Business GrowthBusiness PlanningStrategy Planning

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

Part I of this blog covered why IBD firms are important, what’s calling them to invest and change, and the current “double whammy” situation that influences their investment decisions. In short, since the need to invest is real and the investment hurdles are real, IBDs probably need to rethink and reconfigure their business model that will allow investment to stay relevant. In this blog, let’s look at some of their options to reinvent.

Options for “fixing a moving train”

Digital disruption and a different value proposition for millennials calls for changing how value is created and delivered in IBD firms.

The current IBD scenario is like that of a fast moving train, carrying a full load of passengers, that suddenly realizes that its wheels need replacing to complete the journey.

The options for the IBDs are similar to that of the running train:

  1. Discontinue current operations AKA “Stop the train/ journey now
  2. Transform the organization with a new business model while continuing business as usual AKA “Change wheels on a moving train
  3. Find and try an alternate business model; shift when appropriate AKA “Run a different vehicle in parallel; move passengers over when safe”
  4. Do nothing AKA “Continue running train as long as possible knowing that passengers will be stranded when the wheels give up”

Option A is on the list only as an extreme case and is not warranted. Since the current business model is yielding profits and reasonably supporting advisors, discontinuing operations does not make sense.

Option D could be an option for IBD firms whose advisors are nearing retirement and the IBD firm itself is not interested continuing much longer. While the “retiring advisors” scenario may be true for most IBD firms, I suspect many IBDs intend to continue in this business. Further, this option will be a disservice to those advisors who are hoping to secure a decent value for their practice when they exit.

So IBDs will probably find themselves deciding between options B and C.

Reinvention options

The proverbial “80-20 rule” plays out in the IBD space as well. Top 20 IBD firms support about 60% of advisors and 970+ firms support the remaining 40%. Business model reinvention options suited for the top 20 firms with access to resources may not be viable for mid-sized firms who lack resources but are more nimble.

Bigger IBD firms can leverage their resources

Rethinking and implementing a new business model could involve building/ acquiring new capabilities beyond restructuring the organization.

Option B, i.e., transforming the organization – to the extent required – will be a herculean task for the top 20 IBD firms because of the magnitude of change management involved internally, as well as in 1000s of advisor practices. The latter part can prove particularly difficult since these advisors are not IBD employees.

Since top 20 IBDs have access to resources (capital, people, etc.), option C, i.e., trying a new business model in parallel may be viable solution.

Taking a page from the playbook banks are using to address industry disruption, here are three potential options:

  • Incubation – It is critical to remember that successful incubation requires a different mind-set, different skill-set (including leadership) and a different set of operating parameters. Several financial services incumbents are doing this; AXA’s Kamet is just one such recent incubation example.
  • Partnership – Last year, Fidelity Institutional partnered with Betterment to provide FinTech capabilities to its RIA practices. Several IBDs may see value in doing something similar.
  • Investment in/ Acquisition of Fintech player/s: At a recent FinTech conference hosted by SV Forum, accounts of bank incumbents investing in FinTech startups were a recurring theme. A panel at the conference confirmed that many banks are pursuing FinTech acquisition (and potential market share cannibalization) to stay relevant. They are betting that the market share of their FinTech business will grow and such acquisitions will also build internal momentum to change the incumbent culture over time.

Mid-sized IBDs can lean on their agility

Mid-sized IBD leaders have fewer advisor practices to influence. They probably share a closer relationship with their advisors (proximity advantage). They are more agile; can make decisions and execute them faster than large organizations. So, option B, i.e., changing the organization on the go can be attempted.

Further, if the IBD is privately held, leaders can also make investment decisions without worrying about missing quarterly earnings estimates.

A closer look at the current IT spend is sure to provide cost saving opportunities that can be reinvested for transformation.

Mid-sized IBDs, however, may be better served by partnering with other IBD organizations to build scale and/ or FinTech organizations to augment capabilities needed to stay relevant.

Options exist if IBDs realize the need

IBD firms will need to get past the “people vs machine” arguments and recognize that automated investment advice is a part of industry’s natural evolution: using automation to deliver better value, more efficiently, to more people. And this evolution will continue and “people and machines” will continue to co-exist augmenting each other.

It may be time IBDs had candid conversations with their Boards on the necessity of transformation and investment to survive. Though financial advice is not commoditized like retail products, IBD firms can learn from the mistakes of retail industry incumbents who did not reinvent themselves in time and lost out to the likes of Amazon.

There may come a time when IBD firms are faced with pursing a ‘direct to consumer’ model to evolve and feel that they are letting down their current independent advisor base.

At that time, IBDs have to ask themselves if their primary mission is to help end investors feel more confident about their finances or if it is to help financial advisor practices. The answer will guide their strategy.

This may read like a management school business case. But more than a decade of business transformation experience has taught me that even an ‘A+’ grade worthy answer on paper is not easy to implement. Business transformation does not impact just numbers on financial statements, it impacts lives. I’m hoping that IBD firms can successfully reinvent themselves in time and stay relevant.

The author is the founder and CEO of S2E Consulting. If you are a mid-sized IBD firm interested in re-configuring your business model, S2E Consulting and its partners would like to help. Please request for a free consultation or send us email (

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