Finra Regs Force Sale of Small BrokerDealers


( Several factors currently at play, including Finra regs may contribute to a substantial sell-off of small broker-dealers in the near future, which in turn will drive down what advisors can command in signing bonuses, ThinkAdvisor writes.

Existing Finra regulation already makes it difficult to remain profitable without scaling up, according to the web publication, with brokers complaining about the resources they must commit to meet all the requirements for disclosure, record-keeping and reporting.

LPL Financial, which has been in the regulator’s crosshairs over the past few years, should be a warning story to smaller firms, according to ThinkAdvisor. Furthermore, the upcoming fiduciary rule implementation by the Department of Labor will dampen profitability still further by placing restrictions on product choices and imposing labor-intensive requirements on disclosure in retirement accounts, while increasing competition from robo-advisors will continue the downward push on fees, the publication writes.

The website suggests the “tipping point” for broker-dealers to stay profitable may soon move to those with $25 million in revenue and higher from the current $10 million in revenue.

The strong dollar is also making it attractive for foreign owners to sell off their broker-dealers, including AXA Advisors, Jackson National and Allianz, ThinkAdvisor writes. In addition, insurance companies such as ING, MetLife, Nationwide and Transamerica have been selling off independent units while favoring those that sell proprietary products, while wirehouses are seeking 15% returns on their broker-dealers. The only potential buyers out there are larger broker-dealers and private-equity firms, the web publication writes.

What this flood of broker-dealer sales means for advisors could be much lower sign-up packages: rather than the 200% trailing revenue witnessed earlier in 2015, bonuses are likely to come back down toward the 30% to 40% of trailing revenue seen earlier in the 2000s, according to ThinkAdvisor.

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Push For More Transparency Exposes Broker-Dealer Profit Centers

download (10) blog update is courtesy of Think Advisor. With a push for more transparency in the brokerdealer industry, profit centers are being exposed.  

There’s nothing wrong with broker-dealers being profitable, but how those profits are obtained could use a good dose of disclosure. Representatives deserve to know that what they are paying is a true cost and what they are receiving is the best possible commission from a vendor.

First, let’s look at the profit centers that are relatively obvious to reps. In addition to the spreads broker-dealers receive from payout grids, there are two other primary sources of broker-dealer profit: revenue sharing and markup.


Revenue sharing happens between the broker-dealer and the product vendors, so it’s of little concern to reps. For example, on mutual funds and variable annuities, broker-dealers will negotiate with vendors to earn basis points (bps) on assets or sales of products their reps sell.

Broker-dealers will typically make 1 to 10 bps on either assets or sales of products, with small firms making only 1 or 2 bps and larger firms making 8 or more. Larger firms also have the ability to make these basis points on both assets and sales as they leverage their scale to obtain more.

On REITs and alternative investments, BDs earn between 1% and 1.5% extra in commissions on those product sales, which is called “marketing reallowance.” You may have noticed the increasingly large REIT and alts presence at BD conferences over the last five years—it’s simply because these vendors are currently willing to spend more to get in front of reps.


Markups, such as ticket charges, are something that representatives recognize as a profit center when they look at their various costs and see that firms differ on what they charge for them. It may not be apparent how much the markups are, or how extensively the costs incorporate overall costs, but reps recognize that there is a spread between clearing firms’ costs and what broker-dealers charge the representative.

For example, a clearing firm commonly charges $1 for postage and handling fees, and the broker-dealer charges between $4 and $7. A stock ticket charge from the clearing firm may be $9, but they charge the rep $19. BD scale is a primary factor in how low a firm is able to negotiate with the clearing firm: Small broker-dealers may be able to negotiate perhaps $12 from the clearing firm on stock ticket charges, while a large broker-dealer can negotiate down to $5.

For the rest of the article on ThinkAdvisor, click here.