Schwab's Bernie Clark and TD's Tom Nally see IBD reps undergoing a palpable mood switch, but Fidelity's Mike Durbin and Pershing's Mark Tibergien are unconvinced

March 29, 2011 — 1:31 PM UTC by Brooke Southall


Virtually all big IBD reps are intrigued about becoming an independent RIA or working for one, according to results of a new study released by Schwab Advisor Services today.

Some in the IBD world dismissed the study’s significance, a sharp response that highlights the growing struggle between the two major segments of the independent world for big advisors’ business.

More than eight out of ten (86%) of advisors working through an IBD or insurance company say that the idea of being an independent registered investment advisor is appealing, according to the Koski Research-conducted survey of 157 IBD-affiliated advisors with an average of $118 million of assets under advisement. Respondents needed to have a minimum of $10 million in fee business, and to have been in business for more than five years.

Mark Tibergien, CEO of Pershing Advisor Solutions, says the survey’s findings are not something he would argue; the question is whether IBDs can provide advisors hungry to shift their business to fee models the structure to do so. See: Pershing study: Why the IBD talent market is headed for trouble and what might reverse the trend.

His parent company clears trades for more than 100,000 IBD reps and is in the process of helping 68 broker-dealers to provide RIA custody either by helping them set up their own capability or by allowing them to private label Pershing Advisor Solutions.

World is round

“(The survey) is like discovering that the world is round; the IBD world has been moving into the RIA world for years,” he says. “It becomes a question of how they’re going to be supported.”

Indeed, the Schwab survey shows that IBD reps have far more than a big toe in the RIA world.

An average 82% of IBD advisors’ assets under management are currently in a fee-based model, and there is a clear trend toward most IBD advisors maintaining a primarily fee-based practice or a mix of commission- and fee-based business, according to the study.

In addition, 45% of advisors surveyed say their long-term plan is to be mostly or all fee-based, while 46% indicate they expect to maintain a mix of both commission- and fee-based business. Only eight percent of advisors say their practice will be mostly or all commission-based as their business evolves over time.

Sweet spot

“I think there’s a sweet spot (of $70 million to $100 million of AUA) where there’s intrigue (in becoming an RIA),” says Ryan Shanks, CEO of Longmeadow, Mass.-based Finetooth Consulting, which consults advisors looking to choose a new platform. “Then it becomes (a question of): Is that broker-dealer open to relationships with other RIA custodians?”

There is plenty of disagreement among the major custodians, however, about whether the pool of IBD reps longing for the RIA life has really taken a significant uptick.

“What (the study) told me is that the enthusiasm might be even a little higher” than it has been in the past, says Bernie Clark, executive vice president and head of Schwab Advisor Services. This uptick is material considering that there are about $2 trillion of assets advised by IBD reps at stake, he adds. Among advisors that know someone who started or joined an RIA firm, 95% say they find the RIA model appealing.
See: IBD reps are new wave of breakaways to the RIA channel, say some recruiters and custodians.

One reason the numbers are so high, he says, is that so many wirehouse brokers who used IBDs as a safe landing during the 2008-2009 crisis are now reflecting on how they want to be positioned for the long haul. “Why would you claim the middle ground of being a quasi-employee with a lesser brand name?”

Fidelity’s organic growth

The assertion that IBD reps are set on bailing out is not in keeping with the net new assets that Fidelity is realizing both through its clearing and custody units, according to Mike Durbin, president of Fidelity Institutional Wealth Services.

“It’s still a very fluid environment in terms of what the best destination and form are. Both FIWS (on the RIA side) and National Financial Services (on the IBD side) are enjoying strong organic growth this year.”

There are compelling reasons to stay in an IBD environment as an RIA, Shanks adds. “Do you give five (basis) points to a quality IBD and say: keep me out of trouble?” See: Cambridge, Commonwealth see reverse breakaways due to compliance fears.

Tom Nally, manager of institutional sales for TD Ameritrade says that there are some new factors bringing interest from big IBD reps to a fever pitch nowadays.

One big one, he says, is that with net interest margins now at zero in this prolonged low interest rate environment, it’s become more difficult for IBDs to make money and it’s forcing them to make moves that work counter to advisors who care for their clients.

Unbelievably frustrated

“With LPL (disclosing their financial records publicly), you can see the razor-thin margins; independent broker-dealers are introducing more high-fee products and that doesn’t sit well with their advisors. There’s less flexibility and the new products have significant fees. I’m just telling you what we’re hearing from their reps. They’re unbelievably frustrated.”

LPL Financial margins are not razor-thin, according to Joseph Kuo, spokesman for the big Boston and San Diego-based broker-dealer.

“Our margins are approximately 15%, which put us at the very top of the broker-dealer space,” he says. “Pure-play custodians account for their profitability very differently, and any attempt to apply a custodian’s margin analysis to our financial performance becomes an apples to oranges exercise.”

Nor does LPL give incentives to use high-fee products, Kuo adds.

“Unlike other major custodians, we do not manufacture our own financial products, and we therefore do not create financial incentives for advisors in determining what solutions to use with their clients.

“We are among the top five largest third party distributors of financial products in the nation. Our financial advisors have access to approximately 8,500 products from hundreds of product manufacturers on our open architecture platform. They are free to choose any product on our platform that they feel best fits their clients’ needs.”

Pivotal factors

Still, products may not be the pivotal factors in how an advisor chooses what platform to run their business on, according to other findings in the Schwab survey.

The top two macroeconomic changes that would increase the likelihood that an advisor would transition to a fully independent RIA are a friendlier economic and tax environment for small business owners (45%) and an improved overall market and economic environment (43%). Of the advisors surveyed, 58% say they would prefer to join an existing firm, while approximately one-third (34%) say they would prefer to start their own firm.

The two biggest potential advantages to a fee-based model cited by advisors in the survey are providing an easier to understand pricing model for clients (62%) and having greater predictability in revenue (61%).

Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

LPL Financial
Asset Custodian
Top Executive: Bill Morrissey

Pershing Advisor Solutions
Asset Custodian
Top Executive: Mark Tibergien

Finetooth Consulting
Consulting Firm
Top Executive: Ryan Shanks

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