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February 7, 2011:  Smash and Grab for 400 Reps.(QA3)

February 9, 2011:  So Who is the Big Winner of the QA3 Sweepstakes?
RCAP to focus on cost-cutting at CeteraAfter cutting a deal to sell its wholesaling business, the firm will concentrate on consolidating operations at its broker-dealer group

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DOL Fiduciary Rule Explained as of Feb 3, 2017

By Investopedia, Updated Feb 3, 2017-3:38 PM EST

The Department of Labor (DOL) Fiduciary Rule is a new ruling, scheduled to be phased in April 10, 2017 – Jan. 1, 2018, that expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). If this sweeping legislation (1,023 pages in length) is not delayed or stopped outright, it will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. While the new rules are likely to have at least some impact on all financial advisors, it is expected that those who work on commission, such as brokers and insurance agents, will be impacted the most.

However, on February 3, 2017, President Trump issued a memorandum that will most likely delay the rule's implementation by 180 days. This action includes instructions for the DOL to carry out an “economic and legal analysis” on the rule's potential impact.

Breaking Down the Fiduciary RuleThe Department of Labor’s definition of a fiduciary demands that advisors act in the best interests of their clients, and to put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. The definition has been expanded to include any professional making a recommendation or solicitation — and not simply giving ongoing advice. Previously, only advisors who were charging a fee for service (either hourly or as a percentage of account holdings) on retirement plans were considered fiduciaries.Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts. "Suitability" meant that as long as an investment recommendation met a client's defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their client’s best interests first rather than simply finding “suitable” investments. The new rule could therefore eliminate many commission structures that govern the industry.Advisors who wish to continue working on commission will need to provide clients with a disclosure agreement, called a Best Interest Contract Exemption (BICE), in circumstances where a conflict of interest could exist (such as, the advisor receiving a higher commission or special bonus for selling a certain product). This is to guarantee that the advisor is working unconditionally in the best interest of the client. All compensation that is paid to the fiduciary must be clearly spelled out as well.Covered retirement plans include:What Isn't Covered
  • If a customer calls a financial advisor and requests a specific product or investment, that does not constitute financial advice.
  • Financial advisors can provide education to clients, such as general investment advice based on a person's age or income, and it also does not constitute financial advice.
  • Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings.
History of the Fiduciary Rule

Originally, the DOL regulated the quality of financial advice surrounding retirement under ERISA. Enacted in 1974, ERISA had never been revised to reflect changes in retirement savings trends, particularly the shift from defined benefit plans to defined contribution plans, and the huge growth in IRAs.

A set of reforms was proposed back in 2010, but it was quickly withdrawn in 2011 after fierce protest from the financial industry regarding regulatory costs, liability costs and client concerns.

Five years later, the financial industry was put on notice in 2015 that the landscape was going to change. A major overhaul was proposed by President Obama on February 23, 2015. "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests," the president said. "It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."

The DOL proposed its new regulations on April 14, 2016. This time around, the Office of Management and Budget (OMB) approved the rule in record time, while President Obama endorsed and fast-tracked its implementation; the final rulings were issued on April 6, 2016. Before finalizing the ruling, the Labor Department held four days of public hearings. While the final version was being hammered out, the legislation was known as the fiduciary standard. In January 2017 during the first session of Congress of the year, a bill was introduced by Representative Joe Wilson (R, S.C.) to delay the actual start of the fiduciary rule for two years.

Reaction to the Fiduciary Rule

There’s little doubt that the 40-year-old ERISA rules were overdue for a change, and many industry groups have already jumped onboard with the new plan, including the CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA). Supporters applauded the new rule, saying it should increase and streamline transparency for investors, make conversations easier for advisors entertaining changes, and most of all, prevent abuses on the part of financial advisors, such as excessive commissions and investment churning for reasons of compensation. A 2015 report by the White House Council of Economic Advisers found that biased advice drained $17 billion a year from retirement accounts.

However, the legislation has met with staunch opposition from other professionals, including brokers and planners. Financial advisors would rather be held to a “suitability” standard than a “fiduciary” standard because the latter will cost them money – in lost commissions and the added expense of compliance. The stricter fiduciary standards could cost the financial services industry an estimated $2.4 billion per year by eliminating conflicts of interest like front-end load commissions and mutual fund 12b-1 fees paid to wealth management and advisory firms.

While the best interest contract exemptions would permit broker-dealers and insurance companies to provide plan participants with fiduciary advice while still receiving commissions, many professionals fear the conflict-of-interest yardstick would essentially eliminate commissions. This in turn would force financial advisors to create or shift fees onto individuals, and could price many middle- and lower-market investors out of the market, they argue.

Three lawsuits have been filed against the rule. The one that has drawn the most attention was filed in June 2016 by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Roundtable in the U.S. District Court for the Northern District of Texas. The basis of the suit is that the Obama administration did not have authorization to take the action it did in endorsing and fast-tracking the legislation. Some lawmakers also believe the DOL itself is reaching beyond its jurisdiction by targeting IRAs. Precedent dictates Congress alone has approval power regarding a consumer’s right to sue.

Some critics suggest the new Fiduciary Rule makes no difference anyway. Those observers say consumers will still be subject to being cheated by “bad actors.” For example, complying with the new rule will require more paperwork. Paperwork, critics say, is a great place to hide a scam and then later say the customer signed and knew what he or she was signing. More recently, members of President Trump's advisory team have both criticized the rule and Trump signed an executive order to delay it's implementation. The DOL continued to defend the rule in multiple lawsuits going into 2017.

Who Does the Fiduciary Rule Affect?

The new DOL rules are expected to increase compliance costs, especially in the broker-dealer world. Fee-only advisors and Registered Investment Advisors (RIA) are expected to see increases in their compliance costs as well.

The Fiduciary Rule could be tough on smaller, independent broker dealers and RIA firms. They may not have the financial resources to invest in the technology and the compliance expertise to meet all of the requirements. Thus, it won't be surprising to see some of these smaller firms disband or be acquired. The brokerage operations of MetLife Inc. and American International Group have already been sold off in anticipation of these rules and the related costs.

Advisors and registered reps who dabble in terms of advising 401(k) plans may be forced out of that business by their broker-dealers due to the new compliance aspects. This could reduce the number of advisors who serve smaller plans. That's what happened in the U.K. after the country passed similar rules in 2011; since then, the number of financial advisors there has dropped by about 22.5%. Ameriprise CEO Jim Cracchiolo said, “The regulatory environment will likely lead to consolidation within the industry, which we already see. Independent advisers or independent broker-dealers may lack the resources or the scale to navigate the changes required, and seek a strong partner.”

Annuity vendors also will have disclose their commissions to clients, which could significantly reduce sales of these products in many cases. These vehicles have been the source of major controversy among industry experts and regulators for decades, as they usually pay very high commissions to the agents selling them, and come with an array of charges and fees that can significantly reduce the returns that clients earn with them.

What Sort of Investments Will the Rule Impact?

The main impact is anticipated to be connected with IRAs, since these vehicles are often handled at brokerages. In particular, rollovers from 401(k) plans to IRAs will certainly come under scrutiny. There have been many instances reported in the financial press (and likely tens of thousands more in reality) about advisors suggesting rollovers to IRAs, even though it may not have been in the client’s best interest – either in terms of moving the client’s money out of a low-cost company retirement plan that offered solid investment choices or in terms of the types of high-cost investments recommended in the new IRA.

The DOL has also released answers to common questions they've received about the new rules in the form of FAQs, which address topics from investments to advisor compensation.

More Rules from the SEC?

