Hybrids considering dumping Finra and working as RIAs exclusively

Pershing executive said broker-dealer model has some "challenging dimensions" to it

Jun 7, 2018 @ 2:39 pm

By Bruce Kelly

Fed up with what they say is the expense and headaches of operating under the Financial Industry Regulatory Authority Inc., an increasing number of broker-dealers of substantial size that are also registered investment advisers — so-called hybrids — are considering moving to the RIA channel exclusively.

"There are certainly a good number [of broker-dealers] who are serious and taking steps to move in that direction, and there are others who are in more of an exploratory phase," said Robert Cirrotti, managing director and head of retirement solutions for Pershing. The clearing and custody giant has close to 1,400 broker-dealer and RIA clients.

Speaking at Pershing's annual Insite conference in Orlando on Wednesday, Mr. Cirrotti said some broker-dealers are currently asking themselves if there is value to having the broker-dealer alongside the RIA business and how do they transform the business over the long term.

"The broker-dealer model in general has got some challenging dimensions to it," he said. "These firms are trying to view themselves as advisory first rather than a broker-dealer."

Mr. Cirrotti declined to name the Pershing clients considering the change.

There are three reasons driving such thinking for a broker-dealer to cut ties with Finra, Mr. Cirrotti said.

"First, these executive are positioning their firms for the future and determining who they want to be," he said. "Next, the question is, can they shed some expense relative to maintaining two regulators," meaning Finra and the SEC.

"Last, there is a little bit of regulatory arbitrage in a way," he said. "The broker-dealers are asking, 'Do I want to subject myself to two regulators instead of focusing on one who I view as my primary regulator going forward?' Besides shedding expense, it gives you focus of meeting the needs of a particular regulator."

Since at least the credit crisis, small groups of hybrid advisers who work under both Finra and Securities and Exchange Commission rules have been moving away from Finra, the primary regulator of brokers, and working solely as RIAs.

The potential departure of bigger firms as Mr. Cirrotti suggested — the industry considers a mid-sized broker-dealer to work with 101 to 500 reps — could exacerbate the long-term trend of a shrinking Finra. The number of broker-dealers has declined 24% over the past 10 years, from 4,891 in 2008 to 3,712 most recently, according to Finra.

Many of those have been small firms that could not bear the expenses of increased compliance as well as litigation.

A spokesman for Finra, Ray Pellecchia, noted that while the number of broker-dealers has declined over the past 10 years, the number of registered reps has remained steady.

Finra CEO Robert Cook has also recently touted that its recent self-exam process will result in putting a greater emphasis on helping smaller broker-dealers.

Another Pershing executive said that, while a small number of mid-sized broker-dealers are contemplating such a change, the majority of firms considering doing business as RIAs solely continue to be small broker-dealers, or those with 100 or less registered reps.

While there are some financial planning-focused broker-dealers considering leaving Finra, "it's not an onslaught," said Randy Reynolds, managing director.


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