Advisor headcount in the bank-owned BDs increased for the first time since 2016, according to the 2022/2023 Kehrer Bank Broker Dealer Survey. While the increase was small— 2.5%—the reversal of the slow decline in the advisor force was welcome news, as adding advisors is key to future growth.
However, profit margins in the bank-owned BDs slipped, a natural result of an influx of new advisors. Newly minted advisors are less profitable than established advisors while the fresh advisors ramp up their production. In addition, they consume relatively more of the revenue they produce, due to transition compensation arrangements, and the firm incurs recruiting and onboarding expenses.
The fact that adding advisors shrinks profit margins remains a conundrum for the directors of bank and credit union investment services firms. Financial institutions generally manage their investments services businesses like they manage their banking businesses – controlling expenses to increase profit margins. The problem is that the major expense of the investment services business is the compensation paid to advisors, and that is often the focus of cost control. That is why we see advisor hiring freezes and pressure to squeeze advisor payouts.
At the same time, institution management pressures their investments services directors to grow the business. Advisors are a large expense, but they produce the revenue.
And advisor headcount is a key driver of growth. Last year the additional advisors contributed to the 3.2% growth in revenue experienced by the bank-owned BDs. New advisors produce revenue, just not as much as more tenured advisors. Financial institution CFOs should note that, last year, revenue growth combined with thinner margins generated an increase in total profit contribution of 11%. Wouldn’t it make sense to manage investment services businesses to grow total profit rather than increase profit margins?
About the Annual Kehrer Bank Broker Dealer Study. The Annual Kehrer Group Bank Broker Dealer Study has been conducted since 2014. 22 financial institution-affiliated broker dealers, which collectively employ 2,912 advisors, participated in the 2022-2023 survey. Data on calendar year 2022 was collected during the first quarter of 2023. This year’s study was sponsored by LPL Financial.