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Please click the image above to view the table of contents for Tiburon's Independent Reps Research Report

New Tiburon Research Report - An Initial Overview of the Independent Reps & Independent Broker/Dealers Markets

Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its newly updated research report on Independent Reps & Independent Broker/Dealers. This research release summarizes some of the report's key findings.

The purpose of this report is to provide readers with an initial overview of the independent reps & independent broker/dealers markets, which is a booming market of over 90,000 series seven registered reps who own their own businesses and utilize independent broker/dealers such as LPL Financial Services, Raymond James, Royal Alliance, FNIC, Securities America, & Commonwealth Financial Network. This is Tiburon’s third draft of this report.

Tiburon’s first draft of this report was written in 2005; that version focused primary on developing an organized structure for reviewing the independent rep & broker/dealer market, and establishing profiles of the hundreds of complex industry participants, many of which are owned by insurance companies.

Tiburon’s second draft of this report was written earlier in 2008; that version focused on refining the market history chapter, incorporating some recent Tiburon research on independent broker/dealers’ technology offerings, and building complete frameworks for all broker/dealers’ profiles.

This is Tiburon’s third draft of this report. This version brings this report into alignment with other Tiburon research reports, fleshes out its market history chapter, incorporates recent Tiburon research on rep recruiting, begins to reconcile the list of independent broker/dealers, and enhances the profiles of some core Tiburon clients, including Cambridge Investment Research, Commonwealth Financial Network, LPL Financial Services, & Securian Financial Group.

Key Findings
This report has a long list of interesting facts to share:

Market History

  • Insurance companies spun-off their agents, creating some of the first independent broker/dealers in the 1980s
  • The independent rep market was looked down upon by the wirehouses, which claimed that most independent reps were failed wirehouse brokers throughout the late 1980s and 1990s
  • Pacific Life acquired several independent broker/dealers, starting with Mutual Service Corporation in 1987
  • LPL predecessor Linsco acquired Private Ledger to form LPL in 1989
  • ING was formed through the 1991 merger of insurance company Nationale-Nederlanden and Bank NMB Postbank Group, which came as the result of the lifting of merger restrictions between insurance companies & banks in the Netherlands
  • ING acquired seven independent broker/dealers, starting with Locust Street Securities in 1997
  • Ameriprise Financial’s predecessor American Express acquired Securities America in 1998
  • AIG has acquired numerous insurance companies, including blockbuster deals for Sun America in 1999 and American General in 2001, bringing it several independent broker dealers
  • Wells Fargo acquired two independent broker/dealers, including HD Vest in 2001 and FAS Holdings in 2002
  • Independent broker/dealers maintained volume and profitability in the down market of 2002 to 2004
  • LPL acquired three Pacific Life independent broker/dealers in 2007, including Mutual Service Corporation, Associated Financial, and Waterstone
  • Ladenburg Thalmann acquired two independent broker/dealers, beginning with Investacorp in 2007
  • Ameriprise Financial’s Security America acquired Brecek & Young in 2008
  • Ameriprise Financial acquired H&R Block Financial Advisors in 2008

Market Definition

  • The independent broker/dealer market is comprised of mostly smaller firms; only 15% of independent broker/dealers have more than 100 reps
  • Depending on the definition utilized, there are 4,800 to 5,000 independent broker/dealers
  • Depending on the definition utilized, there are 27,204 to 34,005 independent broker/dealer reps producing more than $100,000
  • Depending on the definition utilized, there is $48 to $64 billion independent broker/dealer assets under management

Market Growth

  • There are 147,863 broadly defined independent broker/dealer reps, up 4,000 since 2001
  • Broadly defined independent broker/dealers have $2.0 trillion assets under administration
  • Broadly defined independent broker/dealers generate $11.1 billion revenues, up over 35% since 2001

