There’s no doubt that the down market is hurting the entire financial services sector. But it seems that the independent BD industry is under particular duress — which, according to industry guru Michael Kitces, will only get worse if the DOL’s conflict-of-interest rule goes through in its current form.
Kitces takes us through the evolution of BDs, from selling their firms’ IPOs to selling mutual funds to selling advice. According to Kitces, advisors of the future will rely on their BDs "…not as financial intermediaries to facilitate the distribution and sale of third-party or proprietary securities products, but financial advisor support platforms that help to facilitate the success of advisors who are actually paid for their financial advice!"
Kitces acknowledges that, to at least some extent, the transition toward fiduciary advice may simply mean a push away from ‘traditional’ upfront commissions, and toward levelized commissions akin to ongoing AUM fees. “In the long run, this may not necessarily be problematic for broker-dealers. In fact, traditionally businesses with recurring revenue have better valuations, and in recent years the broker-dealers with more fee-based revenue have already commanded higher valuations than their purely-commission-based brethren,” he asserts.
Compliance is and will be important, but if that’s all a BD offers, then how attractive will they be? In the DC world, so-called “middle ware” groups already provide practice management platforms, brand and intellectual capital to plan advisors.
The bottom line according to Kitces:
… the evolution of financial advisors from selling securities products to actually getting paid for advice raises the fundamental question of why it’s necessary at all for an advisor to affiliate with a broker-dealer intermediary to facilitate the distribution of those products. This existential threat to broker-dealers will only be accelerated by the rollout of the Department of Labor’s fiduciary rule, as the potential shift away from upfront commissions — and possibly away from commissions altogether — will open the door to an explosion of non-product-distribution-based advisor support platforms. And while some broker-dealers may be able to make the “shift” from product intermediary to a bona fide advisor support platform, it seems increasingly likely that many simply aren’t positioned to survive (much less thrive) in an advice-centric future.
What do you think?
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