As if there wasn’t enough confusion among advisors and clients about the new plan, the Securities and Exchange Commission (SEC) has projected proposing its own set of fiduciary rules in April 2017. It is likely any new SEC rules would extend beyond retirement accounts and govern the way in which RIAs and brokers treat clients in all dealings, mandating that the client’s interests must come first in all cases. SEC Chairwoman Mary Jo White has indicated that she supports non-governmental, third-party examinations of investment advisors. The Financial Industry Regulatory Authority (FINRA) would be an example of such a third party.

White has expressed SEC enforcement priorities as including:

  • Increased examinations of investment advisors who are regulated by the SEC.
  • Enhancing their oversight of FINRA as it takes on a bigger role in overseeing broker-dealers.
  • Cybersecurity.
  • Economic risk and analysis of various investment vehicles.
  • Data analytics to better focus its resources for the examination of investment advisors.

A major concern of many advisors and brokers will likely be whether or not a new set of SEC rules will be consistent with the new DOL fiduciary rules. In the event of conflicting rules, financial advisors may find it difficult to follow the proper course of action.

If advisors and their firms are now faced with a second set of rules that is decidedly different than the DOL rules, the costs of compliance and the manpower needed also could drive some smaller broker-dealers out of the business.

How Technology Can Help

The rules will likely spur development and upgrades of many technology platforms and applications that will aid independent broker-dealers in meeting their compliance challenges. There’s little doubt that the new fiduciary rules will take a bite out of advisors’ profit margins, but software solutions might help mitigate the impact.

Digital technology has progressed to the point where computers have become able to perform routine investment management tasks such as portfolio rebalancing, dollar-cost averaging and tax loss harvesting. These automated programs, or robo-advisors, are able to accomplish increasingly sophisticated tasks for clients and at some point will most likely be capable of maintaining complex portfolio management strategies that currently require human intervention.

The concept of fiduciary as it is written in the DOL bill is now colliding head on with the increasing lack of human intervention in the robo-advisor arena. Regardless of how this issue plays out, though, it seems clear that robo-advisors will ultimately profit from the DOL rule. It may soon be possible to employ robo-advisors to create trading algorithms that are always absolutely in compliance with the DOL rules, regardless of market conditions or client circumstances, and without the possibility of human error. Most of these programs already use low-cost index funds for their trading, which will sit well with regulators.

Glut of IBDs for sale creating a buyer's market, putting pressure on prices Sellers may not get prices they expect

By Bruce Kelly   |  November 25, 2015 - 12:20 pm EST

A glut of firms for sale is creating a buyer's market for independent broker-dealers that could put pressure on the prices sellers are able to attract.

Firms for sale include Cetera Financial Group, AIG Adviser Group and Next Financial Group, which collectively represent 15 individual broker-dealers and more than 15,000 registered representatives and advisers.

“There is a higher number of potential opportunities than we have ever seen before,” said Richard Lampen, president and chief executive of Ladenburg Thalmann Financial Services, which has completed five broker-dealer acquisitions since 2007. “The $64,000 question is, how many deals are going to get done?”

“With so many potential sellers in the market, and rumors of more sellers, I'm curious to see how the market-clearing process will work,” Mr. Lampen said. “There are some willing buyers, but is there a price that's going to work?”

Mr. Lampen said sellers are going to have a reality check when it comes to offers their properties are likely to attract. He said the industry has put behind it the outsized valuations of independent broker-dealers used in acquisitions by RCS Capital Corp., a brokerage holding company that one-time real estate mogul Nicholas Schorsch put together in a flurry of acquisitions between 2013 and 2014.

“Some sellers still think it's 2014, and Nick Schorsch price expectations are out there,” Mr. Lampen said. “But it's hard to imagine any one overpaying at this stage in the process.”


The largest of the firms reportedly in play is Cetera Financial Group, the network that Mr. Schorsch put together. It is made up of 10 broker-dealers with about 9,500 reps and advisers. Larry Roth, the CEO of Cetera and its parent company, RCS Capital, told advisers on a conference call recently that a half dozen companies had shown interest in the firm and that a new owner or significant private-equity investor would be in place by year-end.

AIG Advisor Group is made up of four firms with 4,925 producing registered reps and advisers.

The brokerage network is part of a “strategic review” its parent company, American International Group Inc., is undertaking, according to Kevin Dinino, a company spokesman. He said the company has received “several inquiries regarding the Advisor Group.”

In a memo to its advisers, Peter Harbeck, chairman of the Advisor Group, and Erica McGinnis, its CEO, wrote: “We are writing to let you know that we are evaluating these inquiries. All interested parties have a favorable view of our growth prospects, are committed to the independent broker-dealer industry and are not among our competitors.”

Activist investor Carl Icahn has been pressuring AIG to unlock shareholder value. According to Bloomberg News, Mr. Icahn told AIG CEO Peter Hancock in a letter that AIG should split into three companies to escape the restrictions imposed on the largest financial firms. One company would focus on life insurance, the second on property-casualty coverage and the third on mortgage guaranties.

Rounding out the firms for sale is Next Financial Group Inc., with close to 740 reps and advisers.


While Mr. Lampen says the days of over-the-rainbow asking prices for independent broker-dealers are over, at least one transaction this year startled the industry with its price tag.

In the largest independent broker-dealer acquisition of the year, H.D. Vest Financial Services Inc. said in October it was being acquired by Blucora Inc., a company that focuses on Internet businesses, for $580 million. H.D. Vest has close to 4,500 registered reps and financial advisers who are primarily tax professionals and accountants. Those advisers manage more than $36 billion in client assets.

H.D. Vest's price tag represented a significant premium. The firm produced $304.8 million in total revenue in 2014, according to the most recent survey of independent broker-dealers by InvestmentNews. That means Blucora is paying almost twice H.D. Vest's top line.

IBDs have traditionally been valued at 30% to 60% of a firm's annual revenue.

Mr. Lampen said the big price was due, in part, to the synergies that Blucora could find by combining its Internet tax business with H.D. Vest. “Blucora paid a full price but had the financial wherewithal to do so,” he said.

While potential buyers and sellers wrangle over asking prices for independent broker-dealers, advisers sit and worry, said Jodie Papike, executive vice-president of Cross-Search, a recruiting firm for independent reps and employees at such firms.

“For advisers, it's an unsettling time,” said Ms. Papike. “Even at stable firms, the advisers are looking over their shoulders and wondering if a target is on their backs. And the advisers at the firms up for sale are wondering what to do.”

“Three years ago, advisers would barely mention the parent company of a broker-dealer they wanted to move to,” Ms. Papike said. “Now, it's one of the first things in a conversation, and they want to know about the long-term stability of the firm. They're asking, who's the owner and will that cause me pain in the future?”

Aug 7, 2015 @ 2:35 pm

By Bruce Kelly  

Now that RCS Capital Corp. has dumped its wholesaling business, the company can better focus on the 11 broker-dealers and 9,500 financial advisers that make up its Cetera Financial Group, according to the company's top executives. In other words, the cost-cutting and consolidation can begin in earnest.

RCAP announced Thursday that private equity giant Apollo Global Management agreed to buy RCAP's wholesaling business for $25 million in cash. That business includes 140 wholesalers and national accounts salespeople and more than 1,000 selling agreements with 300 independent broker-dealers. The business focused on selling nontraded real estate investment trusts.

As part of the deal, Apollo also agreed to buy $25 million in RCAP preferred shares and enter into a strategic relationship to have Cetera sell Apollo investment products. Two senior Apollo executives will join RCAP's board.

