When Ryan Smith's former broker-dealer closed in 2011, he and his two partners, who already ran their own registered investment adviser, decided to do something audacious. They launched a broker-dealer, DFPG Investments Inc.
Mr. Smith's mission was to create first-class due diligence for the plethora of nontraded real estate investment trusts and real estate private placements beginning to swamp the broker-dealer landscape.
With that laudatory goal, DFPG opened as a record number of small and midsize broker-dealers were closing. Thin margins, exacerbated by record low interest rates, had erased once-rich spreads on margin accounts and money market funds.
Executives with small broker-dealers such as DFPG (which had only $6.6 million in revenue in 2013) routinely grumble about the expense of performing their own due diligence on nontraded REITs and private placements. They may turn instead to third-party due diligence firms, whose work sometimes is paid for by the REIT or private placement sponsor.
Not so for DFPG. "We are very selective with the sponsors we work with, and we're known for this," Mr. Smith said. "We have as good a due diligence as anyone. Reps come to us and ask [to sell] certain REITs and private placements, and they're shocked when we tell them why they can't sell them."
A significant part of building DFPG Investments, along with Diversify Wealth Management, an RIA, has been expanding its internal due diligence team.
"Due diligence is a must for us," he said.
— Bruce Kelly
Wealth strategist and partner, Herbein Wealth Management