by Bruce Kelly and featured in Investment News
New York – The top 25 independent-contractor broker-dealers continued their growth last year and hit $9.16 billion in revenue. The pace, however, was off from that of 2004. The top 25 firms saw gross revenue increase 18.8% last year, down from an increase of 21% in 2004, according to InvestmentNews’ annual survey of broker-dealer firms.
Leading the way was LPL Financial Services, the industry leader as measured by the
number of affiliated registered representatives and gross revenue.
LPL, whose broker-dealer is Linsco/Private Ledger Corp. of Boston and San Diego, recorded $1.39 billion in gross revenue last year, an increase of 21.9% over that of
2004. The firm had 6,454 affiliated registered reps at the end of last year.
Almost “18% growth for broker-dealers is great growth,” said Philip Palaveev, senior manager at Moss Adams LLP in Seattle.
“But are they going to grow through recruiting or same-shop growth?” he said. “Recruiting advisers is actually buying businesses.”
Many top firms are good at recruiting, Mr. Palaveev said, but aren’t good at helping to build the businesses of their affiliated advisers. “How much of that growth dropped to the bottom line?” he asked.
Broker-dealer gains in gross revenue last year came amid a mixed stock market. Of course, any comparison is imperfect, as there have been some changes in the list. For example, Northwestern Mutual Investment Services LLC of Milwaukee, which reported $358.4 million in gross revenue, is included in the InvestmentNews listing for the first time.
The Standard & Poor’s 500 stock index was up 4.9% last year, while the Dow Jones Industrial Average dropped 0.6%. Also online: Data from the Independent Broker- Dealers Report: Broker-dealers ranked by reps producing more than $100,000, top independent broker-dealers ranked by gross revenue, top 50 firms ranked by total fee revenue, and independent broker-dealer profiles.
The Nasdaq Composite Index, meanwhile, was up just 1.4%. And a handful of key regulatory and compliance issues continue to dog the industry. Over the past three years, firms have seen their expenses rise because of compliance costs, observers said, and the industry continues to wait for regulators to decide on key issues.
Those include point-of-sale disclosure for mutual funds – a rule proposal from the Securities and Exchange Commission – and variable annuity supervision and suitability – a rule proposal at Washington-based NASD. And brokerage executives said that state regulators increasingly are flexing their muscles.
The fact that financial services products such as variable annuities are evolving so quickly makes it very difficult to write a rule that encompasses every aspect of such a product, industry observers said.
Some firms also cut lower-producing reps and raised minimums for the offices of supervisory jurisdictions, executives said.
“For lack of a better word, it was a year of transition for us,” said M. Shawn Dreffein, chief executive of National Planning Corp. in Santa Monica, Calif., and president and chief executive of National Planning Holdings Inc.
Gross revenue increased 3% to $420.3 million at the broker-dealer network. The firm raised the minimum for an OSJ to $250,000 in gross dealer concession after examining the business model and deciding that “it was more effective dealing with larger offices,” Ms. Dreffein said.Firms are bulking up on compliance staff, “but it doesn’t come cheap,” said Jonathan Henschen, president of Henschen & Associates of Marine on St. Croix, Minn. “Everybody’s adding compliance people,” he said. Those expenses, plus firms’ adding technology for scanning and imaging client documents, and making offices work without paper, are driving costs, Mr. Henschen noted.
“The work is extraordinary,” said Peter Wheeler, president of Commonwealth Financial Network in Waltham, Mass. The firm had $313.3 million in gross revenue last year, up 16.4% from the amount in 2004. “It’s very expensive,” Mr. Wheeler said. “In Boston, the market for compliance professionals is just so hot.”
Last year, firms dealt with the contentious issue of equity index annuities, a fixed-insurance product that securities regulators put under the microscope because of suitability concerns.
While some firms haven’t changed policy concerning the product, other firms have told their affiliated reps to sell only those equity index annuities approved by the broker-dealer and to move all sales through the firm. Others have told reps to stop selling the product altogether. The pace of change over the past few years affects the industry’s nearly 120,000 affiliated brokers and advisers, executives said.
“I told [NASD Vice Chairman] Mary Schapiro that we are better off as an industry, and at Raymond James, for regulatory pressure,” said Dick Averitt, chief executive of Raymond James Financial Services Inc. in St. Petersburg, Fla. However, he added, “it was kind of done in a rush.”
The firm hit $829 million in gross revenue last year, an increase of 8.7% from the amount in 2004.
“So much has been pushed down to advisers,” said Mr. Averitt, adding that the field sales force feels “a little battered. We want to make changes, thoughtfully.”
Although NASD officials at industry conferences recently have said that the pace of regulation has slowed, some brokerage executives said that the pressure is as great as ever. “I feel the environment is the same as it was a year ago,” said Steve McWhorter, chief executive of Securities America Inc. of Omaha, Neb., which increased gross revenue 15.1% last year to $351.1 million.
“I do not see the pendulum swinging,” he said. “It’s on par with last year.”
Mr. McWhorter added that he thinks that both the industry and regulators are attempting to re-establish a relationship that is based on trust. Firms “expect a lessening” of pressure from regulators, said Valerie Brown, president of ING Advisors Network Inc. of Atlanta. But through enforcement actions and exams, firms are seeing a “widening of interpretations of existing rules,” she said.
When discussing the regulators, one clear positive, many broker-dealer executives said, was John Simmers’ election to NASD’s board of governors. Mr. Simmers, the El Segundo, Calif.-based chief executive of ING Advisors Network, was elected in February.
He is “very qualified” and will make an “excellent board member,” said John Dixon, chairman of Mutual Service Corp. of West Palm Beach, Fla., and president of Pacific Select Distributors Inc., the broker-dealer network.
Los Angeles-based Pacific Select saw gross revenue increase 9.5% to $355.3 million last year.
Independent reps make up about one-quarter to one-third of the active reps, Mr. Dixon noted, but that part of the industry has had “spotty representation on the board of governors.”
One change for which broker-dealers are positioning themselves carefully is the coming retirement boom. Investors are acutely conscious of the discussions around Social Security reform and the need to save money for retirement, said Mark Casady, chief executive of Linsco/Private Ledger.
Some baby boomers are hitting the peak retirement years and perhaps have seen their children graduate from college, so their ability to save also is real, he said.
“It’s here, it’s real, it’s now,” said Mr. Casady, echoing other industry executives’ comments about the retirement market.