RCAP is searching for replacements for its chief executive, Michael Weil, and chief financial officer, Brian Jones, according to a company statement.

Second in headcount among independent broker-dealers to LPL Financial, Cetera has $239 billion of assets under administration and $47 billion in assets under management.


On a conference call with RCAP investors and analysts after the deal was announced, RCAP's top executives made clear that a new, streamlined RCAP would benefit advisers.

“By separating wholesale distribution from our retail advisory platform, RCS Capital will be a more simplified and refocused company dedicated to providing outstanding service to our 9,500 financial advisors and their more than 2 million retail clients throughout the country,” said Mr. Weil.

Mr. Weil and Larry Roth, CEO of the Cetera unit, said further cost-cutting at the firms that comprise Cetera Financial Group will occur but they did not give specific details.

“We have significant additional opportunities for expense reduction,” said Mr. Roth. “There are traditional things that you would expect.”

Mr. Roth cited the recent consolidation of RCAP's legal, finance and due diligence groups and the potential $7 million in savings from closing J.P. Turner & Co., one of the firm's retail broker-dealers. Some J.P. Turner advisers were given jobs in Summit, another Cetera broker-dealer.

“We've acquired 11 broker-dealers in 18 months,” said Mr. Weil. “We know and we're prepared to identify the opportunities around redundancies, call centers, etc. It's a reality; we're at that point in the evolution” of the company, he said.


Meanwhile, Nicholas Schorsch, the former executive chairman of RCAP and its biggest shareholder, was ebullient. On a conference call with brokers Friday morning, he said the transaction with Apollo was “a one plus one equals infinity” deal, according to Rita Robbins, president of Affiliated Advisors Inc. “Nick meant that 'everything is possible'” for RCAP now that Apollo is taking a role in the company, including the two board seats, she said.

Separately, Mr. Schorsch and his partners agreed to sell a 60% stake in AR Capital, a private company that develops nontraded REITs, to Apollo for $378 million in cash and Apollo stock. The new company, AR Global Investments, will have six Apollo executives and four from the old company, including Mr. Schorsch.

Mr. Schorsch and his partners could increase their payday another $500 million for “performance-related considerations,” according to Apollo. Mr. Schorsch and his partners would earn that half billion dollars for raising $40 billion of fresh capital for Apollo within five years.

From an earnings perspective, RCAP has been posting losses of late. The company reported a loss in the second quarter of $66.1 million compared with income of $48.5 million for the second quarter last year.

Wholesaling investment products, particularly high commission nontraded real estate investment trusts, was the backbone of RCAP. But sales of nontraded REITs at RCAP have fallen since it was revealed last October that accounting errors at another company Mr. Schorsch controlled, American Realty Capital Properties Inc., had been intentionally not corrected

RCS Capital to sell Wholdaling business to Apollo to focus on Cetera Financial Group. Private-equity giant agrees to pay $25 million for the wholesaling business of broker-dealer holding company

Aug 6, 2015 @ 2:41 pm

By Bruce Kelly  

RCS Capital Corp., known by its ticker symbol RCAP, is exiting the business of widely distributing financial products by wholesaling to focus on its retail brokerage, Cetera Financial Group.

Private equity giant Apollo Global Management agreed to buy RCAP's wholesaling business for $25 million in cash, RCAP said in a statement Thursday. RCAP's largest shareholder is Nicholas Schorsch, the company's former executive chairman, who began his buying binge of broker-dealers in 2013. RCAP will use the cash to pay down debt.

It appears RCAP is taking a bath on its wholesaling business. In May 2014, RCAP said it was buying Validus Strategic Capital Partners, which owned the wholesaling broker-dealer SC Distributors and an advisory company, Strategic Capital Advisory Services, for $80 million. That deal marked the final piece in putting together the business that Apollo has agreed to acquire.

Meanwhile, Mr. Schorsch and his partners are receiving a significant payday in a separate transaction set to give them $378 million in cash and Apollo stock while selling 60% ownership in a new company, AR Global Investments, that will own substantially all of the ongoing asset management business of AR Capital, or ARC. Mr. Schorsch is the largest shareholder of AR Capital, a private real estate investment company he launched in 2007. AR Global will have six Apollo executives on its board and four from AR Capital, including Mr. Schorsch.

AR Global will add $19 billion in assets under management to Apollo, including $16 billion in real estate and $3 billion in credit.

Investors were quick to react Thursday, sending the stock down 30% by the end of the trading day. The stock closed down 1.72 to 4.21 after climbing about 15% after the company said it was postponing its earnings call and rumors of an acquisition began to circulate through the market.


In addition to the acquisition, Apollo will purchase $25 million of preferred RCAP stock and Luxor Capital Partners, a New York-based hedge fund, will buy $12.5 million of preferred shares. Two senior Apollo executives will join RCAP's board. The company is also searching for replacements for its CEO, Michael Weil, and chief financial officer, Brian Jones, according to a company statement.

The separation of retail brokerage, Cetera Financial Group, and wholesaling broker-dealers, “streamlines” RCAP, said Larry Roth, Cetera CEO, on a conference call Thursday afternoon. “The retail business is alive and well and healthy,” despite headwinds from commission business, he said.

As part of the deal, Cetera Financial Group will enter into a “strategic relationship” with Apollo, which has $160 billion in assets, to offer Apollo investment products through Cetera's network of 10,000 brokers and financial advisers.


RCAP has been posting losses of late. The company reported a loss in the second quarter of $66.1 million compared to income of $48.5 million for the second quarter last year.

Wholesaling investment products, particularly high commission nontraded real estate investment trusts, was the backbone of Mr. Schorsch's brokerage empire. Sales of nontraded REITs at RCAP have fallen since it was revealed last October that accounting errors at another company Mr. Schorsch controlled, American Realty Capital Properties Inc., had been intentionally not corrected.

Independent broker-dealer M&A market is heating up
Competition swells as more buyers are chasing fewer sellers across the IBD space

By Bruce Kelly

Jan 19, 2014 @ 12:01 am (Updated 10:00 am) EST

 After a blistering year for mergers and acquisitions among independent broker-dealers in 2013, this year has already seen robust deal making.

Last week, RCS Capital Corp., whose chairman is industry upstart Nicholas Schorsch, said it was buying Cetera Financial Group Inc. for $1.15 billion andJ.P. Turner & Co. for $27 million.

The two deals will add 6,925 registered reps and advisers to Mr. Schorsch's network of B-Ds when completed later this year, for a total head count of about 9,300.


More Info: The 50 largest broker-dealers ranked by head count

And earlier this month, SWS Group Inc., a clearing and retail securities firm with an independent-contractor broker-dealer, said it had received a takeover bid from one of its biggest investors, Hilltop Holdings Inc.

The hot start to buying and selling this year comes after five large independent-broker-dealer acquisitions were an-nounced in 2013. The firms totaled 1,960 reps and investment advisers, and had a combined $539 million in gross revenue (based on 2012 numbers ) the last year fresh revenue and rep head count numbers were available).

Two smaller but noteworthy broker-dealer acquisitions were announced in June: Symetra Investment Services Inc. with 280 reps by John Hancock Financial Services Inc., and tax preparer Gilman Ciocia Inc. with 160 independent financial reps by National Holdings Corp.

Compare this with 2012, when three significant acquisitions of independent broker-dealers oc-curred. At the time those deals were announced, the three firms had $420.4 million in gross revenue and 3,530 reps and investment advisers.

