The Trend
The total number of broker-dealers registered with the Financial Industry Regulatory Authority has fallen every year since at least 2011, while the number of registered representatives has fallen each year since 2016, according to FINRA.
The number of BDs fell 2.3% — or 82 firms — to 3,435 in 2020 from 3,517 in 2019, according to FINRA's 2021 industry snapshot. Meanwhile, the number of registered reps dropped 1.1% — or 7,125 individuals — to 617,549 registered reps in 2020 vs. 624,674 in 2019, according to FINRA.
The Drivers
- The growth of self-directed trading.
- As registered reps retire or shift channels, there aren't nearly enough newcomers entering the sector to replace them.
- A shift in what business model is most appealing in favor of RIAs, especially to newcomers.
- The declining number of training programs.
- Increased consolidation of firms.
- Increased compliance requirements for registered reps and BDs.
- Changing demographics.
- Decreased appeal among younger Americans for Wall Street in favor of the technology sector.
- Technology itself, especially the ability for potential clients to screen incoming landline phone calls thanks to caller ID and the shift away from landline phones to mobile phones.
- The cachet of big-name wirehouse firms is not what it used to be, especially among younger Americans.
- Declining profitability.
The Buzz
Andy Tasnady, managing partner of Tasnady Associates:
"There's multiple reasons" for the declining number of registered reps, and "I do think the trend will continue."
"The growth of the alternative investment channel, I think, is one of the bigger" reasons, he said, pointing to the "Schwabs of the world and the Robinhoods of the world."
Those alternative channels "require fewer advisors and, in many cases, don't even require advisors [because] it's automated, self-directed." That is one reason why the "number of advisors that are needed is just going to continue to [decline]."
"Replacements are fewer and fewer" after registered reps leave the sector as well. It is more appealing for younger people entering the sector to "have more of the salary/service center-based position than it is the 100% high-risk, higher-pressure-type roles" that registered reps have. A straight salary-type position is more attractive to many young people than sales- or commission-based roles, he said.
In addition, "we used to have big-time training programs for kids coming out of college, and that's largely gone."
There has also been "a lot of consolidation" in the sector, he said, noting: "We used to have a lot of regional firms, and there's very few of them left."
Then there is the "increased cost of compliance coupled with the reduced levels of commissions."
New rivals offering "zero-cost trading have really pressured the margins in the whole business," he said.
BDs, meanwhile, face the same issues. "The trading volume and the revenue of trading volume have really fallen off the map in the last 10 years.
"It's harder to make money in that space. But the larger firms can spread out their fixed costs and survive and still do well."
However, "I don't think that industry's going away, because there still is a market" for it.
Danny Sarch, president of Leitner Sarch Consultants:
"We've got the demographic challenge that there are only half as many people born in the baby-bust generation as the baby-boom generation."
And whom will investors trust with their money? "The odds are better" that it will be somebody "with a little bit of gray" in their hair than a newcomer to the sector. But a significant percentage of advisors are retiring every year, he said.
