How independent firms can continue to thrive

Since 2012, integrated full-service firms have outperformed independent firms in terms of both revenue and earnings growth, says Ian Russell, IIAC president and CEO, in his weekly letter.

The securities industry has experienced “turbulent” markets, rising compliance costs and disruption from technology over the last five years, he writes, but it’s also seen “steady, strong demand for wealth management services.”

As a result, integrated firms’ average total revenue over the last three years has been up 34% from the 2007-2009 period. Independents have seen a 1% increase over the same period.

“These firms have taken advantage of their broad business base, with investment banking and trading operations complementing record strong retail performance,” Russell says. “Integrated firms also have the advantage of business scale to spread fixed costs.”

But don’t count the independents out just yet.

While “money-losing” institutional firms in the space have “dragged down performance of the independent firm grouping,” Russell says independent dealers in the retail markets “have performed well, with revenue and earnings up strongly since 2012.”

Fifteen firms have been lost in that time due to mergers, acquisitions and the tough business climate, but the remaining 90 “have competed successfully” in the rapidly shifting wealth management landscape.

In the six years ended 2017, independent retail dealers saw average operating profit rise 45%, the letter says.

Across the industry as a whole, there were 163 firms as of Q2 2018, compared to 166 in Q1 2018 and during the same period a year ago, it adds. In the retail space, there were 91 firms as of Q2 2018, compared to 92 the previous quarter and 90 a year earlier (30 are considered retail full-service firms).

Read: How financial services firms plan to differentiate their services

The road ahead

“The wealth business will remain fairly robust in the foreseeable future, given the continued impact of demographic trends,” Russell says, with more boomers moving into retirement and needing guidance at the same time as more millennials “account for a growing share of income and savings.”

 The business climate for independent firms won’t improve, however, so they must remain nimble when it comes to adjusting business plans, he writes. Having “a clear strategic vision” and utilizing technology will be key elements.

Russell expects many firms will target “affluent mass-market clients with assets [of] less than $500K.” Planning for these clients can be less varied and require a “narrower product shelf,” he says, leading to “less complex compliance requirements and risk.”

The use of hybrid robo-investing platforms in particular (where, for example, account opening documents can be completed and collected online but an advisor still works directly with a client) are allowing firms to “penetrate the small investor market on cost-effective terms […].”

Read: Why young clients, in particular, need coaching

Still, some firms may go the opposite route by focusing on wealthier clients, hoping that higher revenues will offset rising compliance costs.

Larger, integrated firms have more scale and product, Russell writes, but independent dealers will continue to compete. One way that’s happened so far, he says, is more than half of the independents have turned to carrying brokers to help with “investment products, financial services, securities execution and clearing, and custodial services.”

In the years to come, he predicts, “these firms will rely even more heavily on the various service vendors […] for a wide range of technology applications, technology products and tools for the wealth business.”

As a result, they’ll continue to attract investors, especially small business owners and corporate issuers.

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