With the emergence of the financial planning profession over 50 years ago came its companion: the independent broker-dealer. At the time, it was a quite an innovative approach for a financial professional to combine insurance and securities to help shape a client's financial future.
In the late 1960s, you were either an insurance agent or a stockbroker, not both. To accommodate this financial planning movement, however, early innovators in the form of a handful of Midwestern insurance companies created product platforms for independent advisor contractors to operate their businesses in this manner.
Then along came the lucrative mutual fund and similarly packaged products, and it was off to the races for independent advisors and their broker-dealers.
In the go-go years of the 1980s and 1990s, non-Wall Street broker-dealers and insurance companies' products finally had a distribution channel of their own that they could compensate and control to drive outsize profits. As a result, life was golden in IBD land, attracting all sorts of outside private equity investments and M&A to keep the party going.
The hidden challenge for IBDs with this model, however, lay in its sales-commission-driven structure, which not only tied advisors by regulation to their broker-dealers despite being "independent," but also opened the industry to nefarious activities led by bad actors and fraudsters. These questionable characters introduced highly profitable packaged products, some of which were Ponzi schemes in REIT disguise, staining the reputation of the industry and putting some firms under.
Despite these inherent problems and bad PR, the IBD model was still so successful that it led to the creation of an entire financial services sector with more than 100,000 advisors, reaching its pinnacle in the early 2000s.
Consolidation Craze
Since then, the IBD space has been in steady decline as technology, low-cost product innovation, new operating models and a regulatory crackdown in the form of FINRA and state security agency fines combined to decimate this once-dazzling financial services segment. The industry shrank 25% in the last decade alone, according to Cerulli.
To compete effectively in the 2020s and beyond, this battered sector must deal with low-cost, huge-reach competitors, such as Vanguard, plus the online discounters offering direct, low-cost retail wealth management services. At the same time, they had to leverage their back-office operations in the form of RIA custodial platforms to support professional, fee-based, human advice competitors, which sapped what little profitability was left.
The result? Industry consolidation over the past decade has become the answer.
This is exactly what has been playing out on the big screen with more gargantuan deals, many of which have been driven by private equity investors' inevitable need to exit, along with the realization by many insurance company owners that mutual funds don't have the juice they had in the past.
Just last month, we saw Voya sell its IBD operations to Cetera, while Advisor Group has been on an acquisition tear of its own, rolling in several well-known IBDs in the past couple of years. At the same time, LPL is completing its tie-up with Waddell & Reed, and the list goes on. In a consolidating industry, scale becomes ever more important, and that is where the action has been.
Future Landscape
What will the IBD space look like going forward? Perhaps there are some clues to that future in how the most successful and fastest-growing segment of the wealth space — the independent RIA — has evolved.
RIAs are truly independent, meaning that their fiduciary models and compensation are not tied to any product or platform. They exist as separate entities, charge a fee for services rendered and are paid by the client, not any product. This has the double benefit of allowing RIAs to "shop the street" for the lowest-cost, highest-quality products and services from any provider they recommend to their clients.
By unbundling advice from a product transaction, all sorts of innovations in product structures, cost eliminations and business operations are happening, which are completely rewriting the wealth management playbook.
