BOSTON - Broker-dealers have quickly become a major distribution channels for investment products and services but have to make adjustments to stay among the leaders, Cerulli Associates says.

A report issued by the research and consulting firm last week says broker-dealers are now the second-largest distribution channel for mutual fund companies, accounting for an estimated 19% of fund sales in 2000.

The main issues confronting them, Cerulli says, are practice management, generating new business, and staffing. The practices of reps who put business through these broker-dealers have reached capacity, and the broker-dealers are having a hard time finding new clients and raising their profits now that the investment market has weakened.

The business practices that the independents pioneered have become standard among their competitors, Cerulli says. For example, financial planning and fee-based practices have are commonplace at national full-services firms such as Salomon Smith Barney and Merrill Lynch.

Also, insurance companies have been migrating their agents to financial planners, and that has swelled the ranks of independent broker-dealer reps. The report says 55% of independent reps believed that other financial planners and other independent broker-dealers were their biggest competitors.

To stay competitive, and continue to recruit and retain reps, independent broker-dealer firms will have to devote more resources to home-office support and technology. Some of them are adding advanced planning tools and building Internet-based broker workstations to help reps serve clients who are becoming more affluent.

But Cerulli acknowledges that adding these resources can put more pressure on these firms' already thin margins.

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