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Struggling Small Broker-Dealers Finding New Life as Super Branches

01 Feb 2018
Struggling Small Broker-Dealers Finding New Life as Super Branches

Regardless of what the future holds, it’s clear the financial industry is facing ever-tightening regulations and the increased cost of compliance. 

Consequently, more and more small and mid-sized independent broker-dealers are surrendering their costly supervisory and compliance responsibilities and rolling up under independent advisory and brokerage firms as super branches.

While the industry lacks a precise definition of what constitutes a super branch, in general, an OSJ or branch office that supports 10 or more financial professionals who produce at least $3 million in combined gross dealer concessions and operate in multiple geographic locations would fit this growing business model.

No matter how this business model is defined, it’s becoming an increasingly popular option for small broker-dealers struggling under the burden of new costly regulations. 


The Dilemma: Find More Capital or Close Doors

Like many small broker-dealers, Foothill Securities, headquartered in Santa Clara, California, faced the challenges of a more complex regulatory environment and demand for bigger and better technology infrastructure, at a time of margin compression. The firm had recruited successfully between 2006 and 2016, growing to 210 financial professionals, but growth alone could not provide the capital needed to sustain the company. 

Foothill’s board of directors faced a dilemma: find more capital, find a partner for merger or acquisition, or potentially, close the doors of a firm that had operated in Silicon Valley since the 1960s.

In 2006, Foothill Securities had $17 million in annual production from its financial professionals. Using a value proposition based on its small, flat corporate structure, high payouts and financial professional ownership, the company grew to 210 financial professionals, 13 staff and $40 million in annual production over the next 10 years. 

Following a regulatory audit in 2016, the board of directors decided the company needed a stronger partner with better financial stability, stronger compliance processes, more advanced technology, a service-oriented culture and a broader selection of investment products. 

“The industry was going through dramatic changes,” said Stephen Kareta, who had been leading Foothill’s recruiting and training initiatives since 2006. “I’m not sure what the new rule of thumb is for the number of financial professionals or amount of revenue needed to sustain a broker-dealer today, but if there isn’t enough money for compliance and technology, the company can’t sustain itself.”

The Foothill board tapped Kareta to lead the search effort and set an aggressive timeline – six to eight months – for a decision.

“We had a simple recruiting mantra,” Kareta said of Foothill’s growth years. “High payout, opportunity for ownership and a small, flat corporate structure. The financial professionals liked the high payout, but started to see things unnerved by the lack of financial stability.

At the board’s direction, Kareta began his search for a new home for the firm – a larger, financially stable independent advisory and brokerage firm that could handle a $40 million group while allowing the Foothill culture to live on as a branch. 

The search became more complicated when CUE, a large OSJ branch within Foothill and itself once an independent broker-dealer, asked to be a separate branch from Foothill under the new broker-dealer. 

The Foothill group, with about $22 million in annual production, wanted its financial professionals to report directly to the new firm. CUE, with $14 million in annual production, wanted to operate as an OSJ as it had under Foothill. In addition, the company served 21 independent registered investment advisor (RIA) firms, meaning the new broker-dealer would need to accommodate that structure.

The Foothill Securities board of directors chose Securities America as its new advisory and brokerage firm.


Renewed Focus on Client Service Leads to Change

Much like Foothill Securities, Evolution Financial Advisors, formerly an independent broker-dealer that operated as Wall Street Financial Group (WSFG), was facing a change in 2016. The desire to renew its focus on serving clients led the Fairport, New York, practice to transition to a branch office under Securities America.

“Now we can leverage our client-focused approach with industry-leading resources,” said Evolution President Vikkie Bach. “As a large OSJ branch under a leading independent advisory and brokerage firm, we gained compliance support, strong technology and important value-added programs like succession planning, practice management and a full suite of asset management resources.”

Like Bach, other owners and executives at small and midsized broker-dealers that have found new life as branch offices are discovering a host of benefits including:

Reduced Risk to Net Worth

Given the current litigious business environment, actions by a single rogue financial professional or poor advice from a well-meaning financial professional can lead to liabilities that can wipe out an owner’s hard-earned equity overnight.

By winding down the firm and becoming a branch office, owners reduce their risk through technology that enhances compliance and supervision processes, broader and more affordable errors and omissions coverage and shared risk with a larger, more capitalized firm.

Access to Superior Compliance and Technology

Keeping pace with rapidly evolving technology can put a significant strain on smaller broker-dealers. 

A larger independent advisory and brokerage firm is better positioned to provide branch offices up-to-date compliance systems, performance reporting, portfolio management and client management systems and the supervision systems needed to support them. Access to these tools accelerates the branch’s revenue growth and helps recruit and retain financial professionals. 

“We had one financial professionals looking to get out of managing people and another considering their continuity plan,” said Bach. “Now, they’re saying, ‘Wow! We have all these services and tools. Forget the five-year plan. We’re not going anywhere. You’re stuck with us for 10 years.’”

Increased Ability to Recruit

By streamlining the day-to-day supervisory and compliance responsibilities, owners are left with significantly more time to recruit and develop their financial professionals.

Evolution Financial Services Vice President Robert Anderson said the change will allow him to get back to his real passion – working closely with financial professionals to help build their businesses. 

“When Vikkie and I purchased WSFG, I was an OSJ and managed a branch for WSFG,” Anderson said. “I was used to developing financial professionals. As an industry, we’re doing a poor job of drawing young people into the business. There’s not enough focus on helping financial professionals reach their goals.”

Because large advisory and brokerage firms typically have internal teams of recruiters, owners are no longer dependent on their own bandwidth and resources to grow the branch. Larger firms also have access to capital and incentive packages, including up-front money, needed to recruit more profitable advisors.

The rapidly changing business environment has caused many owners of small broker-dealers to reevaluate their current operating structure. Many are coming to the conclusion the perceived reward of running a broker-dealer is no longer worth the risk. 

Operating as a branch manager lets them focus on what they do best – serving clients, recruiting and helping them grow their business.



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