What To Do When You Smell a Storm Coming At Your B/d

When broker-dealers shut their doors, a lot of people suffer: home office staff, advisors, clients. The good news is, new technology and today’s 24-hour media cycle have put advisors in a much better position to sniff out trouble and to know when things are bad enough to leap.

When broker-dealers shut their doors, a lot of people suffer: home office staff, advisors, clients. Today’s heightened regulatory environment is resulting in an increasing number of broker-dealers shutting down, merging or being bought out.

The good news is, new technology and today’s 24-hour media cycle have put advisors in a much better position to sniff out trouble and to know when things are bad enough to leap. The amount of information available and in the news gives advisors a look behind the curtain at their broker-dealers in a way that wasn’t possible even a few years ago. In years past, advisors were typically in the dark if their broker-dealer was at risk with regulatory, legal or financial issues. Today, technology and the media have put awealth of information at advisors’ finger tips. The hard part is knowing how to find good information and then knowing how to evaluate it and what kind of action to take. Meanwhile, because advisors have access to so much information about their broker-dealers, firms who don’t openly communicate with their advisors are at a competitive disadvantage.

Case in point: Years ago, a firm called Brookstreet Securities went out of business as a result of markdowns on collateralized mortgage obligation securities (CMOs). Just one week after advisors learned the news of their broker-dealer’s financial difficulties, the broker-dealer went out of business. Such short notice left advisors little time to find a new firm. Today, advisors typically get more forewarning. For example, when QA3 recently closed its doors, rumors of the firm’s trouble over the sale of failed private placements were in the press for months prior. When Securities America found itself faced with similar disputes, news of the firm’s uncertain future and Ameriprise’s plans to sell the unit were hard to miss.

Looking Behind The Curtain


In contrast to the situation of BrookStreet advisors’, some QA3 advisors were able to check out the rumors of financial trouble and get proactive about finding new digs. Of course, plenty of advisors still missed the signs of distress, and found themselves in crisis when news of the firm’s closing hit. Securities America advisors, meanwhile, have a choice of whether to wait and see who the buyer will be or to start hunting for a new home.
We recognize that most advisors don’t want to move their practice. Yet in today’s difficult environment where more and more broker/dealers are merging, struggling or going out of business, it’s important not to ignore signs of financial distress.

Evaluating What You Find


If and when you see signs of financial distress at your broker-dealer, it’s important to look a little deeper and evaluate the situation. A broker-dealer without a solid financial base may not be able to survive potential regulatory problems or arbitration. This means that advisors who hear rumors or see signs of distress should look at their firm’s excess net capital figure to evaluate whether the firm has enough in reserves to cover current or pending arbitration costs. If your firm doesn’t have significantly more in excess net capital than it might potentially owe in legal expenses, it may not be there tomorrow. Advisors can assess a firm’s risk by checking for any arbitration against the broker/dealer on the website of the Financial Industry Regulatory Authority Inc. (www.finra.org). They also can check the firm’s financials at the website of the Securities and Exchange Commission at sec.gov.

Many QA3 advisors, for example, were tipped off to trouble when they investigated and discovered that their firm had only $118,000 of excess net capital at the end of 2009, yet $42 million in legal liabilities.

Protecting Yourself

Advisors who confirm their broker-dealer is faced with financial trouble can be proactive by formulating a back-up plan. This means finding a broker-dealer that fits the culture and needs of your business, and understanding its transition process. Having a plan for what to do when and if you broker-dealer is no longer there for you serves as an insurance policy both for your business and for your clients. While no one wants to think they’ll ever need such an insurance policy, the increasing number of firms that are having trouble today and the history of advisors being left in a lurch when they find themselves at one of those firms, makes having this kind of protection essential.

Jodie Papike is the Executive Vice President of Cross-Search, the first third-party, independent broker-dealer advisor and executive placement firm. For more information, please visit www.cross-search.com.

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