Big Firms Get Even Bigger, Cerulli Says
Consolidation has accelerated at the 25 largest broker-dealers as their technology investments pay off and smaller firms find it difficult to keep up, according to a report from Boston-based consulting firm Cerulli Associates.
The increase in concentration of brokers comes as the number of registered broker-dealers has declined successively over ten years, falling to 956 in 2019 from 1,358 in 2009, an annualized decline of 3.4%.
To grow and retain brokers, firms have had to make costly investments in trading and managed account platforms, advisor-facing technology, investment research and compliance capabilities, the report noted. That’s also limiting the number of new entrants, Cerulli said.
“Greater scale enables firms to increase these relatively fixed investments and returns on those investments can increase significantly when they support a larger number of advisors and assets under management,” Michael Rose, Cerulli associate director, said in a prepared statement.
In a timely example, independent broker-dealer Cetera Financial Group, which has around 8,000 brokers, announced on Monday it was buying the retail brokerage business of Voya Financial, which includes around 900 brokers.
The wirehouse channel has also seen consolidation since their number dropped to four from six during the financial crisis. While their overall headcount has fallen in the past 10 years, Cerulli noted that they are focused on expanding market share by adding assets and platforms to serve different types of customers.
In an example highlighted in the report, Morgan Stanley, the largest wirehouse with nearly 16,000 brokers, in 2019 acquired stock plan administration software firm Solium and last year acquired online broker-dealer E*Trade Financial.
“While not directly bringing additional B/D advisors or wealth management assets to the wirehouse, both of these businesses have the opportunity to be highly synergistic to that business, which was a significant part of why Morgan Stanley embarked upon these acquisitions,” the Cerulli report said.
Cerulli isn’t alone in predicting that the consolidation will continue. Chip Roame, managing partner of California-based Tiburon Strategic Advisors, anticipates “substantial” brokerage industry consolidation to continue as it becomes more difficult for smaller firms, particularly independent brokers with fewer than 1,000 brokers, to compete.
Those firms will struggle to keep up with industry trends, such as the growth in fee-based accounts, Roame said.
“As that is true, the traditional IBD model becomes less important, and the IBD firms must compete with custodians like Schwab and Fidelity,” Roame said.