"Companies controlled by Mr. Schorsch  known as a nontraded REIT czar along with Cetera Financial Group Inc. and Ladenburg Thalman Financial Services Inc., have been the three major acquirers in the marketplace with a tightening supply of firms, "said Steven Insel, an industry veteran M&A attorney and partner at Elkins Kalt Weintraub Reuben Gartside.

There are a lot of buyers chasing fewer sellers,"Mr. Insel said.   The question for sellers is if they are willing to sell because they have a distressed situation, like bad reps," that cost the firm because of arbitration awards that favor investors, he said.

Often deals are done when the seller has problems or there is a succession issue, Mr. Insel said. Insurance companies, which have tended to refocus on their core businesses since the credit crisis, also continue to look for buyers for their broker-dealers, he added.

It's a comparative dearth of targets," Mr. Insel said. All of a sudden, buying [broker-dealers with $20 million in revenue] is attractive because there are so few candidates."


The biggest force driving the M&A boom is Mr. Schorsch, a newcomer to the independent-broker-dealer marketplace. He is chief executive of American Realty Capital as well as chairman of RCS Capital.

Through various businesses he controls, Mr. Schorsch last year engineered three broker-dealer acquisitions, pushing his way into a business that has long been dominated by major players LPL Financial, Ameriprise Financial Services Inc., Raymond James Financial Services Inc. and Commonwealth Financial Network. His aggressive start to this year shows he is far from done, said John Rooney, managing principal of Commonwealth Financial.

We're seeing a couple of groups planning to take advantage of favorable capital markets and are buying assets,Mr. Rooney said.Through consolidation and scaling, a group can create an entity that can be a publicly floated financial company. Regarding an aggregator [executing that strategy], it remains to be seen if one can pull it off.

After the announcement of each deal, Mr. Schorsch repeated his belief in the business model of independent broker-dealers and financial advisers, and the advantage of buying businesses that would benefit from a rise in interest rates. He also stressed that he wanted to acquire three broker-dealers, First Allied Securities Inc., Investors Capital Corp. and Summit Financial Services Group Inc., as part of a broader strategy to diversify his core real estate business.

Critics knocked the flamboyant Mr. Schorsch's newfound desire for broker-dealers as simply another outlet for him to sell his nontraded real estate investment trusts. Mr. Schorsch has repeatedly refuted such speculation.

Along with Mr. Schorsch, the other big buyer last year was Cetera Financial Group, which in 2013 acquired from MetLife Inc. two broker-dealers: Walnut Street Securities Inc.and Tower Square Securities Inc. Valerie Brown, CEO of Cetera Financial, was not available to comment on the deal with Mr. Schorsch.

With Cetera in Mr. Schorsch's pocket, the landscape for deal making potentially will shift.

Regardless, Mr. Schorsch said he expects another busy year in 2014 for independent broker-dealer mergers and acquisitions, with eight to 10 such deals during the year.

He said acquisitions will have two distinct characteristics.

The first group will be large companies such as insurers that continue to restructure and sell assets that are not a core part of their businesses. The second will be the industry upstarts such as RCS Capital and Ladenburg Thalmann Financial Services, which want broker-dealers that can fit together and work as a long-term bet on the financial advice industry, Mr. Schorsch said.

I do think [M&A] activity will increase, he said. The economy is better, assets under management are growing and businesses have cleaned up their balance sheets.

Conditions this year for a continued strong pace of mergers and acquisitions continue to resemble those in 2013, executives, recruiters and analysts said. Financing remains historically cheap. But business conditions are difficult.

Record-low interest rates have erased former profit centers of firms' lending on margin and pocketing spreads on client money in money market funds. And small to independent broker-dealers  those with fewer than 100 independent-contractor reps and midsize firms with 101 to 500 reps continue to face high costs per head for compliance, supervision and technology.


Those costs have risen in the wake of changes by regulators after the 2008-09 credit crisis. Combined, the market collapse and rising costs have caused a shakeout in the securities industry. In 2008, the Financial Industry Regulatory Authority Inc. counted 4,895 broker-dealer members under its regulatory watch. As of last month, there were 4,180 registered broker-dealers, according to Finra's website.
"I expect similar issues going into 2014, and that will lead to continued consolidation in the marketplace, "said Dennis Gallant, president of GDC Research, a consultancy.

"The challenge for these small organizations is the question of: How do we get bigger faster?He said.  "Now there's a quick solution, and doing an acquisition or selling is a good alternative. That isn't changing."

Since the credit crisis, insurance companies have been looking to sell their broker-dealers, and private-equity firms have been ready to buy. Mr. Schorsch's aggressive entrance into the business has upset that balance, said Jodie Papike, executive vice president with industry recruiting firm Cross-Search.

"The trend for the past year with larger broker-dealers is that ARC has been picking them up,Ms. Papike said. "Before, we didn't have ARC with deep pockets to do deals quickly and pay top dollar. That changes the landscape."

And Mr. Schorsch has been outspending his rivals, on a relative basis, when he buys firms. One multiple used in broker-dealer acquisitions is the price paid in comparison with the firm's prior-year revenue, or gross dealer concession, known as the firm's "trailing 12."

In November, Mr. Schorsch's broker-dealer, RCS Capital Corp., said it was buyingSummit Financial and its broker-dealer, Summit Brokerage Services Inc., for $49 million in cash and stock. That sum equated to paying about 67% of Summit's trailing 12, clearly on the higher end of the scale, which has ranged historically from 15% to 20% of trailing 12 up to 80%.

The multiple RCS Capital will pay for Cetera Financial Group is even higher, at 100% of the firm's estimated 2013 trailing $1.14 billion in revenue.

"I don't know if anyone can compete [with ARC and Mr. Schorsch] in 2014,"  Ms. Papike said. "I'm sure they will continue."

Schorsch snaps up Summit for $49M
Latest deal is third in six months for his firms; says he wouldn't rule out a fourth acquisition of a B-D

By Bruce Kelly

Nov 18, 2013 @ 9:35 am (Updated 4:23 pm) EST
Bloomberg News

Nicholas Schorsch and RCS Capital Corp. continue their blistering pace of broker-dealer acquisitions, this morning announcing the purchase of Summit Financial Services Group Inc.

RCS Capital, which is publicly traded with the symbol RCAP, is paying $49 million in cash and stock for Summit Financial, according to a filing this morning with theSecurities and Exchange Commission.

Summit Financial controls the independent broker-dealer Summit Brokerage Services Inc. That firm was started about 10 years ago and controlled by Marshall Leeds.


In 1999, he sold JW Genesis Financial Group Inc., an independent broker-dealer, and its clearing operations, to First Union Bank for $170 million. After several mergers, that broker-dealer is now Wells Fargo Advisors Financial Network.

Summit had 374 producing representatives at the end of last year, and the firm produced $74 million in gross revenue.

Until this year, Mr. Schorsch was best known for shaking up the nontraded real estate investment trust industry for implementing shareholder-friendly practices across several REITs he controls. This year, he has broadened his scope in the financial services industry and pushed into independent broker-dealers.

Through various entities he controls, Mr. Schorsch has purchased First Allied Securities Inc. and Investors Capital Holdings Inc. After the acquisition of Summit, he will have a network of about 2,300 registered reps and financial advisers.

In an interview Monday, Mr. Schorsch said that he wouldn't rule out a fourth acquisition of an independent broker-dealer, though he stressed that organic growth at the businesses that he has bought is as important as growth through mergers and acquisitions.

"We are not exclusively focused on M&A," he said.

"Is this our last independent broker-dealer? I can't answer," Mr. Schorsch said.

"We continue to look at opportunities as they come, including wholesale broker-dealers, retail firms and insurance company firms," he said.

