How Smaller Sized Broker-Dealers Can Survive

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BrokerDealer.com blog update includes a look at smaller-sized brokerdealers and best strategies that can help them survive in an industry plagued by ‘the race to zero’ insofar as commission rates, ever-increasing compliance costs, and one that requires technology fluency in order to address a combination of needs and demands from institutional clients.

Below view is courtesy of extract from Nick Fera’s contributed column to the TheStreet.com Sept 10 edition..

NEW YORK (TheStreet) — If you’re a small to mid-sized broker-dealer, you know your industry has seen significant consolidation in recent years. Let’s look at how you can survive in this environment.

Since the financial crisis, the U.S. broker-dealer sector has been a hotbed for mergers and acquisitions. A noticeable uptick in consolidation occurred between 2008 and 2010, coinciding (understandably) with the introduction of Dodd-Frank reforms.

The number of broker-dealer firms registered with the Financial Industry Regulatory Authority dropped to 4,040 by April 2015 from 4,578 in 2010, a nearly 12% decrease over five years. Most analysts and industry experts agree that there are two primary factors fueling this trend: shrinking margins and swelling compliance costs.

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Small, mid-sized and specialty broker-dealers are at the center of this consolidation. Many of them lack the cash flow and technology to overcome today’s strict regulatory environment. Despite these dreary numbers, hope is not lost. Independent broker-dealers that have yet to merge or become acquisition targets still have options available to capitalize on their evolving industry.

Squeezing the Middle

Similar to the airline industry’s restructuring during the ’80s and ’90s, a handful of large players are eagerly snapping up regional and middle-market broker-dealers. Businesses including Cetera Financial, RCS Capital (RCAP – Get Report) and AIG’s (AIG – Get Report) AIG Advisor Group have grown their portfolios by purchasing firms that likely didn’t have the resources or client base to stay out of the red for years to come.

During and after the recent economic recovery, smaller brokers that did little to differentiate their service offerings (in terms of research, trade execution or asset coverage) or improve their operating cost structures began experiencing a downturn in activity. Business that didn’t shift to the bigger firms went instead to boutique shops that support a niche set of securities or focus heavily on research.

For better or for worse, this recent wave of consolidation has been a necessary chapter for the broker-dealer sector. The large serial acquirers have the budgets, staff and margins to compensate for the gaps that plague small and mid-sized firms. In volatile times (when losing a client or two could bring a broker-dealer down), mergers and acquisitions are enticing alternatives.

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Morgan Stanley Hit With $20mil Whistleblower Suit

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Two ex-brokers hit brokerdealer Morgan Stanley with a $20 million lawsuit this week, alleging that they were fired in retaliation for complaining about improper practices and violations of securities law at the wirehouse, according to news from BankInvestmentConsultant.com.

whistleblowingIn a news story filed Aug 27, Jamie Feldman-Boland and her husband, John Boland, say that they witnessed trainees and interns entering in trades on behalf of advisors, and presumably doing so with brokers’ access codes in violation of the broker-dealer firm’s policy.

Other misconduct they say witnessed: an advisor trying to improperly get an insurance commission; cancelling a business deal worth $200 million to punish Feldman; and harassment of Feldman by another advisor and her branch manager.

Morgan denies the allegations.

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“These former financial advisor trainees have filed numerous unsubstantiated claims since their terminations in 2011.  To date, none have been found to have any merit. We believe this latest claim is equally without merit and will be dismissed,” a Morgan spokeswoman said.

Alice Keeney Jump, an attorney at law firm Reavis Parent Lehrer who is representing the Feldman and Boland, rebutted Morgan’s argument, saying that the couple’s allegations are straightforward.

“I disagree any arbitration panel has settled these claims,” Jump says.

She adds, “My clients are fully confident in the truth of their allegations and have decided to pursue their rights.”

COLD CALLS

Feldman, 38, joined Morgan in 2008 after four years at Merrill Lynch, according to Finra’s BrokerCheck. Boland followed her to the firm in 2010 while the two were engaged, according to the complaint, which also stated that Morgan knew of their relationship.

When she joined the firm at its Midtown office in New York, she was part of a joint production agreement with two other advisors, according to the complaint. Her partner for high-net-worth clients, Michael Silverstein, had more than thirty years of industry experience, according to FINRA records.

According to the complaint, Silverstein did not devote time to meeting with or serving prospective clients that Feldman brought in, which in turn hurt her production numbers at the firm. Feldman alleges that by January 2011 she had presented clients with more than $100 million in assets to Silverstein, but he failed to prepare any investment portfolios.

In their complaint, Feldman and Boland also allege that trainees and interns cold-called Pfizer and Verizon employees close to retirement to urge them to roll-over their 401(k)s to Morgan Stanley, guaranteeing them a 15% return, according to the complaint.

