Business PlanningStrategy Planning

Can Independent Broker Dealer firms reinvent themselves in time? (Part I)

Be Paranoid. Disrupt Yourself. Go To War For Talent.” HBR’s Oct 2015 cover page shared these ‘New Rules of Competition’ for businesses. While the context was different, these rules are timely for US based Independent Broker Dealer (IBD) firms.

Why care about IBDs?

Cerulli estimates that IBD firms support one-third of total advisor population, i.e., 95,000+ independent advisors (including dually registered advisors), who in turn advice 20+ MM people and $2 Tr assets. Per a Society of Actuaries study, more than 89% of pre-retirees and retirees express some concern about their long-term financial future in retirement, but only 50% meet with a financial adviser. If IBD firms cannot stay relevant for the near future, apart from impacting those they employ, they will further widen the retail financial advice gap.

Converging forces demanding change (and investment)

IBD firms have seen their share of changes; more recently the growth of Registered Investment Advisors (RIAs) and the industry consolidation post 2008 financial crisis. I believe the current situation will have a bigger impact on their future and calls for proactive action.

Oversimplifying, two converging forces are making it imperative for IBDs to reinvent and reconfigure their business model:

  1. Digital disruption
  2. The emergence of millennials

Digital disruption

In a recent blog, I shared why “robo-advisors” are just the symptom and not the root cause. Long story short, as the digital evolution continues (refer to slides 7-12 here), and data starts taking center stage as a key differentiator, new ways of delivering value will emerge as industries adapt to the new digital ecosystem.

A digital transformation of a Financial Services organization involves more than just technology as McKinsey articulated. It involves rethinking the value chain (what and how to deliver value) to meet customer needs and expectations.

The ubiquity of digital devices and apps in our lives demonstrate that digital maturity is not associated with the user’s age. IoT is no longer a fantasy but a near term reality. Fast forward 5 years, telematics are expected to help people drive safely by automatically adjusting vehicle speed if the driver fails to properly judge the severity of the upcoming bend.

In such an era, investors will, at the least, expect real-time, insightful and proactive finance advice personalized to their specific situation based on ‘permissioned’ data from their digital footprint. IBDs are a long way from providing infrastructure that enables advisors to do that.


While Gen X and Gen Y segments have figured in IBD firms’ strategic annual planning discussions for more than 6 years, with the millennial population overtaking the boomers’ this year, IBD firms are paying serious attention to this segment now.

A different value proposition:

Millennials will demand a different value proposition from their financial advisors. The financial situation and need of millennials are different than boomers. But the required change goes much beyond that – it involves a paradigm shift that gets to the heart of how millennials think about money in life.

Today’s advisor conversations revolve around materialistic and tangible goals – acquiring a car, buying a house or two, maintaining lifestyle for retirement, etc.

Millennials present a different paradigm – they aspire for experiential goals, are comfortable renting/sharing rather than buying, are putting off marriage and kids, look for purpose beyond a paycheck at work, and – at least for now – are comfortable being employed in an on-demand economy.

IBDs will need to help advisors morph to deliver in this new paradigm.

A different way of delivering service:

Millennials live online. The current in-person meeting model could be considered a hassle than a benefit. Used to “app” culture, they expect real time, hassle free, convenient service 24×7 on their mobile device. They are more open to alternative financial products (e.g., P2P lending, bit coins). Being used to SaaS freemium model, they expect to see and experience value before paying for it. IBDs will need to enable advisors deliver advice in this paradigm.

A different way of acquiring clients:

Referrals will continue to be the most effective way to acquire clients but ‘referrals’ in case of millennials can come from strangers – AKA online reviews. Traditional acquisition channels like seminars, events and networking may be less effective. IBDs will need shift more attention to social media marketing, coupled with transparency on user reviews. User-centric, pared down automated investment advice may be a way to allow millennials experience the brand promise.

All this spells ‘investments’ for IBD firms and ‘change’ for advisors.

The “double whammy” situation

Investment requests within IBDs go through extensive scrutiny and are made to jump through hoops due to these two realities: low margin business and advisor adoption dependency

Low margin business

IBD margins are slim, influenced by the interest rate environment and high advisor payout rates. IBDs can increase their margins by scaling up with Assets under Management (AUM) and running their operations efficiently.

However, IBDs’ current cost structure – especially legacy IT, legal/compliance and leadership support overheads – make investment request discussions fairly difficult.

Even mid-sized projects can make a dent in the bottom line, attracting unfavorable ‘market’ attention.

Advisor adoption dependency

IBD firms and independent advisors have a symbiotic relationship.

Even concepts as fundamental as scaling requires advisor adoption; while IBDs can increase AUM by recruiting new advisors, IBD scaling is more sustainable when their individual advisor practices increase AUM by client acquisition and relationship deepening.

Having worked in IBD firms I appreciate how challenging it can be to influence ‘independent’ advisors to run their practice a certain way – even if it can be beneficial to them and their clients.

Need for rethinking business model

Digital transformation, no doubt, requires significant investment of time, resources and focus from the IBD firms. The dependence on advisors to transform will be the bigger hurdle. Convincing advisors to make simpler changes like adopting an automated marketing software can be a long drawn process. You can only imagine the effort needed to convince them to transform their businesses – replacing many of their current processes, spending their time and money – to enable a larger digital transformation .

When 75% of independent advisor population is over the age of 45 yrs, predominantly serving clients over the age of 40 yrs, enabling the millennial paradigm shift – which starts with recruiting younger advisors – is no small task.

The need for change is real. The investment hurdles in current business model are equally real. So, reinventing IBD business model seems to be logical solution. What are IBD firm’s options to reinvent? Read Part II of this blog.

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