Mr. Schorsch said that the acquisition of Summit Brokerage, which is based in Florida, complements the geography of the back office operations and advisers of Investors Capital Corp., which is based outside Boston.

The two firms operations' "are spread up and down the East Coast," he said.

Like the parent company of Investors Capital Corp., Investors Capital Holdings Ltd., Summit Financial Services is a publicly listed, microcapitalization stock. Its market cap after the announcement of the merger was about $26 million, about half that of Investors Capital Holdings.

RCS Capital is paying about $1.43 a share for Summit.

Following the merger, Summit and its various subsidiaries will continue to operate under the Summit name. The transaction is expected to close in the first quarter next year.  LPL Financial is hiking the cost of E&O insurance per rep by $200 in 2014
Offices of supervisory jurisdictions also face $500 fee per branch for audits

Investment News, Written By Bruce Kelly, November 6, 2013

Recently reported by Bruce Kelly for Investment News: "Rounding out a series of fee increase announcements, LPL Financial LLC has informed its registered representatives and financial advisers that it is increasing the cost of errors and omissions insurance per rep next year by $200, for an annual charge of $3,200, according to two LPL advisers.
Managers of large offices known as offices of supervisory jurisdiction also face a new fee. Next year, larger OSJs will pay $500 per branch for the LPL home office to perform mandatory audits of each branch operating under that manager.

    LPL will charge the OSJ manager $500 per non-OSJ branch exam only if the OSJ manager has more than two such branches.
    If the OSJ manager has less than two of those branches, than LPL will perform the exams for no additional fee. LPL will not charge for any non-OSJ branch exams performed prior to July 1, 2014, even though the exams will begin Jan. 1, company spokeswoman Betsy Weinberger wrote in an e-mail.

"LPL Financial annually assesses its fee structures to ensure they fairly represent the services and support we provide," she wrote. "The fee adjustments we are announcing thoughtfully balance our firm's need and cost structure with our advisers' goal to keep the costs of running their business affordable, reaffirming the value of affiliation with LPL Financial."

Typically, LPL Financial has typically waited until the fall to announce changes to its fees all at once, thus rankling advisers, who will now face an increase for the third consecutive year.

This year, LPL announced the fee increases incrementally, perhaps lessoning the sting for some advisers.

The two advisers who provided InvestmentNews with information about the fee hikes declined to be identified.

Last month, the largest independent broker-dealer, with more than 13,000 affiliated advisers, informed advisers about fee increases for its third-party money management platform, called Model Wealth Portfolios.

In January, LPL will begin charging 15 or 20 basis points on new accounts in the MWP platform for advisers who choose the firm's internal research to create model portfolios. Advisers have paid for a variety of choices of money managers in the MWP platform, including BlackRock Inc. and JPMorgan Chase & Co., but until now there had been no charge for model portfolios created internally by LPL.

And in July, the firm informed reps who had been responsible for supervising themselves of a $4,800 fee increase in 2015 for those one-person, one-office reps who choose to be supervised by LPL's home office.

A coming rule revision by the Financial Industry Regulatory Authority Inc. is one of the factors pushing LPL to make changes in supervision, the company said at the time."

Is Investors Capital in play?  Spike in trading and share price fuel speculation that Broker Dealerparent is acquisition target

Investment News, Written By Bruce Kelly, September 9, 2013

Bruce Kelly for Investment News recently reported: "Heavy trading and a run-up in the share price of Investors Capital Holdings Ltd., the parent company of independent broker dealer Investors Capital Corp., is fueling speculation that the firm has become an acquisition target.

Last Thursday saw an intense spike in its trading volume, with 434,100 shares changing hands and the price of the stock briefly reaching $8.90 per share, its 52-week high.

The typical daily trading volume this year has been closer 13,000 shares, according to Yahoo! Finance. Shares traded at $4.05 as recently as Aug. 30. Its low for the year is $2.96 per share.  Trading settled down on Friday, but heavier-than-usual trading resumed today, with more than 47,500 shares traded as of 2:11 p.m. The share price for the day fluctuated between $5.46 per share and $6.10 per share.

The company issued a press release after the volume spike on Thursday saying that it had been contacted by the New York Stock Exchange in accordance with the Big Board's usual practices. Investors Capital's "policy is not to comment on unusual market activity," according to the release.

Investors Capital Holdings is a micro-cap stock with a market capitalization of $41.6 million. But with brokerage firms currently scouring the market for potential merger targets, Investors Capital may be seeing interest, as indicated by its volume and price volatility, said one industry observer.

"The spike in volume and price, along with the 'no comment' press release, could mean that Investors Capital is an acquisition target, and time will tell," said Brad Fay, an independent third-party recruiter who focuses on midsize broker-dealers such as Investors Capital. "With 450 producers on track for $80 million to $85 million in revenue, it could be the right size and fit for a firm to achieve scale needed to reduce fixed costs and offset increased regulatory expenses."

Bob Foney, a spokesman for Investors Capital, said he could not comment beyond what was in the company's press release Thursday.

In 2011, managers and reps from the firm bought about 40% of the firm in 2011 from its founder and longtime chief executive, Theodore E. "Ted" Charles, who retired. Mr. Charles and his family controlled the majority of the company's shares, which they sold at the time for $4.25 per share.

A heavy buyer of the stock this year has been Investors Capital rep and director James D. Crosson. According to Reuters, Mr. Crosson has made 22 insider buys of company stock this year through Sept. 2 while the other six members of the board, including CEO Timothy Murphy, made 24 purchases. Mr. Crosson was not available for comment."

Broker Dealers Reining in Sales of Alternatives
Revising sales policies and rejiggering suitable allocations for clients; seniors a concern

Investment News, Written By Bruce Kelly, May 16, 2013

Writes Bruce Kelly, "Amid increasing pressure from regulators, broker-dealers are making changes to how they sell alternative investments.

VSR Financial Services Inc., Berthel Fisher & Co. Financial Services Inc. and the Cetera Financial Group Inc., which has four independent-contractor broker dealers under its umbrella, this year have revised policies or added new guidelines and procedures for the sale of certain alternatives, such as nontraded real estate investment trusts.

In some cases, the moves could decrease the amount of alternative securities a client can hold in their accounts.

VSR and Berthel Fisher are well-known in the independent-broker-dealer industry for their focus on selling alternative investments. The Cetera Financial Group, meanwhile, has been an active buyer of independent broker dealers and is widely expected to launch an initial public offering soon.

The changes particularly affect alternative investments that are illiquid. Illiquid securities are not traded on an exchange, leaving investors with little or no ability to sell them immediately. Indeed, executives at the three firms say they are increasingly interested in adding liquid alternative investment options to their platforms.

Illiquid products remain enormously popular with clients, however, as yields on traditional investments for retirees certificates of deposits, annuities and the like have stayed remained puny due to the Federal Reserve's continuing low-interest-rate policy.

In making the changes, the broker dealers are following the lead of both state regulators and the Financial Industry Regulatory Authority Inc., executives at the firms said.

"Over a period of time, and as Finra put out bulletins, we continued to make changes we felt may be prudent," said Thomas Berthel, chief executive of Berthel Fisher. "And illiquid investment is where the issue lies."

Mr. Kelly continues... "In February, for example, LPL Financial LLC agreed to pay Massachusetts $500,000 to settle complaints tied to the firm's sale of nontraded REITs, which are illiquid real estate investment trusts. Massachusetts Commonwealth Secretary William Galvin in December had charged LPL with failure to supervise registered representatives who sold the nontraded REITs in an alleged violation of both state limitations and the company's rules.

