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Why you don’t want to work for a small broker-dealer now

Many people at smaller independent broker-dealers and RIAs are feeling stressed out.

If you’re considering a move to an independent broker-dealer, small wealth management shop or registered investment adviser firm, now may not be the best time. And if you currently work at one of those, now might be the time to update your resume and prepare for an exit.

That’s because – after there were a record 123 acquisitions in the RIA space last year, a 37% increase on 2014, according to DeVoe & Co. – this year is likely to continue that trend and set another mark for M&A activity. And after a merger or acquisition, there are typically layoffs.

Wealth Enhancement Group, a wealth management firm that includes RIA Wealth Enhancement Advisory Services, inked a deal to acquire HHG & Co., a Darien, Conn.-based wealth management firm. Private equity firm Lightyear Capital owns a majority stake in the acquirer, which has approximately $4.5bn in client brokerage and advisory assets, while the acquired shop has more than $1bn in assets under management.

Independent broker-dealers, smaller wealth management shops and RIAs are feeling more pressure to merge with or sign a deal to be acquired by a competitor due to the increased cost of doing business, driven largely by higher net capital requirements and the need to ramp up internal controls by hiring compliance, risk and operations personnel.

That means cutting back in other areas. So far, the cuts have been felt most in research, sales and trading divisions. However, executives can only cut employees so much before it impacts the firm’s ability to conduct business effectively.

“The biggest impact, as a result of the heightened regulatory environment, is you’re going to see a consolidation within the broker-dealer community,” said Sean Kelleher, president and principal partner of Wall Street Access.

Regulatory headaches squeezing broker-dealer profitability

Kelleher believes that as a result of Basel III, which apply to the clearing firms, and other regulations such as Dodd-Frank, the introducing broker community is being asked to increase their net capital requirements with their clearing firms.

“You could see a lot of smaller boutique broker-dealers going away or trying to find strategic partners, because the higher capital requirements being asked for by clearing firms represent a fairly high hurdle,” Kelleher said. “That’s why we believe that there could be a significant amount of consolidation.”

Since the financial crisis, most if not all introducing broker-dealers, along with most firms on Wall Street, have cut costs considerably and reduced their overall headcount. That trend will continue, which will go hand in hand with a wave of broker-dealer mergers, according to Kelleher. The industry will experience consolidation and contraction.

“The current environment is challenging enough that some people may decide to exit the business altogether,” he said. “The principals might close up shop.

“Or if they turn to M&A to achieve economies of scale, post-merger there will be further job cuts, as there will be redundancy in certain areas that could be felt pretty immediately.”

Job seekers in search of stability

Scalable, well-capitalized broker-dealers are investing of millions of dollars in their infrastructure and technology to make sure that they are responsive and ready to protect their advisers. Conversely, the concern around smaller independent broker-dealers is that are that they are definitively not investing sufficiently in the things that will matter to advisers most.

“We are hearing from many advisers currently in smaller broker-dealers who are looking at other options,” said Howard Diamond, COO and general counsel of Diamond Consultants.

One of two things are motivating these advisers who practice under a broker-dealer umbrella to make a change, according to Diamond: They want to move to a more stable, well-capitalized and progressive broker-dealer; or the ones that are primarily fee-based are looking to move to a core RIA/hybrid model.

“Under this model, advisers customize their compliance infrastructure to meet regulatory demands, but they also service their client base appropriately,” Diamond said. “This will largely mean that well-scaled platforms such as Dynasty, HighTower, Focus and Blair that can afford to engage service providers like Envestnet will thrive even more.”

How you can avoid the cuts

Pro tip: The closer you are to revenue, the more value you have to a prospective employer. Wall Street has always rewarded revenue-generators. It’s a simple equation – the more revenue you generate, the more valuable you are.

“If I were advising any young person in the industry, I’d say to work for the core business of that company – the further you get away from that you’re at risk,” said Danny Sarch, the president of Leitner Sarch Consultants. “The core business of wealth management is giving advice to clients, and big-producing advisers are in the best spot, although it’s a lot of hard work to get from 30 years old to there.

“Who’s going to get cut, the guy out in the field bringing in client assets or the guy doing the analysis of the company?” he said. “Make yourself indispensable.”

Another option? Leave your broker-dealer, wealth management firm or RIA and join a hedge fund, private equity firm or asset management shop.

“In many ways, the buy-side is the more attractive venue at the moment due to the pressures on the sell-side,” said Tom Burnett, vice chairman of Wall Street Access. “Consider opportunities at stable broker-dealers, but widen your range and look at buy-side opportunities as well.”

Photo credit: Ma-Ke/iStock/Thinkstock

AUTHORDan Butcher US Editor

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