Independent Channel Broker-Dealer Recruiter Jon Henschen Discusses How DOL Fiduciary Rule Will Accelerate Broker-Dealer Closings

Share Article

Independent channel broker-dealer recruiter Jon Henschen of Henschen & Associates discusses the impact of the DOL’s proposed Fiduciary Rule on the financial services industry, predicting a wave of broker dealer closures.

Jon Henschen Find a Broker Dealer

Jon Henschen

The DOL fiduciary standard could bring about a perfect storm if it coincides with a potential U.S. recession.

Jon Henschen’s most recent article, published February 22, 2016 on ThinkAdvisor, “DOL Fiduciary Rule Will Accelerate Broker-Dealer Closings” discusses the impact of the DOL’s proposed Fiduciary Rule on the financial services industry, predicting a wave of broker dealer closures, particular among small IBDs.

Henschen opens his argument by documenting the steep and consistent drop in the number of broker-dealers since 2008, noting that the industry was down to 4,578 BDs in 2010. By February of 2014, that number was down to 4,181. 2015 closed with 4,034 broker-dealers, with the largest segment of firms closing by far being equity trading firms. September 2015 initially looked hopeful, with 14 new firms admitted and only 5 withdrawals. Nevertheless, fourth quarter results continued the downward trend.

Looking at the fourth quarter of 2015, 16 new firms were admitted and 53 firms withdrew. Of the 53 that withdrew, 32 were equity trading firms, 12 were private placement firms and 5 were mutual fund firms. Of these 53 firms closing, 37 of them had fewer than 10 reps.

According to Henschen, these statistics could very well be the tip of the iceberg, as the DOL fiduciary standard could bring about a perfect storm if it coincides with a potential U.S. recession. Besides the lower revenue associated with a down market, a recession will put an end to Fed Funds interest rate increases, which will kill hopes of higher money market revenue for broker-dealers.

In terms of revenues, Henschen asserts that broker dealers will see revenues decline due to fewer product choices, lower commissions and higher rates of litigation because of the DOL fiduciary standard. The article continues by examining the DOL rule’s likely impact on specific product segments:

Variable Annuity Revenue—Variable annuities in qualified accounts will likely have two options: either a 2% to 3% upfront commission with a trail option, or a no-load VA as the only option for ERISA accounts. There is definitive talk that fixed index annuities and index universal life will likely need to fall under FINRA scrutiny, causing legions of fixed insurance reps needing to get their securities licenses in order to sell indexed products.

Stock and Bond Trading Firms—Since 2008, by far the largest percentage of firms closing has been the stock and bond trading broker-dealers in the retail channel. The DOL fiduciary redefinition under ERISA will quicken their demise, as the new rules are expected to disallow commission-based trading of stocks and bonds in qualified accounts.

Private Placement Firms (REITs, BDCs, Alternative Investments)—Henschen sees two issues for firms focused on this product segment. First, the DOL fiduciary standard won’t allow illiquid investments in qualified retirement accounts. Second, FINRA Rule 15-02 requires these products to lower commissions paid to advisors and for the pricing on statements to reflect actual values, i.e., mark-to-market pricing.

Mutual Fund Revenue—The new restriction on these products due to the DOL fiduciary standard means that only “C” shares will be available, or as with variable annuities, no-load mutual funds for ERISA accounts. Following the track of regulators’ discussion leading to the DOL fiduciary rule (likely to be released as early as April), both broker-dealers and advisors will no longer receive 12b-1 fees in fee accounts.

Henschen concludes his analysis by commenting that the ability to weather the coming storm will be extremely challenging for smaller BDs. A large segment of the remaining 4,035 broker-dealers are small, one- to 10-representative shops, which are the most vulnerable segment to selling unless they have substantial capital backing. Seeing the number of BDs dwindle down to 2,000 over the next three years may turn out to be an optimistic forecast.

Read the full article at

Jon Henschen is President of Henschen & Associates, an independent broker dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Jon Henschen
Visit website