Community banks are no longer the only financial firms looking to outsource broker-dealer services, as more midsize banks are considering vendors.

Midsize banks are vetting such services for different reasons than those of small banks, which have been intent on mining for revenue. For bigger banks, the rationale centers on cutting operations and compliance costs.

Zions Bancorp. (ZION) and Regions Financial (RF) recently announced partnerships with PrimeVest Financial Services to expand their wealth management and insurance operations. The moves highlight a trend: the number of advisory firms is falling even as the ranks of registered advisors climb.

The number of firms has fallen by 13% since 2007, according to October data from the Financial Industry Regulatory Authority. After declining by 6% from 2007 to 2011, the number of representatives grew by 1% during the first 10 months of this year.

Expense control is a big factor.

"We looked at the time and capital it would take" to build a broker-dealer unit compared to outsourcing, says Jim Nonnengard, an executive vice president of Regions Investment Services, a division of Regions Wealth Management. By signing on with PrimeVest, "we can simply focus on the clients."

Regions waslooking to expand its investment services operationsafter selling its broker-dealer, Morgan Keegan, to Raymond James.

The Birmingham, Ala., company plans to tap its new relationship with PrimeVest to add up to 300 advisors over the next three years, Nonnengard says.

Like Regions, a growing number of midsize banks are seeking out vendors to obtain the scale in information technology and compliance to support hiring more advisors. That could mean more competition, particularly for the community banks that are already outsourcing those functions.

A bank's "IT staff has other demands on their time and resources," says Catherine Bonneau, PrimeVest's president and chief executive. Banks often find it difficult to expand their operation if they lack the necessary back-office framework "to make the program efficient."

Zions signed with PrimeVest in June to support the Salt Lake City company's existing broker-dealer and advisory firm. The $53 billion-asset company particularly wanted to expand its life insurance business and get back into offering fixed and indexed annuities. PrimeVest handles much of the compliance requirements for both Zions and Regions.

Banks with existing programs are looking at "how to mitigate the risk and are engaging third-party providers as opposed to carrying that in a Camels rating," Bonneau says.

Outsourcing trend has long been en vogue among community banks, many of which found it impossible to develop fee-generating businesses in-house. While heightened regulation on investment services is increasing a reliance on outsourcing, leaders at community banks say they are concerned that such a shift will lead regulators to focus even more on the ins and outs of vendor relationships.

Outsourcing will keep rising "because people won't have the institutional knowledge to comply" with added regulation, says John Corbett, the president and chief executive of CenterState Bank of Florida in Winter Haven. The $2.4 billion-asset bank, a unit of CenterState Banks (CSFL), has a broker-dealer outsourcing relationship with NBC Securities in Birmingham. Still, "the vendor management compliance issue is going to be huge."

Regulators have beencautioning banks about third-party relationships. Representatives from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said during a panel discussion at the American Bankers Association's annual convention in October that their agencies were paying attention to vendor agreements.

"Outsourcing arrangement make a lot of sense but the bank should be mindful that there's rising regulatory scrutiny of it," says Jo Ann Barefoot, a co-chairman of Treliant Risk Advisors who sits on the Consumer Financial Protection Bureau's consumer advisory board. "The bank is likely to be held responsible for what the third party does, particularly on consumer protection," adds Barefoot, a former deputy comptroller of the currency.

PrimeVest has witnessed firsthand that regulators are scrutinizing their relationships, leading potential clients to spend three to six months to vet potential vendors, Bonneau says.

PrimeVest, which will be rebranded as Cetera Financial Institutions next month, has become more selective about its clients. The company has been weeding out the banks that signed on in an effort to find quick-hit fee income to pad lackluster earnings.

"It does not warrant the exposure of risk of maintaining a program that is totally reactive," Bonneau says. Still, she says that increased regulatory scrutiny has helped both clients and vendors become more prepared.

"Because we service so many different financial institutions from so many different regions of the country, we get a very good cross section of what the regulatory landscape is at any point in time," Bonneau says. PrimeVest treats requests from individual clients as though each could become a broader petition from more clients, she says.