The outlook for the independent broker-dealer model

This is part one of a four-part series in which guest author Brad Wales makes four distinct predictions for the financial services industry and challenging readers to consider not just if, but when they will prove accurate.

Depending on your definition of “prediction,” one’s track record of success with making such proclamations can be easily within reach of the near-mythical levels of Nostradamus himself.

As many a market pundit surely understands, with self-preservation top of mind, you simply omit one key variable in your predictions: timing.

To make my point, let it be known that I, Brad Wales, hereby declare the Dow will hit 50,000!! Not yet impressed? OK, make that the Dow hitting 100,000!

I am confident I will be proven correct. I have no idea whether my stroke of certain genius will be proven in five years or perhaps 20, or maybe Dow 100,000 will take 50 years. But it’s a relatively safe bet it will one day reach that point, and my career as a market commentator (with surely a book deal to follow) will be chiseled into financial lore for decades to follow.

Next time you hear someone making predictions, pay attention to whether they provide a time frame for their prognostications. Or at a minimum, at least hopefully, they acknowledge such an omission.

In this series, I’ll share four specific “predictions” of my own, albeit with no specific time forecast noted. Instead, I challenge you to consider: 1) Do you believe these predictions will prove accurate? 2) If so, what timeline do you foresee for them?


Or perhaps better phrased, the demise of the independent broker-dealer model as currently known.

As a starting point, should we still even be referring to such firms primarily as “broker-dealers”? Most such industry firms were indeed historically broker-dealers that over time added “corporate” RIAs to their offerings. Essentially these are broker-dealers that happen to also have an RIA. Indeed, most advisers affiliated with an independent broker-dealer are also affiliated with the adjoining corporate RIA.

Many of these same firms, though, have now grown to a point where more than 50% of their client assets are held in advisory accounts, and only a minority of assets remain in commission accounts. Put differently, are these now arguably better defined as corporate RIAs that happen to also have a broker-dealer? As the shift toward fee-based accounts continues in haste, this will only further be solidified.

The above observation, though, does not necessarily explain the “demise” of the model altogether. So what prompts me to make such a prediction?

I’m not expressing a desire to see this occur. If I had to put my chips on the table though, I foresee a downward spiral to come.

In my role as founder of Transition To RIA, I speak to a lot of advisers. This includes advisers at wirehouses and advisers at independent broker-dealers. The refrain I frequently hear from each group is consistent.

Let’s start with independent broker-dealer advisers. These advisers are increasingly moving their assets to fee-based relationships. They have likewise already demonstrated they are able and willing to take on the responsibilities of business ownership. As their assets become increasingly fee-based or as new accommodative solutions continue to evolve for commission assets that cannot be converted, these advisers ask themselves, why not simply go full RIA? Why continue to channel 100% of their revenues through a payout grid when they can instead move to the RIA model and keep that upside for themselves?

Likewise, for wirehouse advisers tilting fee-based who are considering exploring “independence” themselves, why go halfway and stop at the independent broker-dealer tollbooth? Why not simply go full RIA from the jump?

Keep in mind I specifically noted advisers who are “considering exploring independence.” As a sidebar prediction, I will go on record as saying the W-2 model (in some form or another) will always remain viable.

Some advisers have no interest, desire or wherewithal to “go independent” for one reason or another. They enjoy being a practitioner of the craft and simply don’t want the responsibility (or headaches) of business ownership, regardless of the economic upside and freedom such a move would bring. I respect that and likewise believe there will always be W-2 platforms to accommodate them.

But for the increasingly fee-based advisers already at independent broker-dealers, I predict the transition to the RIA model will pick up speed in the years to come. As the exodus continues or the ability to attract new advisers wanes, such firms could find themselves in a self-reinforcing downward spiral.

It is arguably for these reasons that many such firms are exploring or implementing “IAR only” models, which might eventually exceed the assets of their “broker-dealer” channels. Even then though, such IAR channels face stiff competition from an increasing array of attractive competing options in the marketplace.

Takeaway: Will this prediction come true? If so, what timeline do you foresee for it?

Brad Wales is the founder of Transition To RIA, a consulting firm focused on helping established financial advisers understand everything there is to know about why and how to transition their practice to the RIA model.

The post The outlook for the independent broker-dealer model appeared first on InvestmentNews.

Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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