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Do-It-Yourself Broker/Dealer

By now, advisors have been bombarded with talk of “going independent.” It's a phrase that is regularly circulated in the hallways and offices of wirehouses and regional broker/dealers, and in the exhibit halls of major industry conferences. The ones who've had success at it claim it's the best thing they've ever done: No more suits breathing down your neck, tracking your every trade and conversation. And of course, there's the increased payout.

But while there are many routes to independence, there is one option that, lately, is more often discussed: Rather than join an existing b/d as an independent contractor, an increasing number of reps are starting their own broker/dealers.

Norman Malo, president of clearing firm National Financial, says these individuals want to have maximum flexibility to build their businesses the way they choose to, but don't want to sacrifice on product or service. “When you associate with a b/d, the firm will have an established book of rules that an advisor may not be okay with,” he says. For example, the b/d may require advisors to send all paperwork through its central office, or maybe it doesn't allow its reps to pay their own employees. Sometimes there are restrictions on products, like private placements or certain variable annuities, as well as marketing. “These guys decide they don't need someone to help with those things and say, ‘I can handle that myself,’” Malo says.


Gary Ran is a perfect example of this trend. After two decades as an employee broker at two large wirehouse firms, he decided it was time to take his $1.5 billion business, and go out on his own. Rather than join an independent b/d, Ran launched Telemus Capital Partners in February 2005. “I didn't join an independent b/d because it seemed like an interim step to real independence. I wanted my own business where everything originated from my firm, and where we were in control 100 percent of the time. I didn't want to rent someone else's platform, because even with small b/ds you become a part of something that is bigger than you,” he explains.

Ran's firm has experienced impressive growth: Telemus' revenue has jumped 50 percent since the start of the year and increased sevenfold since its February 2005 launch. Still, Ran says starting his own b/d was a lot more difficult than he originally expected. He advises reps to make sure they have a scalable business and some management experience behind them.

You'll certainly have an easier transition in setting up your own b/d if you've already worked in the independent contractor space. After all, advisors who are running independent offices already do about 80 percent of the compliance and administrative work, says Warren Forest of Forest Brokerage Advisers, a b/d compliance consultant in Winter Springs, Fla. Because independent b/d-affiliated reps typically have their own staff in place, starting a b/d basically requires little more than some additional training and education.

It's an idea that merits careful consideration. “If you're making about a million in production each year, and the b/d is getting 10 percent of that (or $100,000), then you've got enough to run your own. And you'd be better off financially,” Forest says.


Before you get rid of that familiar logo on your business card, there are a few things you'll want to know about setting up, including the approval process developed by the Financial Industry Regulatory Authority (FINRA.) The most basic requirement is capital: You should have somewhere between $50,000 to $100,000 on hand, according to consultants familiar with the process. Michael Brown, president of Atlanta-based b/d Solutions Consulting, says that number covers both a b/d's net capital requirements plus all expenses the firm will endure in the first six months. (It doesn't take into account any projected income you might earn during that period.)

Typically your startup expenses will include FINRA and state registration, the cost of consultants, salaries, and deposits made to clearing firms. The costs can vary though. For example, if the b/d plans to trade for its own accounts, the cost can go up to $100,000 to $150,000. “FINRA wants to know that if you don't make a dime in the first six months, you'll still survive. They don't want a bunch of start-ups failing because it's not good for the industry,” Brown says.

Even with that capital safety net in place, Forest tells his clients to brace themselves for a loss of about 10 to 20 percent in the initial stages after the launch. During Telemus's first year of operation, he and his partners, who all invested in the firm out of pocket, lost over $1 million. The capital is what it takes to “just get to the starting line,” Brown says.


FINRA also takes the history and experience of the people running the b/d into consideration. In general, FINRA requires b/ds to have a minimum of two principals (though advisors can apply for a waiver of that requirement), plus one financial operations principal. Anyone in a supervisory role is required to have one year of direct experience, or two years of indirect experience in order to be approved. This is where many start-ups run into trouble, according to Brown. He says a lack of qualified principals is probably one of the main reasons applications for b/ds are denied. “Younger brokers come in as good salesmen and want to start their own b/ds, but they have zero supervision experience. We tell them, ‘Go find a gray-haired principal with some experience and come back to us.’ You want to be able to show FINRA that your principals have qualified for their positions,” he adds. Bottom line: You can't start a b/d without cutting your teeth in the industry first.

Ran says he knew getting FINRA (then NASD) approval would require both proof of capital and strategic sustainability. He says many brokers he knows don't start their own firms because they lack managerial skills. “In general, brokers are sales oriented. But you also need a management team. We have a five-person finance team, an accountant, compliance officer, administrative officer, CFO, COO and more. You have to be able to cover a lot of bases because this is such a highly regulated industry, and there is no room to cut corners,” he adds.

Another hurdle wirehouse reps may face when starting their own b/ds is the current employer. At some point during the process, the advisor looking to start his own b/d must file a U-4 with FINRA for his new firm. “Sometimes there's a way the system notifies your current b/d that there's a U-4 for the advisor at a new firm,” Brown says. That can cause a dispute and possible termination, he adds.

Ran had the help of his partners who managed the initial stages of the launch while he worked his day job with the wirehouse. “I spent my nights and weekends helping with the new b/d and my days at the [wirehouse],” he says. But in hindsight, it seems it was well worth the effort. Almost three years after its inception, Telemus has increased its assets under management by 166 percent to $4 billion, and has three offices, 60 employees, and is recruiting out of traditional wirehouse firms. “If you have a scaleable practice then starting your own b/d is a great opportunity to create a high-value business,” he says.


If you've made up your mind to start your own broker/dealer, make sure to follow each of these steps:

  1. Decide whether to start a new b/d, or acquire an existing operation.

  2. Select an approved name for your b/d.

  3. Determine which type of legal entity to form.

  4. Write a detailed business plan, and create an organizational chart.

  5. Prepare a detailed financial forecast for the first year's operations.

  6. Develop “written supervisory procedures.”

  7. Establish your capital requirements, and generate adequate funding.

  8. Select a clearing firm.

  9. Select a certified public accountant.

  10. Design adequate books and record-keeping systems for accounting, continuing education, advertising, business continuity planning, privacy notifications and documentation maintenance.

  11. Ascertain what state registrations will be needed, and initiate the “blue sky” process.

  12. Work with experienced compliance professionals to minimize downtime and expenses.

Source: Forest Brokerage Advisers, Inc.

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