Broker/Dealer Evolution Ahead of Fiduciary Rule

Broker/dealers with less than $10 billion in assets account for a significant majority of overall industry volume but less than 10% of adviser-managed assets, according to data shared by Cerulli Associates. 

A new analysis from Cerulli Associates warns the Department of Labor’s (DOL) Conflict of Interest Rule, should it still go into effect after the Republicans’ sweep of the Presidency and Congress, “will have an enormous impact on the asset management and adviser industries by enforcing heightened fiduciary standards and increasing the cost of doing business.”

Cerulli further suggests that boutique broker/dealers (B/Ds) are one of the segments that will be most impacted under the DOL rule. Sizing this portion of the market, Cerulli observes that B/Ds with fewer than $10 billion in assets account for more than 80% of overall B/D firm volume, but less than 10% of adviser-managed assets.

“Small B/Ds without scale are at high risk under the DOL Rule,” warns Kenton Shirk, associate director at Cerulli. “It is likely that some of these boutique firms will be unable to support new regulatory costs, resulting in an increase in firm consolidations.”

Shirk adds that smaller broker/dealers may be acquired by larger ones, or choose to combine operations, or affiliate as an Office of Supervisory Jurisdiction with an independent firm to realize cost synergies. There are many approaches that can work moving forward, but under the new DOL rulemaking any firm touching retirement accounts governed by the Employee Retirement Income Security Act (ERISA) must double down on transparency and fairness.

“Cost reduction, decreasing business risk, and effectively leveraging time and resources remain the main focuses of the adviser industry in preparation for the implementation of the DOL rule,” Shirk observes. “The rule favors fee-based business, so the majority of advisers surveyed plan to increase its use in their practices.”

NEXT: Technology plays a determining role

As technology use continues to shape the adviser landscape, it is becoming a significant factor for advisers choosing a new B/D.

According to Cerulli, advisers increasingly recognize that technology solutions have already had a large impact on productivity and client experience, and thus forward-looking B/Ds have made technological innovation a strategic priority.

“The largest and well-capitalized B/Ds are best equipped financially to deliver strong technology experiences, whereas smaller firms may struggle to compete given associated costs," Shirk warns. “Cerulli believes that technology will become an increasingly important aspect of a B/D's value proposition over the long term as fewer advisers serve fewer, wealthier clients with the expectation of highly productive and integrated systems that are capable of delivering more sophisticated levels of client service.”

These findings are more are explored in Cerulli's newest annual report, “U.S. Broker/Dealer Marketplace 2016: Retooling for a New Competitive Landscape,” provides an in-depth analysis of B/Ds with financial advisers. More information is available at