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According to FINRA, there has been a steady decline in the number of broker-dealers over the last 15 years. Back in 2005, there were 5,187 firms at the end of the year. At the end of 2019, the total was 3,517.
You might be wondering: Why the change?
Broker-dealers are being consolidated due to a number of issues. Compliance concerns continue to rise as regulations change, technology shifts make it challenging for broker-dealers to keep pace with client and advisor expectations, and consumer access has dramatically increased which increases competition. Smaller firms are having a harder and harder time competing. They’re going out of business, or being purchased by larger rivals.
Consolidation isn’t limited to broker-dealers, either! RIA firms are consolidating at a rapidly increasing rate as well (an increase from 32 in 2013 to 132 in 2019 showcases this). Industry consolidation is inescapable, and many small firms are struggling to keep up with larger firms who can offer more investment management and financial planning services to clients.
A Shifting Center of the Financial Planning Profession
As I reviewed the numbers for consolidation in both broker-dealers and RIAs, I realized something: There seems to be a true shift of what was the center of our profession. Several decades ago, the firm you worked for was your center of gravity.
The name of your firm held everything together. People trusted big brands – and not just in the financial planning profession! In every industry, brand name was key. In fact, it could almost be said that the brand you worked for was both your reputation and your mission. Consumers trusted names they recognized, and that was that.
Now, however, we live in a decade of transparency. Due to the massive power of the internet and social media, many big brands have been torn down due to scandals that tarnished their name. As I look back on the industry’s history, it seems that after a while, the focus shifted from the firm to the product being sold.
There were advisors, or representatives who sold proprietary mutual funds. They would sell a particular brand of annuities or a packaged product. There were proprietary insurance companies and proprietor annuity companies. The focus began to shift away from the name of a big firm in New York that everyone recognized, to a particular tool or product that advisors might sell.
After some time, advisors started leaving big, recognizable firms to strike out on their own. They wanted more choice, and to be independent to work the way they wanted to work. This is where the revolution of fee-based or fee-only services started happening. As advisors started to search for more choice, they created a business model that served both themselves and their clients. The service they offered was different than the big box brands because they offered a different and unique client experience.
Enter: The Independent Broker-Dealer, and the Fiduciary Model
Eventually, independent broker-dealers were created to serve the independent financial advisors who were building their own practice. The independent broker-dealer offered a platform for individual advisors to build their own brand while still having access to a wide variety of products for their clients.
Now, the individual advisors became the “center” of our financial planning universe. When that happens, the advisor is empowered to make their clients their primary priority. In other words, the profession now revolves around what’s best for the clients we serve – just the way it should be.
The fiduciary standard, or the legal obligation to put your clients’ interests above your own, has been adopted by many individual advisors. Firms are now built not to serve the firm, or sell products, or please their shareholders, but to serve their clients. Clearly, this service model is one that clients love. It’s grown RIA assets under management nationwide from 1.6 trillion in 2007 to 4.7 trillion in 2018.
Unfortunately, as much as this business model benefits both clients and the advisors who serve them, it’s tough to build from the ground up. The costs of running a small RIA are high. It’s often said that some advisors won’t reach profitability until Year 3 of their practice. For many entrepreneurs, this isn’t a sustainable way of life.
Should You Join a Bigger Firm Due to Industry Consolidation?
One way advisors can continue to build a fiduciary practice, and stay relevant as the profession evolves, without the financial hardship is to join a larger firm. We’ve reviewed the trend toward industry consolidation, and the reason for this is clear:
When like-minded firms join forces, they’re able to share the cost and time burden of running a practice, while still serving clients in a fiduciary capacity.
There are, of course, other benefits as well. For clients, bigger firms are able to provide more features and benefits, which may lead to longer client relationships that are more satisfactory. Additionally, bigger firms that are a result of consolidation may be able to offer more dedicated wealth managers and client relationship leads who each have a unique specialization. This broadens the types of clients you can serve well.
Finally, clients may find a benefit of up-to-date technology as a result of this trend towards consolidation. As we shrink the number of total firms out there, each of those firms has more scale and access to the resources, human capital, and technology that come with it.
Clients aren’t the only ones who benefit from this consolidation trend. Advisors who consolidate are able to gain leverage to remove many non-advice or non-client-facing tasks from their plates. Larger firms often have dedicated compliance, planning, and tech specialists available for all advisors on their team. There are also more career paths available, as well as more financial stability.
If you’re thinking about consolidating your firm, following the industry trend (and the reasons behind it) may influence your decision. As you look across the landscape, there are all kinds of different firms out there that are offering consolidation services, or consolidation as a part of their business model.