Mr. Berthel said the process of making adjustments to how Berthel Fisher's brokers sell illiquid investments has been going on for two to three years. "But this year, we have mainly looked at how much of a client's net worth should be in illiquid investment," he said. "Our guidelines before weren't out of line. We looked at it and said, 'What do we need to look at for our brokers?' We made some changes, both about how the process works, and some changes to the percentages" of illiquid assets in client accounts, he said.

He declined to offer more-specific details about the changes.

He continues to write... "VSR is scaling back the amount of illiquid alternative investments clients can hold in their accounts, particularly the elderly, said Don Beary, the firm's chairman. "Finra in the past year did a 'senior sweep,' and we've had guidance that we have to be careful about what seniors buy," he said.

The brokerage this month informed its registered reps of new guidelines for the sale of illiquid alternative investments, according to its chief executive, J. Michael Stanfield. In the past, clients could have 40% to 50% of their accounts in illiquid investments. That has been reduced to 35%, with new limits for older clients, he said.

For clients who are 70 to 75, the maximum percentage of illiquid investments a client can own is 25% of a portfolio; for clients between 75 and 84, the new maximum is 15%. The firm is not accepting orders for illiquid investments commonly referred to as direct participation programs for clients who are 85 and above.

Cetera, meanwhile, has not rejiggered allocation percentages for brokers' clients. Instead, the brokerage has beefed up its training requirements for reps who sell alternative investments and has added employees to perform due diligence on the products.

Cetera recently hired an analyst to look at liquid alternatives that are in traditional mutual funds, while its due-diligence department for illiquid alternatives this year has grown to seven members, double the number of a few years ago, said Barnaby Grist, executive vice president of wealth management at Cetera Financial Group Inc.

The firm also is testing advisers on information in the prospectuses of illiquid alternative investments, he said. "The regulators are appropriately looking at a growing market," Mr. Grist said. "And they want to make sure broker-dealers properly understand these products."

Independent Broker Dealers: Barclays, Morgan Stanley, Raymond James Grab Advisors From Rivals...
The movement involves financial advisors with more than $15.6 billion in client AUM

Advisor One, Written By Janet Levaux, February 15, 2013

According to Janet Levaux for Advisor One, "Barclays said it recruited 16 advisors from Merrill Lynch and eight other firms, including Goldman Sachs and U.S. Trust with a total of $15 billion in assets under management and $35 million in trailing 12-month fees and commissions."

Janet Levaux continues, "Morgan Stanley grabbed one advisor from Wells Fargo and three reps from JPMorgan (JPM) with about $434 million in assets, and Raymond James (RJF) has added two advisors from Merrill Lynch with about $124 million in assets and $1 million fees and commissions.

Morgan Stanley Wealth Management said last week that Calvin Mason joined the wirehouse in Pueblo, Colo.., from Wells Fargo. He has had yearly production of $1.44 million and prior assets of $144 million.

Advisors Steven Sheresky, Jeffrey Sheresky and Jeffrey Samsen moved to Morgan Stanley in Midtown Manhattan from JPMorgan Chase. The team has prior assets of $290 million.

Janet Levaux cites: "Barclays announced last week that it has hired 16 advisors, or investment representatives for its Wealth and Investment Management division, in seven of its offices across the United States.

"We are pleased to welcome these talented individuals to Barclays," said Mitch Cox, head of wealth management for Barclays, in a press release. "These hires underscore our commitment to attracting top-performing professionals who seek Barclays' unique, in-depth approach, of guiding clients to customized solutions that extend far beyond their investment portfolio."
The newly recruited reps by location are:
" In New York, Ramon Hache, Stephen Brazell and Joseph Chung and Steven Guggenheimer moved to Barclays from Deutshe Bank, while Steven Guggenheimer and George Zaki came over from Bank of America-Merrill Lynch. Also coming to Barclays in New York are Jonathan Mann, previously with AllianceBernstein.
" In Houston, Don Childress came to Barclays from Goldman Sachs, along with Jeff Collins and Neil Stone.
" In Beverly Hills, Calif., Watt Webb was recruited by Barclays from Bank of New York Mellon and Warren Cohn from Bank of America-U.S. Trust. In addition, Adams Morgens joined the Barclays' Los Angeles office from UnionBanc."
"In Boston, Barry Pederson came over to Barclays from Morgan Keegan. Pederson joined the brokerage business in 1993 after 12 seasons with the National Hockey League."
"In Chicago, Adam Strauss moved to Barclays from Goldman Sachs."
" In Miami, Ileana Platt and Rafael Urquidi joined the wealth group from Credit Suisse."

Continuing Janet Levaux writes, "Also, Barclays said last week that it opened an office in Beverly Hills, as part of the organization's continued efforts in growing its Wealth and Investment Management business in the Americas. It has four advisors in that location.

"We remain focused on strengthening our wealth management offering in the Americas," said Cox, in a press release. "Growth in Southern California continues to be a priority for Barclays and underscores our commitment to delivering highly customized investment solutions to serve the complex needs of ultrahigh-net-worth clients in the region."

Janet Levaux continues to say: "Raymond James said Thursday that Jeff Faucette and Tony Williams of Huntington, W. Va., left Merrill Lynch to join Raymond James & Associates, the firm's traditional, employee-advisor channel.

"We are pleased that this team of seasoned advisors chose to join Raymond James," said Rusty Clark, local complex manager for Raymond James, in a press release. "Their success is a result of experience, talent and a strong sense of doing what is best for their clients. We look forward to supporting them as they grow their business."

The team, also known as the Williams Faucette Advisory Group of Raymond James, has managed more than $124 million in client assets and had annual fees and commissions of close to $1 million in the recent year or so of business.

"We were looking for a firm that reflects the values that are most important to us and our clients," said Faucette, vice president, investments, in a statement. "We were drawn to Raymond James' conservative approach and its ability to persevere through the economic challenges over the past years, all while achieving 100 consecutive quarters of profitability."

Independent Broker Dealers: Choppy waters still persist for the Independent Broker Dealer...Independent Broker Dealers are still struggling with compliance and litigation costs in 2013

Investment News, Written By Bruce Kelly, January 2013

Small Independent Broker Dealers will continue to face strong head winds in 2013, and dozens will shut down, seek a merger partner or abandon the transaction-oriented style used by securities houses to become registered investment advisers that charge fees rather than commissions, reported by Bruce Kelly for

He warns: Difficulties such firms face include higher compliance costs, record low interest rates for money market accounts, competitive commission rates from large or discount broker-dealers and a tax increase that will cut available discretionary funds that investors can put to work in the stock market.

He continues: Defined by the industry as any broker dealer with 150 registered representatives or fewer, small broker dealers make up the overwhelming majority of firms registered with the Financial Industry Regulatory Authority Inc. (FINRA) In the the first 11 months of 2012, pressures on the industry reduced the number of Finra-registered firms to 4,319 97 fewer than the year before. That's a decline of 14% since the end of 2007, when FINRA reported 5,005 member broker dealers, according to its website. The majority of those that have closed have been small independent contractor broker dealers  many of them shops with 10 registered representatives or fewer, according to industry executives and analysts.

"The industry is now at 4,300 and change, and it will go to 4,000," said David Alsup, national director of business development with Compliance Department Inc., a consultant. A net number of 12 to 14 broker dealers will close per month for the foreseeable future, he said. "At 4,000, it will probably begin to stabilize, but that's still a net loss of 7% to 8% over the next three years."

