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Is a trend developing?

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Jun 12, 2009 10:26 pm

I don’t know if this is a fluke or if a general trend is occuring in our business today.  This week, I’ve spoken with 3 Advisors who are all contemplating dropping their existing B/D and either:

  A) Starting the process to form their own B/D   B) Buying a "shell" B/D   Some of the Advisors are needing a B/D with a clearing relationship while others are looking at an Application-Only (No Clearing Firm) B/D to do all direct business.   One of the RIA Firms I support also operates his own B/D as a 1-man shop.  We had a conference call with a prospective OSJ Group this week.  The Group was informed by their existing B/D that the hassles were such that it was darn near impossible to do it on your own (of course they would say that right!).  Well, this gentleman who is a 1-man show has been operating his own B/D for over 10-years and is managing well.  He spends about 30% of his time on B/D Compliance issues and said if he were to outsource the compliance work to a firm like Regulatory Compliance, the time spent on doing B/D Regulatory work would drop significantly.   I spoke with Regulatory Compliance today and they are seeing a tremendous amount of interest from existing Advisors either with Wirehouse Firms or Independents looking into it.   Based on my experience, as Independent B/D's get larger, they have to factor in for the "lowest common denominator" in terms of compliance.  I.E. B/D Compliance rules based on the worst rep within the firm which, unfortunately, the good reps have to painstakingly endure.  Probably why, as B/D's get larger, they have to be more restrictive in their compliance rules.   Survey to the group -- have you ever considered forming your own B/D and is a trend developing?  From my perspective, I have to say I'm leaning towards the development of a trend but I could be mistaken.    
Jun 12, 2009 11:10 pm

I’d like to hear a little more about the application-only firm concept. 

Jun 13, 2009 12:40 am

My father worked for FINRA (NASD at the time) for 30 yars. He said the process of forming your own B/D is so expensive, time consuming, and difficult, that it makes very little sense to start your own unless you are looking to do something very specific that most indy B/D’s wouldn’t be as helpful with (focus on a niche in the investment industry). Years ago this was common practice (relatively speaking) for “family offices”, before they even coined that phrase, and before wirehouse planning teams and big RIA firms. Compliance was alos less onerous back then.

I wonder, are some advisors asking about forming their own B/D because they don’t understand what it entails? I just can’t think of a real good reason for the average FA to do this, unless they have a huge book, want to form a big firm, or are looking to specialize in something that most indy B/D’s have little specialty in.

Jun 13, 2009 2:13 am

<SPAN =line>

I was curious so one of the B/D Compliance Consulting Websites had a B/D Startup Estimator.  I assumed a basic sole-prop B/D doing business direct with vendors (application way).  See below:   Summary of this "B/D Start-Up Estimate"
Part One: Register the "Core Broker/Dealer" with FINRA   Consulting Fees (See payment schedule below) $ 12500     Regulatory Fees (Paid directly to the various agencies) $ 3955   Part Two: Register the Broker/Dealer in Additional States   Consulting Fees (Invoiced separately as completed) $ 0     Regulatory Fees (Paid directly to the various agencies) $ 0   Part Three: Register the Representatives in Additional States   Consulting Fees (Invoiced separately as completed) $ 0     Regulatory Fees (Paid directly to the various agencies) $ 0     Total Estimated Broker/Dealer Start-Up Costs $ 16455