The wealth management industry was already evolving rapidly to match the needs of clients and advisors, yet the COVID-19 crisis is likely to accelerate the pace even faster.
While each segment of the financial services ecosystem will no doubt be impacted, there’s one area in particular likely to evolve more than others: the Independent broker/dealer (IBD) channel.
The IBD segment was already well on its way to radical reorganization over the past several years as demonstrated by the following:
- Many smaller IBDs and those with an insurance lineage folded into larger firms;
- Broker/dealers sought new sources of revenue to replace higher fee-paying products;
- And, the cost to maintain technology and compliance infrastructure soared—especially as b/ds invested heavily in open architecture.
As competition from the RIA space intensified, independent business owners working under these b/d umbrellas have demanded much more from their partners to justify their costs.
Repercussions from the current health and financial crisis remain to be seen. But as industrywide revenues, margins and growth rates contract, here are eight areas where b/ds in particular will feel the impact.
- The Advantages of Scale and Stability: There are certainly IBDs that already have an advantage when it comes to scale—an edge that will prove to be even more obvious in a market downturn. Aside from having requisite capital and enough of a financial cushion to continue investing in technology, advisor support and platforms, a prolonged downturn is likely to lead to further consolidation as subscale IBDs and those only “loosely” in the wealth management arena seek a lifeline. One caveat: Time will tell how the many private equity-backed b/ds with significant debt on their balance sheets will respond to ongoing debt service commitments in times of lower cash flow.
- Flexibility in Communication Becomes More Important: In times of uncertainty, advisors cement their relationships with clients by being a voice of reason, a support system and an authentic reminder that bear markets come and go. The ability to communicate freely and reach clients in a scalable, creative and efficient way is imperative—particularly in times of crisis. While many IBDs tout their “quick” approval times for client communications, as well as the ability to deploy video updates and share unique messages via social media, it’s inevitable that many advisors will feel limited by the restrictions that their firms impose. Those advisors may be drawn to other b/ds or RIAs where they see greater flexibility and control and a more appropriate fit.
- Increased Vigilance Around IBD Fees: With practice profits declining, advisors will look for ways to lower their expenses—and one of the most significant will be the fees paid to b/ds. While many offer similar payouts in the same range, there are some with more expensive ongoing fees. While it’s never advisable to change firms simply for the economics alone, advisors will be more dialed into the amount of value they are deriving from their b/d partners relative to the cost.
- From Frustrated to Exasperated: Advisors who are currently frustrated with their firms’ technology, service and bureaucracy will be even more so going forward. Because during times of crisis, deficiencies rise to the surface, leaving advisors to question their partners and perhaps consider looking for another that is more responsive and efficient.
- More Activity in Recruiting and Transitions: IBDs will seek to recoup losses by allocating additional resources to competitive recruiting and, in many cases, enhance transition packages. Similar to the 2009 post-financial crisis period (which was one of the most robust recruitment years on record), some advisors will have additional motivation to consider the upfront checks offered by IBDs as a viable wealth replacement strategy. Plus, many will seek a fresh start at a b/d or custodian that more closely aligns with their vision and current business mix.
- A Jump in Mergers and New Strategic Partnerships: Independent advisors benefit from higher take-home economics, giving them the ability to weather a downturn better than their employee-based counterparts. But there will be those business owners who will struggle more post-crisis, as well as those who may no longer be excited about operating a stand-alone business. We expect to see a tremendous increase in consolidation as they seek mergers, stronger OSJ partners or an IBD they can outsource non-value-add activities to.
- The Stabilization of Valuations: Businesses are valued as a multiple of GDC or free cash flow and both will take major hits. While business owners can expect lower valuations in the short term, record low interest rates and increased demand from buyers seeking to jump-start their growth through acquisition are likely to stabilize valuations in the long run.
- Increase in Succession-Driven M&A Deals: Leading up to this crisis, M&A across the industry was at an all-time high, mainly driven by aging advisors seeking to monetize their businesses and maintain continuity for clients. Succession plan timelines are likely to accelerate as many advisors close to retirement will not want to relive the stress of the recession likely to come.
In a world that is undergoing historical change, “business as usual” will be a forgotten moniker for a long time to come. So even if happy with the status quo, take the time to be proactive and self-protective. Identify any deficiencies in your b/d relationship and reassess strategic partnerships to ensure that you have everything you need to best serve your clients and your business in what will be a “new normal.”
Louis Diamond is executive vice president and senior consultant of Diamond Consultants based in Morristown, N.J., a nationally recognized search and consulting firm in the financial services industry.