With the emergence of the financial planning pro- fession over 50 years agocame its companion: the independentbroker-dealer. At the time, it was aquite an innovative approach for afinancial professional to combineinsurance and securities to help shapea client’s financial future.
In the late 1960s, you were eitheran insurance agent or a stockbroker,not both. To accommodate this financial planning movement, however, earlyinnovators in the form of a handful ofMidwestern insurance companies created product platforms for independentadvisor contractors to operate theirbusinesses in this manner. Then alongcame the lucrative mutual fund and similarly packaged products, and it was offto the races for independent advisorsand their broker-dealers.
In the go-go years of the 1980s and1990s, non-Wall Street broker-dealersand insurance companies’ productsfinally had a distribution channel oftheir own that they could compensateand control to drive outsized profits.As a result, life was golden in IBD land,attracting all sorts of outside privateequity investments and M&A to keep theparty going.
The hidden challenge for IBDs with
this model, however, lay in its sales-
commission-driven structure, which not
only tied advisors by regulation to their
broker-dealers despite being “indepen-
dent,” but also opened the industry to
nefarious activities led by bad actors
and fraudsters. These questionable
characters introduced highly profitable
packaged products, some of which were
Ponzi schemes in REIT disguise, stain-
ing the reputation of the industry and
putting some firms under.
Despite these inherent problems andbad PR, the IBD model was still sosuccessful that it led to the creation ofan entire financial services sector withmore than 100,000 advisors, reaching itspinnacle in the early 2000s.
Since then, the IBD space has beenin steady decline as technology, low-cost product innovation, new operating models and a regulatory crackdownin the form of FINRA and state security agency fines combined to have adecimating effect on this once-dazzlingfinancial services segment. The industryshrank 25% in the last decade alone,according to Cerulli.
To compete effectively in the 2020sand beyond, this battered sector mustdeal with low-cost, huge-reach competitors, such as Vanguard, plus the onlinediscounters offering direct, low-costretail wealth management services. Atthe same time, they had to leveragetheir back-office operations in the formof RIA custodial platforms to supportprofessional, fee-based, human advicecompetitors, which sapped what littleprofitability was left.
The result? Industry consolidation overthe past decade has become the answer.
This is exactly what has been playing out on the big screen with moregargantuan deals, many of which havebeen driven by private equity investors’inevitable need to exit, along with therealization by many insurance companyowners that mutual funds don’t have thejuice they had in the past.
By Timothy Welsh
The Curious Plight of the Independent
Change is afoot in the IBD space, and “RIA-ifying” appears to be the