Despite a bruising, competitive market that some say is inhospitable to their survival, many small independent-contractor broker-dealers see plenty of opportunity.
In fact, to the executives of large firms who contend that the high cost of technology and the growing burden of regulation will force the minnows to sell out, small-firm executives give a figurative Bronx cheer.
"We focus on service. That may not be economical for a large firm to do," said Clive Slovin, president and chief executive of The Strategic Financial Alliance Inc. in Atlanta, which opened for business in 2003.
The firm has about 70 affiliated independent registered representatives with gross revenue of about $17 million.
"The sole objective is to help the financial adviser meet the needs of clients," Mr. Slovin said. "That's not a mass market approach, and that's why small companies can survive — and prosper."
The firm has no proprietary products to sell, and there are no other business divisions with which to integrate or contend, Mr. Slovin said.
Small firms are defined as having 150 affiliated reps or fewer, according to the
Financial Industry Regulatory Authority Inc. of New York and Washington.
Small broker-dealers make up the overwhelming number of firms that are members of Finra. There are 4,594 small firms, or 91.8% of the self-regulatory organization's total broker-dealer membership.
While small firms don't have the economies of scale of larger broker-dealers or the power to squeeze vendors such as mutual fund companies for favorable pricing, they do offer the advantage of a close culture, executives and consultants said.
"For some advisers, a small broker-dealer gives that sense of belonging," said Philip Palaveev, senior consultant with Moss Adams LLP of Seattle. "Large broker-dealers can feel like a supermarket."
One executive at a small firm agrees.
"Advisers have a voice and role in a small broker-dealer," said Dennis McCarron, president of U.S. Wealth Advisors LLC of Braintree, Mass., which has about 50 affiliated reps and $6 million in gross revenue. "They can come in and pound their chests."
Furthermore, advisers affiliated with small firms can also create their own hometown business and use that to their advantage, Mr. McCarron added. "We encourage advisers to create their own RIA brand in their communities. We're behind-the-scenes," Mr. McCarron said.
Small firms, however, are bound to feel the pinch, said one consultant.
New compliance costs, such as those associated with forthcoming Finra rules for the sale of variable annuities, only add to the pain, said John Hurley, managing director with Suasion Resources Inc., a Roseland, N.J., consulting firm for financial services companies.
"Big players continue to get bigger, and for smaller firms, it's tougher to recruit," he said. "These markets make it difficult. Some firms will advance, and some will struggle to keep up, and some will be acquired."
Despite the current uncertainties in the choppy market, the drive to open small broker-dealers remains strong for some.
In January, Scott Hanson and Pat McClain resigned from Securities America Inc. of Omaha, Neb., to start their own broker-dealer, Hanson McClain of Sacramento, Calif.
"We just wanted to have more independence," said Mr. Hanson, a partner with the firm, which has a dozen advisers and produces $15 million to $16 million in fees and commissions. "It's a traditional investment advisory firm with a traditional brokerage arm."
Starting a firm is a challenge, Mr. Hanson said. His staff transferred 7,000 client accounts, and he had to hire several key executives, including a chief compliance officer and chief operating officer.
Mr. Hanson said that keeping up with regulators such as Finra and the Securities and Exchange Commission is tough, but small firms can implement new regulation in a way that best fits and is not unduly cumbersome.
"It's a transitional year for us," he said. "A year from now, I'll probably have a big smile on my face."
E-mail Bruce Kelly at [email protected].
