2015 was a year to forget for the independent broker-dealer industry that is home to roughly 160,000 independent registered reps and financial advisers.
Share prices of publicly traded firms either stalled or plummeted. Market volatility ruled in 2015, and as of Wednesday around noon, the S&P 500 was essentially flat for the year.
The share prices of publicly traded IBDs didn't fare any better, and some fared worse. Shares of LPL Financial Holdings Inc. were down 4% for the year as of Wednesday at noon, while the price of Ladenburg Thalmann Financial Services plummeted 26%. And RCS Capital Corp., known by its ticker RCAP and home to the Cetera Financial Group advisers, was down a stunning 97%.
Regulation out of Washington caused panic. The new fiduciary standard for brokers dealing with retirement plans that was proposed by the Department of Labor could depress sales of high-commission products such as variable annuities and nontraded real estate investment trusts, the bread and butter of many small to midsized firms.
Large insurance companies, which snapped up IBDs in the late 1990s, continued to flee the business because of low margins and high risk. American International Group Inc., for example, is looking to sell its network of nearly 5,000 advisers and four broker-dealers.
And reputations were scorched. Nicholas Schorsch, who paid a record price for the Cetera Financial Group just 20 months ago, is no longer the controlling partner at RCAP. Another firm he controlled, Realty Capital Securities, this month settled charges by the Massachusetts Securities Division that RCS had fraudulently rounded up proxy votes to support real estate deals sponsored by Mr. Schorsch's AR Capital, the company that managed his REITs.
(More:
How Nick Schorsch lost his mojo)
The question for 2016 is whether independent broker-dealers can regain the momentum they enjoyed in 2009 and 2010.
That's when many wirehouse advisers were running away from Wall Street financial institutions and their damage to advisers' reputations to join independent broker-dealers and establish a “hybrid” business, meaning they had one foot in a broker-dealer, registered with the Financial Industry Regulatory Authority Inc., and the other in the registered investment adviser world, which is regulated by the states and the Securities and Exchange Commission.
“The Department of Labor fiduciary rule will compound the problem. It will just get worse,” said Jonathan Henschen, an industry recruiter. “Our world is becoming all about compliance rather than the adviser and the client. 2015 was a depressing year.”
“Can the mojo return to the IBD world the way it was a few years ago, when we enjoyed steady growth?” asked Larry Papike, president of Cross-Search, a recruiting firm that specializes in independent reps and employees who work at IBDs. “With everything so up in the air with the DOL and the fiduciary rule, I don't see it. The questions are, how will the rule look and how will the IBD industry deal with it? We've always been able to adjust in the past, but the fiduciary rule is a big unknown.”
The recent turmoil, including RCAP's persistent problems and the impending sale of AIG Advisor Group, could turn 2016 into a strong recruiting year, at least in the first quarter, said Mr. Papike. “This year was horrible for recruiting with the exception of the last quarter and last two months," he said. "Everyone I've spoken to in last two months has pointed to the recent disruption in the market as being positive for recruiting. AIG and RCAP are so fluid and up in the air. There will be recruiting momentum in the first quarter.”