Read more

Independent Broker Dealers: A Sound Choice for the Financial Advisor
Small Broker Dealers Tarnished by Private Placements

There has been much noise around Independent Broker Dealers (IBDs). The Small Independent Broker Dealers (SIBDs), who have less than 500 advisors, have received much of the negative press. Some SIBDs shut down in 2011 and 2012 resulting from the sale of private placements, REITs, and TICs that had gone south: Medical Capital, Provident Royalties, and DBSI, Inc. created sanctions and fines causing about 50 IBDs to go out of business as reported by the Investment News. This has caused financial advisors to become especially wary of all of the IBDs, especially the SIBDs, as the public has "thrown the baby out with the bathwater." We recently spoke to a team of advisors who decided to put their move to an independent broker dealer on hold, due to the recent "stability "concerns they had heard about smaller broker dealers.

The Truth Behind the Numbers

The decrease in number of IBDs follows suit with the decrease in the number of financial advisors. There were 79,802 independent financial advisors in 2011, down almost 14% from 92,727 in 2010. If you count dually registered advisors then the decrease is only 11% from 2010 to 2011. This compares to all financial advisors that decreased from 323,566 to 316,109, a 2% decrease.2 The independent financial advisors rate of decrease is much higher than those of all advisors. The independent advisors who were lower producers left the business as a result of the 2008 meltdown, or retirement, while others may have gone RIA, or possibly into the bank channel. The pace of the advisors leaving the wirehouses has also decreased since 2008 due to recruiting and retention bonuses.3 There are currently 4,380 brokerage firms.4 In the first quarter of 2012, 93 broker-dealers closed, compared to 137 firms during the same period in 2011. Only 44 new B-Ds opened during the first quarter of 2012, while 57 broker dealers started up in the first quarter of 2011.5 In other words, there was a net decrease of 80 broker dealers in first quarter of 2011 versus a net decrease of 49 broker dealers in the first quarter of 2012. The rate of reduction of broker dealers seems to be slowing. If the IBDs finish 2012 at the same rate of losing a net of 49 broker dealers per quarter in 2012, they will lose 196 broker dealers or 4.5% this year. This is about twice the rate of the number of advisors leaving the business. It was reported by Investment News that about 50 broker dealers went out of business from the failed alternative investments i.e. Provident, Medcap, and DBSI. This would explain the uptick in failed broker dealers in 2011.

There were also mergers in 2011 involving larger broker dealers, who have over 1000 advisors, which contributed to this decrease. The major ones were: Ameriprise Financial who sold off Securities America to Ladenburg Thalmann; Wells Fargo sold H.D. Vest Financial Services to Parthenon Capital Partners; Lovell Minnick Partners acquired First Allied from Advanced Equities; Pacific West Securities closed down and moved its reps over to Multi-Financial; and Allied Beacon Partners absorbed Workman Securities' reps. This year Cetera Financial acquired Genworth's broker dealer, LPL Financial purchased Fortigent. In the regional space, Raymond James bought Morgan Keegan.

Accounting for Non-Retail Broker Dealers

Out of the 4,380 broker dealers, about 3,100 broker dealers have 150 or fewer financial advisors (71%), 2,650 have fewer than 25 representatives (61%) (micro broker dealers) and 450 have between 25 to 150 representatives. We have recently done research and found that about 40% of the micro broker dealers are not retail broker dealers but are set up to transact many other types of business such as: investment management, mutual funds, institutional business, private placements, REITs, investment banking, foreign business, trading, and mergers and acquisitions.7 In 2010, out of the 20 broker dealers, reported to have gone out of business, 9, or 45% had no retail reps8. When referring to broker dealers closing down, these firms should be segregated from the data to show a more accurate picture of the retail broker dealer landscape and to help us better understand how the retail IBDs are doing. This would greatly reduce the reported number of IBDs, on the retail side, who have exited the business.

    We have recently done research and found that about 40% of the micro broker dealers are not retail broker dealers but are set up to transact many other types of business such as: investment management, mutual funds, institutional business, private placements, REITs, investment banking, foreign business, trading, and mergers and acquisitions.

Profit Margin Compression

In the past few years, many IBDs have gone through profit margin compression from decreased revenues as well as increased costs. There are several reasons for profit margin compression: 1. Increase in costs associated with compliance and accounting costs as a result of the Dodd-Frank regulations, 2. Decreased trading volumes from the 2008 financial meltdown, 3. Revenue lost from margin loan interest and money market fees, 3. Increase in competitive pricing, i.e. payout to the financial advisor, as a result of competition between IBDs, and 4. Cost of implementing technology. Profit margin compression has been more bothersome for the smaller and micro retail broker dealers, who do not have scale to offset the increase in expenses. This has caused some net capital issues, especially with the micro broker dealers. In response to margin compression, some of the small and micro broker dealers have looked at several options: 1. Do nothing and weather the storm, 2. Sell their firm to larger broker dealer, 3. Merge with a similar sized broker dealer, or 4. Close up and let the representatives joining multiple broker dealers. However, we are speaking to most small broker dealers where it is business as usual, and a few that are exploring their options. They are watching costs, and recruiting new financial advisors to increase revenues.

At many of the micro broker dealers, the owner or one of the partners of the firm is usually involved in other corporate functions, such as compliance or the back office operations in addition to being a producer, in order to be profitable. The majority of these firms are continuing to weather the storm without any plans to close up shop.

In most cases, the small and micro broker dealers are working in standard securities, and insurance products, steering away from alternative investments, as well as other products which may pose compliance risk. This has been their norm for years and they will continue to deal with FINRA's increase in fees.

Break Away Brokers

When a wirehouse advisor leaves a "Wall Street" firm we usually see a higher comfort level in joining a large broker dealer (greater that 1000 advisors) which frequently coincides with increased brand recognition, and more robust wealth management platforms and technology than the SIBD. Since the wirehouse broker is coming from an environment where they are benefitting from a brand, and they have wealth management platforms, and decent technology, the natural progression is to go to a larger IBD. Many of the large IBDs have some brand recognition, financial strength, and have bulked up their wealth management platforms so the wirehouse broker can ACAT their clients to similar third party mangers . We see the "break-away" brokers becoming more comfortable with the larger IBDs or are in some cases, going to IBDs who are specializing in large producers (aggregators). They may also consider starting their own RIAs. We usually see a wirehouse advisor going to a hybrid firm where he can either use the corporate RIA or set up his own RIA as opposed to going directly to the pure RIA model. This coupled with the possibility of FINRA overseeing RIAs, may further decrease the wirehouse advisor's desire to go pure RIA. The "break-away" broker focuses on how his clients will perceive the new broker dealers since the wirehouses have good branding with their clients. However, those who are comfortable with the small broker dealer and the larger clearing firm "story" will join a smaller firm.

According to Cerulli data cited by Envestnet, the number of independent advisors is expected to grow to 164,560 by 2014, up 25% from 2008, while the number of advisors at wirehouses is set to shrink to 48,919 in 2014, down 10.8% from 20089. The IBDs should enjoy some exceptional growth in the coming years.

Independent Adivosors Switching Firms

More recently, as some of the independent firms are getting larger (1000's of representatives) we are seeing more advisors considering leaving the larger independent firms for smaller independent broker dealers. We are hearing that the financial advisors aren't getting good service from some of the larger firms that have not adequately added staff to support their advisors. The ratio of back office support to the financial advisor may fall, with high growth and the level of service from the back office support staff will drop, executives in the home office can't be reached or don't return calls. In short, the financial advisor sometimes does not feel like a valued part of the organization, when in fact they are the "customers" of the broker dealer. A financial advisor of a larger broker dealer recently mentioned to us that the people in his home office were getting more confrontational and treat him like he is a "subordinate". He further mentioned that he should be getting "Ritz Carlton" white glove service since he is "buttering their bread". We are hearing more of these types of statements as reasons why some financial advisors desire to join smaller broker dealers. Their observations are that the smaller firms are: more specialized for their practice; have more personalized service, lower expenses, and higher payout by having direct home office supervision. These advisors are also drawn to the potential ownership, "family culture", and lower production requirements that an ISBD may offer. In short, they want to feel like they are a customer of the broker dealer, and a valued member of the organization.