Key Issues

  • The largest share of independent reps’ clients are in the moderately affluent category of $100,000-$1.0 million in investable assets
  • Independent reps across all broker/dealers rely heavily on retirement plan rollovers for new assets; reps at LPL and SunAmerica have done a particularly good job of gathering these assets
  • Industry executives believe that fee-accounts will continue to grow as independent reps will want a more stable and predictable income stream
  • While up-front product commissions are the dominant revenue source across most broker/dealers, independent reps at Raymond James and LPL collect more investment advisory fees than most
  • Up-front product commissions seem to give way to investment advisory fees with the larger independent reps
  • Two-thirds of independent reps believe that within five years at least three-quarters of their revenues will come from fee-accounts
  • Across independent reps of all sizes, about 60% of new clients are the result of passive and proactive client referrals, with even a slight increase for larger reps
  • More than three-quarters of independent reps believe that a service mentality, strong ethics, and determination are the most critical personality traits for success in the financial planning business
  • The average rep firm has 4.1 non-partner employees; the number grows with revenues
  • The average rep firm has 260 clients; the largest independent reps serve almost three times as many as the average
  • The average rep firm has $37 million in client assets under administration; Raymond James and Advantage Capital reps lead the way
  • The average rep firm generates $437,000 in revenues; the largest independent reps generate more than five times this amount
  • The average rep firm serves 169 clients per partner; FSC Reps serve the most clients per partner
  • The average rep firm advises on $23 million assets per partner; larger firms handle more than three times the average
  • Business expenses for the average independent rep total $204,000 and are led by compensation for reps and administrative support personnel
  • Almost half of all independent reps intend to sell their businesses upon retirement, with selling to an existing partner or employee being the most popular planned exit strategy

Leading Independent Broker/Dealers

  • LPL and Raymond James Financial services are the leading independent broker/dealers in terms of the number of reps, with LPL Approaching 6,000; NFP Securities and Commonwealth only have 1,000 reps apiece
  • LPL and Raymond James Financial Services have a huge lead over the other independent broker/dealers in terms of the number of reps producing more than $100,000; Lincoln Financial, and NFP Securities reps tend to be primarily focused on insurance products and/or tax services
  • Half of all LPL, Commonwealth, and Securities America Reps produce more than $100,000; Lincoln Financial has very few $100,000 producers
  • Raymond James Financial Services and LPL have nearly $100 billion assets under administration; other leading firms have between $5 and $25 billion assets under administration
  • LPL, Raymond James Financial Services, and Lincoln Financial Advisors are the leading independent broker/dealers in terms of revenues, generating over $500 million each; the other leading firms generate between $150 million and $350 million

Market Segmentation

  • Average independent rep has been a rep fifteen years and became a rep at age 33
  • The independent rep population is made up of individuals from many prior occupations, with captive insurance agents and stockbrokers being the largest concentrations
  • Nearly one-third of independent reps hold the Certified Financial Planner designation
  • Nearly three-quarters of independent reps have Series 7 licenses; the remaining independent reps have Series 6 licenses
  • Independent reps aim to appeal to investors who are dissatisfied with their wirehouse or regional broker/dealer and may not be able to afford the high minimums of fee-based financial advisors
  • In size terms, LPL is the Industry leader both in number of reps and revenues, with Raymond James & Lincoln Financial Advisors the only nearby competitors
  • Only one-fifth of OSJ managers make more than $300,000 in pretax net income

Independent Broker/Dealers, Custodians, & Clearing Brokers

  • While AIG Financial Advisors is the most widely utilized broker/dealer amongst survey participants, Sentra-Spelman received the highest satisfaction score amongst broker/dealers with significant sample sizes
  • The independent broker/dealer market is comprised of mostly smaller firms; only 15% of independent broker/dealers have more than 100 reps
  • The average independent broker/dealer generates more than $65 million revenues per rep, which has increased nearly 25% since 2001
  • All independent broker/dealers are rapidly expanding their fee-based offers as the trend away from commissions continue
  • LPL and MSC Reps seem most satisfied with their product, sales, & marketing support
  • Less than half of the independent broker/dealers with less than $30 million in revenues operate in the black
  • Across the industry and the various products, payouts are in the 80%-90% range (with the exception of general securities which are generally closer to 70%); many firms have one grid for all non-general securities products
  • On a relative basis as a share of revenues, LPL and Raymond James have been the most successful at fee-accounts, with each capturing more than 20% of revenues from such accounts
  • Over three-quarters of breakaway brokers join independent broker/dealers
  • Key considerations for financial advisors looking for a new firm include firm culture, environment, back-office support, and succession planning

Custodians

  • Independent reps are facing fewer clearing & execution alternatives
  • Bank of New York Mellon Corporation’s Pershing has more than twice the independent broker/dealer clearing agreements than its closest competitor
  • Independent reps rely heavily upon commissionable mutual funds and annuities
  • Mutual funds and annuities generate half of the revenues for many of the leading independent broker/dealers’; NFP Securities is the exception, generating two-thirds of its revenues from insurance products

