There have been estimates that the number of broker-dealers registered with FINRA fell by nearly 10% between 2005 and 2010, a trend that has continued over the past couple of years, and is expected to be seen in the future, due to a couple of key factors. Below is an overview of the key trends driving the continued decline of independent broker-dealers.
Industry Consolidation
Very challenging industry conditions following the credit crisis started a trend by which smaller broker-dealers either closed up shop or were snapped up by larger rivals.  Consolidation in the industry has continued, with large players including LPL Financial (Nasdaq:LPLA), Raymond James (NYSE:RJF) and insurance firms cited as looking to be more active in acquiring smaller broker-dealers. Low interest rates help make buyout activity more affordable, and the larger players are said to be interested in the steady fees that the more profitable broker-dealers are able to bring in each year. Stronger stock market returns are also increasing the appeal of acquiring market share because higher asset levels boosts fees that are based off assets under management.
Stock market gains boost profit margins, but low interest rates lower them. Smaller brokers that don't have the scale of the larger players and are more focused on fixed income are having a tougher time generating sufficient profits in today's investment climate. Scale allows larger brokers to spread fixed costs across a larger network of brokers and puts the smaller players at a disadvantage. As such, this is thought to be driving them into the arms of the bigger industry players.   
Heightened Regulatory Environment
Since the peak of the financial crisis, the financial services industry has been under fire by politicians and the main regulatory bodies. In addition, high profile scandals, including Bernie Madoff's Ponzi scheme, the collapse of MF Global and Peregrine Financial Group, and multi-billion dollar losses at money center bank JPMorgan Chase courtesy of a trader nicknamed the "London Whale" have shaken faith in the industry considerably. In a backlash of sorts but also warranted in many respects, politicians and regulators, including the Securities and Exchange Commission and FINRA, have set out to make the industry safer for the investing public.
The most significant piece of legislation to stem from the financial debacle is the Dodd Frank Financial Regulatory Reform Bill. The text of the bill is nearly 850 pages and was officially passed by Congress in 2010; but more than two years later, many of the provisions and stipulations are still being finalized.  This has both increased the costs and uncertainty of adhering to financial regulation.  It also puts smaller, independent broker dealers at a disadvantage, in terms of higher fees to hire attorneys and accountants to try and decipher all of the bill's details. 
The larger broker-dealers have proven better able to navigate new regulations. In some cases, such as with the bulge-bracket brokers, they have considerable lobbying resources and are able to influence the outcome of regulation. This is something smaller firms have little hope of doing.
Technology Needs
Heightened regulation increases the need for broker-dealers to maintain records and regulatory filings. The software developers in the industry are releasing tools to help them keep files organized and retrieved easily, but some of the offerings are expensive. One industry consultant mentioned that the larger brokers can more easily handle higher capital expenditures in these areas. Scale, again, helps them spread these costs across a wide broker network.   
Other Considerations
There are other reasons why independent brokers are increasingly exiting the industry or merging with larger rivals. Examples include a broker that ran out of capital due to higher regulatory costs. Another cited higher insurance costs with needing to close its doors. Of course, there are also those that aren't managed well or see a downturn in business; some have experienced excessive client complaints or defections, which can kill profitability.
It is also interesting to know which types of firms are leading the industry consolidation. In addition to the larger brokers cited above that have turned acquisitive, private equity firms are thought to be moving more aggressively into the industry. They look for the independent broker-dealers that demonstrate above-average profitability or growth prospects. Interestingly, insurance firms, which used to look to buy broker-dealers to improve their own sales distribution channel, are getting out of the business to return focus to their traditional insurance operations. Low interest rates have hurt annuity sales and the ability to sell them profitably.
The Bottom Line
A consultant from the firm Booz Allen recently estimated that consolidation among broker-dealers should continue for at least the next three to five years.  Overall, the number of investment professionals has remained steady in recent years, but brokers look to be increasingly working for the larger broker-dealers out there.   

At the time of writing, Ryan Fuhrmann did not own shares of any of the companies mentioned in this article.

Related Articles
  1. Professionals

    Tips To Get Into A Broker Training Program

    Becoming a registered representative isn't easy. Learn how to succeed at the first step.
  2. Investing Basics

    Differences Between Stockbrokers, Investment Advisors And Financial Planners

    Find out how these three financial positions differ and in which areas they can help you with your finances.
  3. Professionals

    Working For An Independent Broker-Dealer Vs. A Big Bank

    Here is an overview of what broker-dealers and big banks have to offer to employees and the different opportunities available.
  4. Professionals

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  5. Professionals

    Tips For Fitting In At Your Brokerage Firm

    Part of starting a successful career as a broker is finding the right place to work.
  6. Investing Basics

    Understanding Brokerage Fees

    Agents charge brokerage fees for facilitating transactions between buyers and sellers.
  7. Professionals

    Tips on Building a Resume for a Private Equity Job

    Trying to land a job in the coveted private equity sector? Ensure your resume meets the stringent PE job requirements with these important tips.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Investing

    Career Choice: Bulge Bracket Vs. Boutique Bank

    Bulge bracket banks offer higher salaries and prestige. But boutique banks are rapidly gaining market share and may offer better work/life balance and job security.
  10. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  1. Investment Banker

    Someone working at an institution raising capital for companies, ...
  2. Clowngrade

    An upgrade or downgrade of a security for reasons considered ...
  3. Valium Picnic

    A market holiday or a slow trading day.
  4. Piker

    A broker or investor who makes small size trades.
  5. Blocked Period

    A period of time in which an investor’s securities are prevented ...
  6. Borrowing Power Of Securities

    The value associated with being able to invest in securities ...
  1. How can an investment banker switch to a career in corporate finance?

    It's pretty easy for an investment banker to switch to a career in corporate finance. The career skills are easily transferable, ... Read Full Answer >>
  2. What are the best MBA programs for corporate finance?

    Opinions vary based on which publications you consult, but the best MBA programs for a career in corporate finance are at ... Read Full Answer >>
  3. What is the interest rate offered on a typical margin account?

    Interest rates on margin accounts vary according to the size of the loan and the brokerage firm being used. Generally, interest ... Read Full Answer >>
  4. How stressful is the typical corporate finance job?

    In the financial industry, corporate finance jobs are often contrasted with investment banking jobs. The traditional view ... Read Full Answer >>
  5. What should I study in school to prepare for a career in corporate finance?

    Depending on which area you want to specialize in, corporate finance can be one of the most competitive fields in business. ... Read Full Answer >>
  6. What are the differences between a Chartered Financial Analyst (CFA) and a Certified ...

    The differences between a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP) are many, but comes down ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!