The investments were in fact in closed-end mutual funds which experienced sharp fluctuations in net value, according to the complaint.

In April 2011, Feldman went to her branch manager to complain about these and other violations she had witnessed. The manager, David Turetzky, told her to leave his office, and later asked for a list of her clients, according to the complaint.

The following month, Turetzky called Feldman into his office to tell her that the firm would not pursue “at this time” a $200 million commodities deal that one of her clients wanted, according to the complaint.

Feldman alleges this was retaliation for her earlier complaints as well as a confrontation with Silverstein, who tried to claim that he was in fact the introducing broker and therefore entitled to the fees and commissions.

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Goldman Smacked: Finra Fine of $1.8mil re OATS Violation

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(Bloomberg) — BrokerDealer Goldman Sachs Group Inc agreed to pay $1.8 million to resolve Financial Industry Regulatory Authority claims that one of its units submitted inaccurate trading information over a period of eight years.Goldman Sachs agreed to resolve the claims without admitting or denying the findings, Finra said in a statement Monday. Wall Street’s self-funded regulator accused the bank of sending bad data to the Order Audit Trail system, which Finra uses to monitor the trading practices of regulated firms.

“OATS data is integral to Finra’s automated market surveillance program to detect manipulative activity and other potential violations of Finra rules and federal securities laws,” Thomas Gira, executive vice president of market regulation, said in the statement.

From July 2006 to March 2015, Goldman Sachs transmitted inaccurate or incomplete information on more than 20 percent of all trading data submitted to Finra, the regulator said.

The conduct centered around the firm’s dark-pool trading venue Sigma X, which has been working on improving its technology. The New York-based bank hired Raj Mahajan, the former head of high-frequency trader Allston Trading, in January to run its equities electronic execution business, which includes the dark pool.

“We’re pleased to have concluded this matter,” Tiffany Galvin, a spokeswoman for Goldman Sachs, said in an e-mailed statement. “We self-reported many of the issues to Finra, voluntarily took steps to fix those issues, and provided substantial assistance to the Finra staff conducting the investigation.”

Finra Fines Bolster BD Regulator’s Finances

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Finra, aka Financial Industry Regulatory Authority Inc, the broker-dealer industry’s regulator announced a major uptick in revenues and profits, including a 2-fold increase in revenue collected from fines imposed on brokerdealers and others.

Finra’s income for 2014 jumped more than $100 million, as a result of cost-cutting and revenue-generating measures, InvestmentNews reports.

In particular, the industry-funded watchdog doubled money raised through fines, despite a drop in the number of actions, while a voluntary retirement program ate into overall expenses.

Finra’s net income jumped to $129 million in 2014 from $1.7 million in 2013, according to the regulator’s annual report cited by InvestmentNews. Revenue increased from $900.7 million to $996.6 million. In large part, this was due to the $132.6 million collected in fines during 2014, compared to $60.4 million in 2013. While the number of monetary sanctions dropped from 754 in 2013 to 645 in 2014, the average fine soared from $80,100 to $205,600 in the same time period, according to the publication.

Finra also had a 5.8% return in its investment portfolio, which rose from $1.954 billion in 2013 to $2.076 billion in 2014. The regulator attributed this primarily to its fixed-income holdings, according to the newspaper.

Meanwhile, the authority cut its expenses from $998.9 million to $964.8 million from 2013 to 2014. This was helped by 176 employees taking voluntary retirement, according to the report, says InvestmentNews.

Mind you, the number of Finra executives earning $1 million or more went up, from four in 2013 to seven last year. And its member firms each got a $1,200 rebate to offset the regulator’s annual gross-income assessment.

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Finra Launches Ad Campaign For BrokerCheck

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BrokerDealer.com update profiles this week’s MadMen style-campaign by Finra in their effort to encourage investors to use Finra’s BrokerCheck platform in advance of engaging a particular registered broker-dealer. Below is the excerpt from InvestmentNews.com.

Finra launched an advertising campaign on Monday to encourage investors to research their brokers before hiring them, but some industry observers said Finra’s database doesn’t provide enough information.

BrokerDealer.com provides a global database of broker-dealers registered in the US as well as those performing brokerdealer services in upwards of 30 major countries throughout the world.

The digital, print and television ads promote BrokerCheck, an online database managed by the Financial Industry Regulatory Authority Inc. The database provides employment and disciplinary history about brokers, as well as their certifications and licenses.

The ads are hitting the airwaves just days after Finra submitted a rule to the Securities and Exchange Commission for final approval that would require brokers to include a link to BrokerCheck on their websites and brokers’ profile pages.

A print ad will run in Tuesday’s Wall Street Journal. Digital ads will appear on financial-news websites as well as search engines.

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