Wealth Management & Family Office Service Product Companies

  • Most independent reps commented that offering business lending is not an important part of their businesses because they don’t have many clients ask for such
  • Most independent reps commented that they anticipate reverse mortgages will be a big part of their businesses in the future
  • Independent reps have turned the tables on banks that got into the financial advice business by offering banking services
  • Nationwide and AIG Financial Advisors are the leading annuity companies across most rep firm sizes

Fee-Accounts, TAMPs, Separately Managed Accounts, & Outsourcing Trends

  • Many financial advisors are using the rapidly-growing TAMP model
  • Larger fee-based financial advisors utilize separately managed accounts

Wealth Management & Family Office Service Product Companies

  • Fee-based financial advisors have turned the tables on banks that got into the financial advice business by offering banking services
  • One fee-based financial advisor said his firm increased CD business from $6 million per month to $12 million per month by offering Everbank CDs

Technology Companies & Other Key Vendors to Independent Reps

  • Morningstar is the most popular financial planning software across all revenue ranges
  • Morningstar is the dominant data & research service used by independent reps across most broker/dealers
  • Portfolio management software utilization increases with revenues and dbCams is the most popular portfolio management software across most revenue segments
  • Independent reps seem to stick to the conferences of their broker/dealers; the majority of reps attend their broker/dealer’s annual sales or education conference
  • Financial Advisor, Financial Planning, the Wall Street Journal, Investment Advisor, and Registered Rep are each read by nearly half or more of all independent reps
  • Bill Bachrach, Tom Gau, and Dan Sullivan are the three most popular financial advisor coaches

Rapid Industry Growth

  • Independent broker/dealers had over 36,000 registered offices in 2006, growing 33% by 2012
  • Independent broker/dealers had almost $760 billion assets under administration in 2006, growing 125% by 2012
  • Broadly defined independent broker/dealers had over $500 billion assets under administration in 2001, growing 400% by 2012
  • Broadly defined independent broker/dealers generated over $8.2 billion revenues in 2001, growing 300% by 2012
  • On the other hand, some believe that the number of independent reps may top out and even decline
  • There is some evidence that the independent broker/dealer market is hardly growing at all; the top 50 firms lost nearly as many reps as they gained indicating reps may be jumping from firm to firm

Recruiting War, Payout Rate Pressures, & Value Added Playing Field

  • Reps mentioned print & web advertising as the most effective marketing strategies
  • One-third of reps on the move talk about seeking independence & control, especially reps coming from captive channels
  • Almost all reps claim that they are moving because of (and seeking) product, technology, & practice management offerings but their triggering exit for leaving is often firm reputation, strategy, & cultural issues although (caution!) this is often said by stagnant reps and in their selection criteria, they seem to go back to product, technology, & practice management offerings
  • The 50 largest mutual fund companies pay $1.5 billion annually to broker/dealers through revenue sharing or shelf space agreements
  • Independent broker/dealers may generate as much as 20% or more of their revenues from mutual fund company sponsorship programs
  • Product sponsors typically pay 10 bps on assets to firms; the size of a broker/dealer, especially the anticipated volumes sold, allows for negotiation with this amount, either in hard or soft dollars
  • Once reps hit a certain payout percentage, they turn towards value added services that will help reps build strong businesses, including technological advances and more advertising
  • Independent reps are realizing that they need to look beyond the percentage payout to what is available at the organization to help grow their businesses
  • Commonwealth, LPL, Securities America, and Woodbury Financial offer innovative training & support offerings to their reps
  • The demand to go independent will always exist, but the barriers to entry are on the rise and the historical forces behind go-it-on-your-own are not as prevalent

Continued Profitability Pressures & Continued Consolidation

  • Competition, regulations, and the domination of the large independent broker/dealers will make it difficult for the small and medium sized firms to survive
  • Compliance cost burdens could inevitably lead to industry consolidation and that either client fees will rise or individual broker/dealers will have to absorb the growing costs
  • The economics of the independent broker/dealer market continue to drive the growth of the aggregator segment
  • The aggregator firms have strong asset management capabilities causing independent reps to grapple with the stigma of being associated with proprietary products
  • To be considered a major independent, a firm must have $50 million in annual revenues and employ more than 300 reps; leading firms should also be able to point to revenues per rep exceeding $50,000
  • The largest acquisitions have already occurred; consolidations have slowed down because of the lack of acquisition candidates