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Editor's Letter: Do IBDs Need a New Name?

The lines between traditional broker/dealer and RIA are getting blurrier.

Close observers will notice we’ve taken a different tack with our Independent Broker/Dealer Report Card this year.

The annual exercise—a survey of advisors who affiliate with independent broker/dealers to gauge their level of satisfaction with the firms—was, over the years, becoming less useful. After all, most advisors who affiliate with an independent broker/dealer give their firms high marks; otherwise, those advisors likely would not be there. It’s usually in the wake of an acquisition, management change or scandal that advisors’ sentiment around their firms noticeably changes.

So, for the first time, we are not breaking out the results by individual firms and ranking them. Instead, we are using the over 1,000 respondents to benchmark for the satisfaction of the IBD business channel itself. (That said, individual firms that are interested in taking a deeper dive and comparing their results to our published benchmark should reach out to me or the publisher.)

More broadly, the independent broker/dealer entity itself is changing. What started as an innovative business model born out of the insurance world to let brokers sell securities alongside policies—an early stab at “holistic” financial planning—fell victim to the swing away from transaction-based business and toward packaged portfolios and fee-based planning.

There are lots of data points on the decline of the traditional IBD channel, but what’s less quantifiable is how some of those firms are responding by shedding the old broker/dealer skin and emerging as new businesses with multiple affiliation options.

Consider LPL; do we still consider LPL an independent broker/dealer, or do we need a new name? It is a custodian and building out a platform for pure-play RIAs. Commonwealth too now supports pure-play RIAs. Raymond James recently combined some business lines into an RIA and custody services division. The lines between traditional broker/dealer and RIA are getting blurrier.

What’s driving the change is the individual advisor. In our research it’s clear that a lack of business support is what most often drives advisors to jump from one IBD firm to another—or leave the channel altogether. The vast majority already do more fee-based business than commission-based, and over 80% consider themselves fiduciaries, so it’s not the institution, per se, that is driving them away. Rather, it’s a question of whether the institution can support the business that these advisors want to be in.

Many IBDs won’t make the transition. But some are putting the pieces in place and evolving faster than the regulatory definitions they operate under. The transformation of the traditional broker/dealer business will be a dominant story in this industry over the next several years.

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David Armstrong


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