Ranks of B-Ds likely to shrink by 540 firms in three years

Research firm says 336 brokerages shut down last year while 190 opened; ‘a steady trend'

By Bruce Kelly

Jun 23, 2011 @ 3:20 pm (Updated 3:54 pm) EST

Almost twice as many broker-dealers closed down than opened in the last year. And one industry analyst says things will get worse before they get better.

According to the research firm The Compliance Department Inc., 336 broker-dealers alerted the Financial Regulatory Authority Inc. that they were shuttering between May 2010 and May 2011. Some 190 new firms were admitted by Finra during the same time span. And The Compliance Department predicts that the industry could see an 11% net loss of broker-dealers by 2014.

That's an alarming prediction and one that may surprise even hardened veterans of the brokerage business. Certainly, the long-term trend of a shrinking universe of B-Ds has been highlighted by failures over the past year and a half by a number of notable firms, including GunnAllen Financial Inc., Jesup & Lamont Securities and QA3 Financial Corp. Each of those firms sold private placements that the Securities and Exchange Commission subsequently charged with fraud.

Currently, 4,540 broker-dealers are registered with Finra. But David Alsup, national director of business development with The Compliance Department, said that number could drop to 4,000 over the next few years.

“It's a steady trend,” Mr. Alsup said. “It's not a free fall. It will take another three years to get to 4,000 broker-dealers,” he said. “At the rate it's going, at least three years. I don't think it would go much lower than that.”

Mom-and-pop broker-dealers, small shops with one or two registered reps, are dying off, Mr. Alsup said. Such outfits rose on the boom in stock trading in the 1990s. Since then, the trading of securities has ebbed, damaging such firms. “It's close to a washout on that side,” Mr Alsup said. (Click on the followiing link to see the number of broker-dealer closings and openings by month.)

The only real growth in the industry is coming from firms' creating and selling private placements, he said. For the 12-month period ended in May, Finra admitted 92 private placement firms, according to the report. Also, foreign-owned broker-dealers are a strong source of growth, with Finra admitting 25 such firms in the past year.

Broker-dealers, which commonly operate with razor-thin levels of capital, are becoming finding strategies to ensure their survival, he noted. The successful firms have “more capital as a rule, they are bigger shops starting out, and they are targeted specifically at securities arenas such as captive private placements.”

“The big firms are consolidating the small firms and getting bigger,” he said. “In order to survive, broker-dealers need a good compliance team that understands and uses technology.”