Starting a B/D vs. Going Independent
I hold a Series 7, 24, and 63 and have 10 years of industry experience.
I decided to take a break from the industry and have been living/ working abroad. I've recently decided that I want to return to the industry but don't want to be obligated to a particular firm/ product.
I have been contemplating and researching starting my own B/D. Has anyone gone through this process recently? As a single individual (with one other person who holds a Series 63) is this realistic? Can you provide insight on the process.
Is there an alternative? Are there firms that will hold my licenses (at my expenses, if necessary) but allow me to work independently, at my own pace, without being bound by a certain group of investments?
I do not have a book of business and would be starting from scratch.
Thank you in advance!
Call Joe Jackson with Cape Fear Securities, Inc.
It’ll be worth your while. (910) 818-0375.
Starting your own B/D is an absolute hassle, and Im sorry to bear that news. I contemplated the same thing, and afterwards was about to retain a lawyer to start a volley of law suits against FINRA for levying sooo much stupid regulatory shit at an applicant. You need to have two PRINCIPALS, and an onboard financial ops principal. Then there is the quarterly submittals. This is definately a flaw that FINRA needs to change while they still have an investment industry. Cuz there is a definate outflow of financial advisors from the industry. The reason given? WAY too much regulatory oversight by FINRA.
There are many wonderful products out there for the pure RIA. Less hassles.
You have to ask yourself, what advantages would having a B/D bring you?
I’ve looked at this and in general you’re asking for a MOUNTAIN of hassle with questionable payoff vs indy, although I’ll address the issues I saw…
-You are asked to have two principals, although you can ask for a “single principle waiver” which is unlikely if you are seeking to do several different lines of business.
-You can outsource your FINOP principle duties since someone can register this license a few different places simultaneously but only function in a 24 capacity at a couple BDs at a time. A lot of FINOPs will hire themselves out until you get the designation or permanently if you just don’t want to do it.
-If you do form your own BD, you’re likely still going to clear through someone else anyway, unless not engaged in any brokerage accounts. (Only private placements or investment banking, for example.) Most of the large clearing firms have their own red tape, not to mention minimum requirements. The largest one will let a BD come on UNDER (!) another BD to use their clearing services if not already bringing 100MM of assets. If you don’t want to do investment banking business or your own private placements, how is being your own introducing BD for brokerage activity any more “independent” than registering as a rep at a self clearing firm like LPL or anyone else? It definitely will not cost you any less unless you’re doing significantly north of 1MM production. Keep in mind that some lines of business require a 100k net cap requirement as opposed to the 5k for other lines…it’s just to much cost and red tape, unless there’s something very specific you want to do and can’t at this point in time with an indy BD.
-Then there’s the liability. Wow. Want to bring on reps? Good luck getting thrown under the buss as the BD whenever someone is taken to arbitration. If you’re a branch with subreps through an indy BD you can still take your override but not worry about getting a FINRA judgement for failure to supervise. (Unless you have it set up where you actually are, such as you are the OSJ on paper instead of branch…)
I just don’t see how the massive amount of time and effort devoted to just having a BD isn’t better suited to producing. If you MUST go down this road, consider buying one and then changing the name afterward. That’s a bit quicker, although you might take the liability for any bombs that haven’t dropped yet from an arbitration standpoint. A “shell BD” with all the lines of business approval you want might be the way to go…but then again if you’re going to buy the BD, might as well buy the assets?
Can you elaborate on why you want to have a BD? I disagree with the “just get an RIA” statement. Apples and oranges…RIA purists let their ideology get in the way of practicality and turn the entire client value prop into a discussion of their comp, a losing proposition from the start. Ask them what to do when someone already has a commissioned product from the last joker. Pay to move it to fee-based? Get set up to do commission if you want, but your own BD is unlikely the best way to do that… notice that there’s a Rep Top 100 Wirehouse list? Top 100 indy rep list? There is no “Top 100 guy who decided to start a BD alone or with three friends” list. There’s a REASON for this.
Most of the independent broker/dealers are not going to force you to sell anything that you do not believe is in your client’s best interest. You will probably have more flexibility as they already have sales agreements in place and the larger ones are registered in all states to do business. You may run into some restrictions with products like private placements, but the broker/dealer may be doing you a favor by keeping you away from potentially hazardous products.
If you form your own broker/dealer, budget an incredible amount of time for regulatory requirements. You will be audited frequently, you will be liable for all losses, lawsuits, and errors. It sounds great owning your own business until you look at the realities, which are referenced in earlier posts.
For the most part, you also own your business as an independent representative. You are contracting with someone else to do many of the headache tasks that are not fun and in return giving up 10 or 15% of your revenues. If you are a small shop, you will spend much more than that amount on personnel and lost revenue if you try to do it yourself. Look at the surveys of independent BD’s and their profit margins. Now consider the profit margin enjoyed by many independent reps. Be great at one thing. I would not start a broker/dealer unless I knew there would be well in excess of $5 million in revenue within the first two years. The compliance requirements are incredible, which is why many smaller broker/dealers have closed their doors. Read the articles on the shrinking number of registered broker/dealers. If you are convinced you need to own your own B/D, consider going back into production, getting at least the first million in revenues out of the way and perhaps partnering with a few others to share the cost.
A better option might be starting an RIA. There’s no need to start a BD. The RIA route is fast and less challenging on the regulatory front.
Fidelity, Schwab, and TD offer fantastic brokerage and custody for RIAs. You can speed things up on the formation of your business with services like:
There are BDs out there that will allow you to operate relatively independently as well. They are all looking to add high quality advisors who have high growth potential so most will bend over backwards to bring you on if you’ve got an existing book.
Let me know if I can be of assistance in any way.
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