Fifty percent of the deal is being paid in cash, but the other 50% is equity. Now that’s what’s really changed.
What does all this change mean for the big firms?
Mindy: Are these big firms nimble enough to meet the advisors where they are? They are losing advisors because their leaders are not paying close enough attention to what’s driving movement.
Some of the things advisors want would mean easy and inexpensive fixes. Instead, the leaders allow compliance to run the firm, and often that means a much less entrepreneurial culture than advisors want.
It’s also a question of desire. If Merrill, Morgan Stanley and UBS wanted to launch an independent arm, they’ve had plenty of opportunity to do so. They’ve watched plenty of their top advisors vote with their feet and leave to go for a more independent model over the last decade.
Their thinking is that it would cannibalize their private client groups and their employee-based advisors. The margins are razor thin in the independent space, and they don’t really have a desire to do this.
They’re going to stick to their knitting. They’ll continue to do what they do and do it well. If they lose people along the way, in the scheme of things, say 10 or so of their top advisors in a year, and they’ve got 15,000 advisors — by their math, it’s a rounding error.
What’s your view of firms that give advisors broker-dealer and RIA options, such as Raymond James, Commonwealth Financial and LPL Financial?
Louis: In the last year, these firms have introduced multiple new affiliation models, and that is 100% motivated by these changing dynamics — advisors are looking for different ways to affiliate with their organization than ever before.
In the case of LPL and its bid to capture much more top-end wirehouse teams, they started Strategic Wealth Services, a more supported, premium offering. They also started an independent employee unit called Linsco. They’re doubling down on their services as an RIA custodian.
Commonwealth started a supported version of independence geared to wirehouse advisors, as well. They also rolled out their RIA-only, or IAR-only model.
All of these different models — and there’s plenty of other ones that other firms have created — exist because these firms were watching opportunities pass them by. Maybe they’ve lost advisors from their own firm who were looking to evolve their practices and couldn’t meet the need, or they lost deals because they didn’t have these capabilities or this kind of level of freedom as advisors were looking for.
Mindy: The story behind this evolved industry landscape is that most of the models and most of these newer firms were born in response to a gap in the industry. They were born to fill the needs of something that didn’t exist before.
If you take a firm like Sanctuary Wealth Partners, there was a need for advisors who wanted to go independent to have a shared support model and still get paid some nice transition money. And the fact that it’s run by two Merrill insiders just means that the leaders really connect, speak wirehouse and have done extraordinarily well.
If you look at most models — Rockefeller, First Republic, Snowden Lane, LPL’s new Strategic Wealth Services, Dynasty Financial Partners, Hightower, Focus — they were all born to solve for something. Some smart leader identified a hole and built a model to fill it.
How would you characterize all these options?
Louis: It’s filling holes. At the same time, each new business model that comes out improves or innovates upon what someone else did before. None of these models are necessarily groundbreaking or 100% original or unique.
For example, when Dynasty started out it didn’t invent the RIA model. Advisors could always start an RIA with Schwab, Fidelity or Pershing. It was just cumbersome and a lot of work. Dynasty’s innovation was helping advisors launch businesses but in a very turnkey and supported fashion.
Hightower, Focus Financial Partners and others provide capital to advisors looking to get a deal. And there are newer entrants like Rockefeller that came in by taking something that wasn’t really there and saying: “Let’s build an RIA platform or a multi-family office.
By leveraging an impeccable brand, we’ll give advisors really competitive economics to join. And let’s bet on the fact that advisors are looking for a lot more freedom and flexibility.”
It’s worked in an RIA environment, but some of these advisors aren’t looking to necessarily start their own businesses. These newer firms have all come in by filling a hole and also by improving upon something that was already there.
Mindy: While they’re each filling their own version of a gap, it’s all done mindfully and thoughtfully. Most of the leaders who’ve innovated in this space took the time to do a listening tour, meet with advisors and get an understanding of what’s most important to them, what they’re limited by or lacking where they are and what they’re looking for.
That really is in direct contrast to what it’s historically been like to work for a wirehouse. If you work for a major firm, they give you the platform. For most people, that platform is robust and more than good enough.
They tend to limit you in terms of how you can conduct yourself; there are very narrow guardrails, if you will, in terms of the ability to self-brand and self-publish and what you can say on social media or things like that. They’ve tended to create technology based upon what’s going to be most profitable for the firm and good for the firm.
Thus, there’s a breath of fresh air that advisors often find when they begin to do due diligence and consider leaving a world where it’s not all about them … and going to a world where it’s all about them. These firms tell them: “We’re building this for you. We work with you.”
What’s new for advisors focused on being entrepreneurial?
Mindy: In today’s industry landscape, the great news for those who are über entrepreneurial is that they can go out and build their own firms. For those that are entrepreneurial in thinking, who want more control and ownership over how they serve the clients or how they creatively conduct themselves but don’t want to be a business owner, they can get those needs met as well.
That’s the cool thing. There are many different iterations of entrepreneurial spirit, and an advisor is more likely to find the one they want today.
Even with a $10 million team we moved recently from one wirehouse to another, the advisor found a much more entrepreneurial spirit with the move and could create a niche within the new firm, get some exceptions made and have more agency over how he was going to conduct himself.
What does the future of the wirehouses and other broker-dealers look like?
Louis: Regardless of how much market share the independent channel picks up, for the most part, it’s been at the expense of the wirehouses. There’s always going to be a really important place for the wirehouse firms, because so many advisors thrive under that model.
Even though they put up with some bureaucracy and loss of control, they do their best when they don’t have to worry about anything except their clients, where they can go out and deliver an entire firm to clients as part of the value proposition. What those advisors value is simplicity, comfort and a bundled solution set for clients.
We’ll continue to watch many teams leave that channel, but the wirehouses aren’t going anywhere. If anything, they’re becoming larger, because their advisors are growing faster than ever in those channels.
They’re home to the most productive advisors as far as average production today. They also have a tendency to grow organically, because they have great sales cultures and platforms that appeal to many clients.
Mindy: The name of the game is meeting people where they are. It’s about trusting the advisor, whether they’re an employee with a contract that says that the firm owns the clients or an independent advisor who owns the clients.
Regardless, it’s about the bond between advisor and client. Every firm attempting to recruit would do well to honor that bond. That means they should respect that as long as an advisor is compliant — and has his or her clients’ best interests at heart — firms need to listen to what’s most important to the advisor. Meet the advisor where he or she is. They’d be wise to do so, and they’d win a whole lot more.
What else do you see in the future for non-wirehouse BDs?
Louis: If you look at the non-wirehouse broker-dealers on the employee side, all of them are experimenting with different models of affiliation. That’s pretty much true across the board.
Stifel just announced they hired Alex David from Wells Fargo’s independent unit. RBC has served as a custodian historically [and has been growing its wealth business]. We know about all the channels at Raymond James. Ameriprise has multiple ways to affiliate. This is the way they’re changing and expanding. They’re also improving their technology.
In addition, they’re drastically improving the quality of their advisor population, and hence their cultures are being advanced because of that. New advisors that firms like Raymond James, RBC, Stifel, Ameriprise and Janney are recruiting and productive. There are quality advisors coming on board because their business models have been validated and become popular.