Profitability has become a serious challenge for independent broker-dealer firms, according to a survey by Cerulli.

Cerulli said that the promise to advisors of “generous payouts, flexibility and high service levels” have forced many firms to make difficult decisions.

"This will present challenges, but to grow their businesses moving forward, IBDs must look for opportunities to truly advance their advisors' practices, rather than trying to wrestle profit from their current model while allowing advisors to do whatever they feel is best or easiest for themselves in the short term" according to Tyler Cloherty, senior analyst at Cerulli and co-author of the research."

Cerulli said that the very features that draw advisor interest in the channel “create conditions that make profitability challenging in the best of times and nearly impossible when times are bad.” At the heart of the equation is the revenue split between the firms and the advisors and the explicit and implicit levels of service offered by the firms.

For an independent broker-dealer, the core challenge is balancing the independence of its advisors with the firm's ability to create scalable solutions. Though advisor independence is critical, by creating a wide variety of options also creates additional expenses, which either reduce margins or lowers the percentage of revenue passed on to advisors.

According to Cerulli, the challenge facing all independent broker-dealers is deciding exactly when enough is enough. Most firms generally attract experienced advisors, but this creates more resistance when it comes to fine tuning an advisor's practice. Even when presented with an opportunity to improve their practice, many experienced advisors are reluctant to change.

"Ultimately, Cerulli projects an on-going growth of the IBD channel with bifurcation of success," according to Scott Smith, associate director at Cerulli Associates. "The largest firms, which are able to truly capitalize on economies of scale, will be able to further develop industry benchmark platforms, allowing them to service a broad range of advisors. The smaller firms will likely be able to increase their share by better aligning home-office priorities with the advisor base."

Smith said the need to adopt an overtly fiduciary approach to client relationships will be a difficult challenge for all independent broker-dealers. According to Cerulli, only 51% of independent broker-dealer advisors currently consider themselves to be a fiduciary at all times.


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