06.17.20
Broker-Dealers, Under Siege, Look Toward Second-Half Comeback
by: Rich Blake
The broker-dealer (BD) industry can still salvage 2020, shaking off downturns and downgrades to return to some semblance of profitability in the second half of the year, industry members said.
Crass, a cliché, but still true: Out of crisis comes opportunity.
"There may be relatively more money in motion, probably to advisors who are more planning-centric," said Kenneth Kehrer, principal, Kehrer Bielan Research & Consulting.
With great opportunity comes great responsibility to take advantage of one entirely new game-changing factor: "improved advisor productivity from the use of virtual meetings and digital interaction," Kehrer said.
Indeed, numerous BDs and advisory businesses report having success rapidly transforming their teams into WebEx warriors, with resiliency and flexibility being the oft-repeated refrains by executives interviewed for a recent article on working remotely.
Signs of Hope
The pandemic lockdown period began to wind down in May with staggered, slow steps toward some at least symbolic economic reboot, only to have a long-festering problem – police brutality against African-Americans – reach a tipping point, boiling over into the most jarring civil unrest in three decades. Against this backdrop – hardship, fear, frustration, society torn asunder – the U.S. Federal Reserve publicly warned that the financial sector is in a fragile state and will remain so "for some time" with household and business balance sheets under strain from pandemic shocks and staggering levels of unemployment.
But there is some good news.
Interest rates are not expected to enter negative territory, according to SIFMA’s Economic Advisory Roundtable (whew). And pre-COVID-19 GDP-growth could be within reach – by the end of 2022, the roundtable said.
After a severe downturn, hope springs on the snap-back itself and the reverberating "wealth effect" as portfolio valuations climb back, Kehrer explained.
Improving investor sentiment is a usual source of improved BD performance and should impact the second half of the year with investment portfolios repositioning to participate in the sectors that will lead the recovery, he said.
A first-quarter UBS Investor Sentiment survey of U.S. investors (published in late April) found that those who are optimistic about the economy over the next 12 months dropped to just 30% in the quarter, as compared to the 68% who expressed optimism in the fourth quarter of 2019. More than half of those surveyed in the first quarter, meanwhile, see a recession on the horizon, UBS said. This is hardly surprising, given how COVID-19 has affected lives and economies around the world.
However, interestingly, investor optimism for the long term, over the next ten years, has actually increased. Some 78% of investors surveyed were optimistic about the economy over the long term, compared to 66% who felt this way at the end of 2019.
“Yes, the economic damage has been substantial,” wrote Angeles Advisors CIO Michael Rosen in his blog, “but likely transitory.”
'Perfect Storm'
“This too shall pass” is another common refrain these days, although near-term outlooks for several brokerages – particularly some owned by private equity firms leveraging networks of thousands of financial advisors – turned pessimistic during the height of the pandemic market meltdown, owing to debt concerns.
The historic equities sell-off in March, expected to brutalize asset-based fees, was followed by a sharp and surprising April-into-May retracement. This was an emotional rollercoaster ride that frayed nerves, but at least helped mitigate existential concerns; however, drastically slashed interest rates remain near rock-bottom, harming BDs’ ability to earn spreads on client cash.
While the challenges of remote working arrangements due to COVID-19 are being met, this new reality isn’t coming without a toll on new account target rates. Additional headwinds are howling — discount brokers and digital upstarts offering zero commissions, Regulation Best Interest (RBI) compliance burdens and demographic changes causing older producers to ride off into the sunset along with their clients.
Ben Marzouk, a Washington, D.C.-based attorney with Eversheds Sutherland (US) LLP noted that “COVID-19 has forced broker-dealers to revisit their business continuity plans, adapt to a new remote working environment with less face-to-face client interaction and accelerate adoption of e-delivery and E-SIGN systems — all of this is being thrust upon broker-dealers with the June 30 compliance date for the SEC’s Regulation Best Interest just around the corner.”
"The BD business model is under pressure on multiple levels," said Aladin Abughazaleh, Founder, ATA RiskStation. "It's a perfect storm."
"The BD business model is under pressure on multiple levels," said Aladin Abughazaleh, Founder, ATA RiskStation. "It's a perfect storm."
The macro conditions, regulatory obligations and shifting fee trends would be challenging enough without a pandemic and societal turbulence and various associated the operational challenges. But there's more.
Some specific, less glaring but still challenging forces are putting unique pressure on brokers, said Abughazaleh, and these include rising client expectations in terms of technology – everything via their phone – and, owing to more alternatives, declining client loyalty, which is coming at a time when younger generations are coming into their inheritances.
Not conceding their part to play in such a massive inter-generational wealth transfer, bank-owned brokers quickly have pivoted away from referrals gleaned from foot traffic, toward a full-throttle charge into conducting business virtually.
"It is now easier to schedule client meetings, share data and discuss scenarios iteratively, Kehrer said. "An advisor can now go deeper with more clients."