Independent broker/dealers have long been belittled by the Wall Street powerhouses (with their tall, shiny office towers) as members of an unsophisticated channel made up of smaller practices and clients. It's a stereotype that's rather played out — and these days, untrue. There has been a slow but steady shift up-market for reps in the independent b/d business over the past decade. Industry observers say that's because it's never been easier for higher-end advisors to make the switch to independence and bring their wealthy and sophisticated clients with them. These days, quite simply, there is less separating indies from the big boys. The investment platforms have matured, and their offerings are now largely indistinguishable from the offerings of the retail brokerages attached to the big investment banks. (In fact, recently, it's been a blessing not to be attached to those “sophisticated” investment banking units, the ones that brought down the house, embarrassing the retail advisors in the process.)
Yes, the wirehouses are still the leaders — in assets, in sophisticated wealth management operations and in investment options. But the indies have followed on their heels. As one consultant describes it, “The pioneers take the arrows, and the settlers take the land.” In general, independent b/d reps have evolved from variable annuity and mutual fund hawkers into fee-based financial planners with substantial client assets under management.
While the absolute number of independent reps has varied from year to year, the number of those producing more than $100,000 a year has been climbing slowly but steadily.
| Total no. of independent b/d reps: | |||
| 106,952 | 111,211 | 106,913 | 109,653 |
| No. of reps producing over $100,000: | |||
| 29,374 | 30,843 | 32,385 | 34,005 |
| 2004 | 2005 | 2006 | 2007 |
|---|---|---|---|
| Source: Cerulli Associates, Tiburon | |||
Between 2006 and 2007, total client assets jumped 46 percent.
| IBD total client AUMs (bn): | |||||
| $504 | $538 | $698 | $880 | $838 | $1,219 |
| 2001 | 2002 | 2003 | 2004 | 2006 | 2007 |
|---|---|---|---|---|---|
| Source: Tiburon | |||||
Most independent reps consider themselves financial planners.
| Percent of reps with the following self-described titles: | |||
| 1.6% | 32.3% | 61.5% | 4.6% |
| Money Manager | Investment Planner | Financial Planner | Wealth Manager |
|---|---|---|---|
| Source: Cerulli Associates | |||
“The legacy of the independent broker/dealer channel lies with the financial planning model. Most of the tenured reps in this space made the switch to the independent model so they could offer more comprehensive financial plans. The money manager is really starting to go away as advisors see the need to provide more than just investment advice to stay relevant,” says Bing Waldert, associate director, Cerulli Associates.
Most independent reps' clients have less than $5 million in assets.
| Percent of indie b/d clients who fall into the following asset ranges: | ||||
| 0.8% | 6.1% | 31.1% | 44.7% | 17.4% |
| >$10m | $5m-$10m | $1m-$5m | $250,000-$1m | <$250,000 |
|---|---|---|---|---|
| Source: Cerulli Associates | ||||
“Independent b/d reps tend to be more focused on clients with lower net worths. However, there is a slow shift as more sophisticated brokers are entering the space and bringing high-net-worth clients with them. Advisors are breaking away from banks and wirehouses and, sometimes, from insurance firms where clients are looking for more comprehensive advice. The fastest growing practices today have larger clients with more complex needs,” says Waldert.
Independent reps are getting the majority of their revenue from the fee-based model.
| Percent of indie b/d reps who use the following fee and commission mixes: | |||
| 9.8% | 25.8% | 54.5% | 9.8% |
| Commission (90%+) | Fee and Commission Mix (10%-50% from fees) | Fee-Based (50%-90% ) | Fee Only (90%+) |
|---|---|---|---|
| Source: Cerulli Associates | |||
“This is the one place you see a dramatic change in the independent b/d channel. As more advisors join from the wirehouses and banks, where there was a lot of push from the top to move into fees, you see a greater number of IBD reps in the fee-based model. They were already in the fee-based model when they were employees and now as independent b/d reps they are comfortable using it,” says Waldert.
Most independent b/ds have less than 100 reps.
| Percent of b/ds that fall into the following rep count ranges: | ||
| 85% | 13% | 2% |
| Less Than 100 Reps | 100-1,000 Reps | Greater Than 1,000 Reps |
|---|---|---|
| Source: Tiburon | ||
The typical independent practice has between $25 million and $100 million in total assets.
| Percent of independent practices that fall into the following AUM ranges: | |||||
| 32.1% | 40.5% | 19.1% | 6.1% | 2.3% | 0 |
| <$25m | $25m->$100 m | $100m-<$250m | $250m-<$500m | $500m-<$1b | >=$1b |
|---|---|---|---|---|---|
| Source: Cerulli Associates | |||||
“There's an interesting challenge here. There is a steep drop-off when reps reach that $100 million to $250 million level. At that point, they start to look at the pure RIA model. They are already running their own businesses and have reached a certain level of scale. The practice is looking more like a small business and the advisor, at that point, wants to take more ownership in it,” says Waldert.
The average rep gets over half of his comp from asset-based fees.
| Percent of compensation by source for the average indie b/d advisor: | ||||||
| 37.9% | 52.3% | 5.3% | 1.2% | 1.1% | 0.6% | 1.6% |
| Commission | Asset-based | Fees for Plans | Hourly Fees | Retainer Fees | Salaries | Other |
|---|---|---|---|---|---|---|
| Source: Cerulli Associates | ||||||
“Even though [IBD reps] are getting more than 50 percent of their compensation from asset-based fees, they are lagging behind other channels,” says Waldert. That's because wirehouses and banks are more likely to put pressure on their reps to move to the fee-based model — a model that provides recurring revenue to the firm. Independent reps, with their smaller clients, didn't feel much need to take the fee-based route. They weren't being pressured by their b/ds.”
Commissionable mutual funds and annuities are most popular in the independent channel.
| Percent of total independent b/d assets in each product category: | |||||
| 39% | 22% | 16% | 11% | 7% | 5% |
| Commissionable Mutual Funds | Commissionable Variable & Fixed Annuities | No-load Mutual Funds, other fee-based products | Individual Securities | Fixed and Variable Life Insurance | Other |
|---|---|---|---|---|---|
| Source: Tiburon | |||||