The independent broker-dealer industry took a giant step backward last year, with the largest 25 firms collectively reporting a 10.3% drop in gross revenue.
The independent broker-dealer industry took a giant step backward last year, with the largest 25 firms collectively reporting a 10.3% drop in gross revenue.
The sharp drop came despite a huge turnaround in the fortunes of the stock market. Last year, the Dow Jones Industrial Average climbed 18%, and the Standard & Poor's 500 rose 23%.
Altogether, the biggest 25 independent broker-dealers reported $10.5 billion in gross revenue to InvestmentNews for 2009. That's down from $11.7 billion in 2008.
After most of a decade that saw an unprecedented boom time for independent broker-dealers, 2009 was the second consecutive year the industry saw gross revenue decline. In 2008, the top 25 firms reported an average decline in gross revenue of 2.1%. At that time, industry observers said they could not recall a year when the industry had seen such a drop.
Last year, broker-dealers were still suffering from the aftershocks of the calamitous market and economic decline of 2008, said Dennis Gallant, president of consulting firm GDC Research.
Clients of brokers and advisers were reluctant to commit money to trading, and many were moving out of stocks to cash, he said.
“Let's face it — assets declined,” he said. “Advisers saw assets trail off. The dependence on asset-based fees was a factor” in the decline of firms' gross revenue, he said.
The future looks brighter than the immediate past, he said. “Long-term, it's still a growth business. There's still a high demand for advice and a shortage of advisers. Those realities won't go away.”
The pain was far more acute for some firms than others. The reps and advisers from two groups of broker-dealers, the AIG Advisor Group and the ING Advisors Network, suffered through turmoil at their own firms, while wirehouse brokers faced consolidation. In the end, some of those reps defected to rivals.
John Rooney, managing principal of Commonwealth Financial Network, said his firm last year successfully recruited teams from a number of firms, including AIG's Royal Alliance Associates Inc. and ING's Financial Network Investment Corp.
“Brokers move when pain is intense. Last year, pain was intense,” he said, adding that Commonwealth had a “banner” recruiting year and brought on brokers who controlled about $60 million in gross dealer concession, or fees and commissions, over the prior year.
“Switching broker-dealers is really hard to do, so reps have to experience some bad stuff before they [move],” said Eric Schwartz, chief executive of Cambridge Investment Research Inc.
Cambridge had a record recruiting year in 2009, landing brokers with $71 million in fees and commissions, he said.
The AIG and ING broker-dealer networks, now rechristened Advisor Group and Cetera Financial Group, respectively, last year endured months of speculation that they would be jettisoned by their troubled parent companies, the giant insurers American International Group Inc. and ING Groep NV.
CHANGE OF HEART
It was a topsy-turvy year at the AIG broker-dealers. Just as details of a sale were being finalized in August, AIG's new CEO, Robert Benmosche, abruptly pulled the three broker-dealers off the table because of his desire to stay in the business. The lead buyer, private-equity shop Lightyear Capital LLC, then struck a deal with ING, saying in October it would buy three of its broker-dealers and form the Cetera network.
Valerie Brown, chief executive of Cetera, said the three firms in the network, Financial Network Investment Corp., Multi-Financial Securities Corp. and PrimeVest Financial Services Inc., retained their higher-producing rep, while many smaller producers departed. She admitted, however, that recruiting in 2009 was a struggle, particularly as ING was deciding the fate of the broker-dealer network. “It's hard to get someone to come to you in such a case,” she said.
In February, Barnaby Grist left The Charles Schwab Corp.'s Advisor Services Group to join Cetera. At Schwab, Mr. Grist was in charge of Schwab's program for reps and advisers looking to move to an independent platform.
That was an indication that Cetera intended to focus on advisers who charge both fees and commissions, known as hybrids, industry observers said. (For more on Mr. Grist's role at Cetera, see Page 47.)
Ms. Brown said that Cetera this year has doubled the number of recruiters it has on the street, and now has 25 headhunters.
The losses at SagePoint Financial Inc., an AIG broker-dealer, were staggering.
The firm's gross revenue dropped 38.5%, to $227.3 million. According to its audited financial report filed with the Securities and Exchange Commission, SagePoint had a net loss of $33.6 million last year. A major expense on its balance sheet was a $26.5 million write-down in goodwill, an intangible asset related to the benefits or losses from an acquisition.
Another AIG firm, FSC Securities Corp., reported a $2.9 million loss and also took a write-down for loss of goodwill of $9.3 million, according to the financial statements it filed with the SEC. Its gross revenue dropped 29.2%. Another broker-dealer in the network, Royal Alliance Associates Inc., saw its gross revenue decline to the same extent, 29.2%.
Advisor Group chief executive Larry Roth said that the broker-dealers had turned the corner. They are profitable on an operating basis, but the company took one-time non-cash adjustments that affected its financials.
He, too, was optimistic for this year. The Advisor Group's 2010 revenue is estimated to exceed 2009's by 10%, excluding that brought in by new recruits, Mr. Roth said.
On the other side of the coin, two of the largest independent broker-dealers, LPL Financial and Raymond James Financial Services Inc., had excellent recruiting years, often at the expense of other independent broker-dealers.
Executives admitted that this year probably won't match 2009 in recruiting, but they are still optimistic that the year will shape up into a solid one for bringing in new brokers.
“It was the perfect storm for recruiting in 2009. The disruption in the industry played in our favor,” said William C. Van Law III, senior vice president and national director of business development for Raymond James Financial Services. The firm recruited 539 brokers in fiscal 2009. It did not break out numbers across its various channels, but in total, it recruited 758 reps who generated more than $250 million in GDC in the year prior to joining Raymond James.
Industry sources said that LPL Financial recruited brokers that generated $250 million in GDC.
Bill Morrissey, executive vice president of business development with LPL Financial, would not confirm that figure. However, he said the company is optimistic about its chances to recruit advisers and teams with $1 million or more in commissions.
“In 2009, most large advisers put their heads down and worked with clients,” he said. “Now they're looking at options,” he said, particularly as clients of brokers who work with wirehouses want change.
E-mail Bruce Kelly at bkelly@investmentnews.com.
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