Small Broker Dealer Value Proposition

While many of the IBDs have merged and gotten quite large through both organic and growth through acquisition, there are also many small, "boutique" broker dealers, usually with less than 500 representatives who are also doing very well. They have sound financials and have stayed away from many troublesome alternative investments that have put other firms out of business. Their service models are sometimes superior to the larger firms, offering more personalized service in a "family type" culture.

Many times, we hear from our candidates that they "feel like they are a number" at their current firm. The smaller broker dealer's culture is very appealing. Many of the smaller firms offer similar platforms and more "personal" support from the home office and are usually more flexible with terms of their agreements with the financial advisor joining the firm. In many cases, the first or second conversation that a prospective broker has with the firm is with the CEO or officers of the broker dealer. They want to speak to each candidate individually to get to know the advisor, before making a decision to hire them. The fact that the advisor can pick up the phone and contact the officers of the firm is sometimes the reason that an advisor chooses to join a smaller firm who can provide a "family type" of environment. It is appealing that the advisor is not a "rep number"- when they call into the small broker dealer, and they usually know him on a first name basis.

In many cases, these smaller firms have the latitude to customize their offers to the FAs as their management structure is flat. Many of these broker dealers offer payouts without a "grid". They offer high payouts, and in many cases lower costs, and lower production requirements than their larger counterparts. Many of these "boutique broker dealers" also specialize in certain types of business such as: fee-based, wealth management, financial planning, RIA "friendly", commission equity business, packaged products, discretionary business, retirement plans, fixed income, options or alternative investments. The smaller broker dealers are not large enough to be "everything to everybody". By specializing in certain types of business, the financial advisor may feel more of a synergy with a firm that is playing in the same "sand box" as he.

Most of the small broker dealers clear through a big well known clearing firm such as Pershing, National Financial, J.P. Morgan, RBC or First Clearing. The client's assets are held safely at one of these clearing firms. If for some reason, the BD went out of business, or they decided to switch firms, they could simply find another BD on that clearing platform or switch to another clearing firm, to continue their business. Broker dealers are more interchangeable in the advisor's mind, when they switch to another broker dealer within the clearing firm.

We will continue to see a good movement of financial advisors to the independent space. From what we can see, IBDs as well as the SIBDs will continue to benefit from revenue growth with higher growth rates within the SIBD space. The IBDs are here for the long Term. Article written By Shawn W. Smith.

2 Ibid
3 Ibid
7 Financial Advisor Placement Services Research, April 2012 to August 2012.

Independent Broker Dealers in the News . . .

December 11 2012. . . Click here to view full article

Independent Broker Dealers are on the Rise! Joe Russo, the 2012 Chairman of Financial Services Institute's Board of Directors, CEO, Advantage Financial Group, says Independent Broker Dealers are rising . . . " Read more


December 5 2012. . . Click here for full report by

Finra is investigating Independent Broker Dealers that sold variable annuities with subaccounts invested in hedge funds that lost $18 million during the credit crisis. H. Naill Falls Jr., a plaintiff's attorney suing the broker-dealers, said the Financial Industry Regulatory Authority Inc. contacted him a year ago about the sale of the product, a variable annuity issued by Sun Life Financial Inc. " Read more

Independent Broker Dealers in the News . . .

Eyes on Compliance is too Costly. . . Click here for full report by

Broker dealers that still depend on the actual "eyes-on" evaluation of transaction data may be wasting a lot of time and money. About 40% of broker dealers use manual compliance systems that require a per son to review documents, according to a survey of 53 broker dealers comissioned by Albridge Solutions Inc., a Pershing LLC affiliate. Clearing giant Pershing, part of The Bank of New York Mellon Corp., makes the Albridge sales compliance system available to its clients." Read more

Independent Broker Dealers in the News . . .

Advisory firm deal hype hurts advisors: REPORT; Click here for full report by

Advisory firm deal hype hurts advisers: Report by Liz Skinner, September 12, 2012, According to, "Don't believe the hype that sensationalizes the sale of some independent advisory firms. That's the main message delivered in a new research paper based on the experiences of six large registed investment advisors, which calls some transactions "more myth that reality. Read more
Independent Broker Dealers in the News . . .

Overcoming hurdles by Bruce Kelly, Click here for full report by

    "Independent Broker Dealers: Inside the Numbers... Video by Investment News Mark Bruno and Bruce Kelly explore the latest rankings of the largest independent broker dealers." "View Video

"Although 2011 offered its share of challenges, the largest independent broker-dealers were still able to rack up solid gains and post a solid - if not spectacular - year. On average, the largest 25 firms reported an increase in total revenue of 12.3% for the year . . .

For independent broker-dealers, 2011 was a challenge. Mounting technology costs, intense scrutiny and new rules from securities regulators were compounded by record low interest rates, which decimated returns on once-lucrative activities such as margin lending and holding clients' cash. . ." Read more


    "...the largest independent broker-dealers were still able to rack up solid gains and post a solid - if not spectacular - year. "... Read more

Top Reasons Why Financial Advisors Change Broker Dealers, it may surprise you...

Afew years ago, Financial Advisors were primarily concerned with better product offerings, state of the art technology, support services and payout plans from their broker dealers. Today, the "playing field" has significantly changed and Financial Advisors are primarily concerned about Broker Dealers that value their contributions and individual needs. They want to partner with a forward "thinking" managment team who understands the unique challenges of today's marketplace. They are seeking Broker Dealers who are willing to "think outside of the box" in order to grow sales and revenue.

Fees and commissions average 85 to 90%. Many Broker Dealers have high adminstration fees which has become a primary concern with financial advisors. Today many Broker Dealer firms are offering substantially attractive incentives for high-end producers. Some firms are willing to negotiate lower ticket charges depending on the advisors brokerage activity and production yielding a higher net profit for their advisors.

As FINRA continues to make increasing compliance demands on broker dealers, they often let their internal compliance departments make unreasonable demands of their advisors. Many of these departments have a limited or no support philosophy for marketing or sales efforts. They often create unnecessary delays or impossible "road blocks" which adversely impact sales and revenue. Some departments have become known for a dictorial treatment of their advisors regarding documentation requirements and personal audits. Many of today's respected advisors will only tolerate this treatment so long before they start searching out a new Broker Dealer firm.

In today's market, Financial Advisors are painfully aware of the market collapse in 2008 - 2009 and closely diligently monitor Broker Dealer's history of compliance on FINRA's website. It is vital their Broker Dealer be financially sound and in good standing with FINRA.

Often high-end producers will accept poor service for only so long before they start looking for a new firm. If they are dissatisfield with managements lack of support, poor payouts, intolerant compliance demands, or questionable financial stability combined with a lack of quality service, this usually facilitates their decision to start searching for a Broker Dealer that will respond to their needs and concerns.

    Today, the "playing field" has significantly changed and Financial Advisors are primarily concerned about Broker Dealers that value their contributions and individual needs. They want to partner with a forward "thinking" managment team who understands the unique challenges of today's marketplace, and are willing to "think outside of the box" in order to grow sales and revenue.