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2016 Could Be a Tough Year for IBDs

Independent broker-dealers could look back at 2015 as a pivotal year when a model that once looked like the best of all worlds turned into something else. And with the DOL set to cause more havoc, 2016 could be worse.

IBDs offered advisors freedom from restrictions and proprietary products, while at the same time provided the independence of running their own business. While pure RIAs offered the same options, it might have been too much for advisors who still had commissioned business and wanted a bit more support. With intense scrutiny by FINRA (which has not been shy about levying fines over actions of advisors hard to control by nature of the IBD business model), some IBDs are clamping down. And with margins tightening, some are looking to sell proprietary asset management platforms.

Many advisors are moving closer to the RIA model, setting up their own firm or joining one that is independent from their IBD, especially in the DC market. Some larger firms even have their own BD. With so little revenue flowing to the BD from commissions in DC plans and none through independent RIAs set up by advisors, things seem likely to get worse before they get better.

To date, most IBDs have largely ignored the DC market, and been justified in so doing because so few advisors and revenue are tied to the market. The impending DOL conflict-of-interest rule could change that, as more advisors working on a DC plan will be considered fiduciaries, further increasing liability while at the same time inhibiting IRA rollovers.

Consolidation and restructuring is likely for some of the largest IBDs, which account for 160,000 reps. More plan advisors will either set up their own RIA or join specialty groups that have their own. And as more plan advisors become fiduciaries using a fee-based model, more revenue will move away from commissions — lessening the need for a BD and certainly lowering their revenue.

If vulture capital or activist investors get control, look for belt tightening and less risk taking. Sounds like real fun for their reps and clients.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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