The Existential Crisis of the Nickel Broker-Dealer

Bank of New York Mellon’s Brian Shea made some surprisingly candid comments to the Pershing correspondent broker-dealers present at a conference this summer. The gist of his talk seems to have been that models need to change and choices about what services to provide and to whom need to be decided. Before the disruption comes to make these choices for them.

He relays the industry body count first, however…

From Investment News:

The number of broker-dealers has decreased by 12% since 2009 as around 600 firms left the industry or consolidated, Mr. Shea said, citing data from the Securities Industry and Financial Markets Association.

Moreover, profitability of the top 25 broker-dealers, which typically face higher regulatory costs and fixed costs such as clearing and custody, has fallen by 75% over the same period, Mr. Shea told the audience of several hundred Pershing investment advisory and broker-dealer clients on Friday.

Standard and Poor’s Financial Services estimates that the Dodd-Frank Act could reduce pretax profit for the eight largest financial institutions by a total of $22 billion to $34 billion annually. Of Dodd-Frank’s nearly 400 rules, only around half, or 52%, have been implemented, according to Mr. Shea.

It’s not going to get better. During the next market downturn, these firms will be under even more pressure as their products blow up and the sins of the up-cycle become apparent. It happens every time.

Shea’s overarching message to the smaller firms in attendance, ostensibly smaller b-d’s clearing through Pershing, was an upbeat one. It focused on the advantages the small firms have as the big guys struggle with the above-mentioned existential issues.

But I don’t see it that way. I think being the smaller version of something the public no longer needs or wants is not advantageous at all. It’s already over for the nickel broker dealer, what we’re witnessing now is the slow process by which the insiders slowly accept it and move on. Pershing should do the right thing and push them all toward their custody solutions for fiduciaries. The 1990’s model is not going to make a comeback, I don’t care how many unit investment trusts or non-traded REITs you create.

Source:

RIAs and small B-Ds have advantages over bigger firms (Investment News)