Running a smaller broker-dealer wouldn’t seem to be a promising venture these days. Growing regulatory costs, low interest rates and fierce competition for advisors make the business a challenge for any size firm, especially those with limited resources.

But small-firm executives say they can thrive by offering a level of personal service to independent advisors who detest the stifling bureaucracy of larger firms.

Broker-dealers “all do pretty much the same thing—process the business,” says Susan Woltman Tietjen, chief executive at Girard Securities Inc., which has about 250 reps and $52 million in gross revenue. “For the reps, it comes down to how good the people are, the culture, the service and the experience they have. That’s how we distinguish ourselves from the big boys.”

A midsize firm of $25 million or more in revenue can create a nice niche, says recruiter Jon Henschen of Jon Henschen & Associates LLC, which specializes in placing independent reps. “They’re large enough to be financially viable, but not so large that it’s a big bureaucracy,” he says.

Smaller firms cater to experienced advisors who don’t need much guidance, Henschen adds. “They just leave the broker alone,” which is what many reps want.

But small firms face some stiff challenges. Not surprisingly, regulatory pressures top the list.

There exists “a general hostility toward the investment business” on the part of regulators, says Arthur Grant, chief executive at Cadaret Grant & Co. Inc., which has about 770 reps and $150 million of gross revenue. B-D owners “are not enjoying the business like they used to,” Grant says. “Instead of running a business, it’s about compliance, supervision and tracking.”

Sure enough, the number of broker-dealers has continued to fall, from 4,720 five years ago to 4,142 as of March 2014. Many blame this long-term decline on regulatory costs and risks.

“For the most part, the independent midsized firms that are still standing today have survived because they’ve done a pretty good job of supervising their people,” Tietjen says. “The ones that have gone by the wayside are the ones who haven’t.”

Firms have no choice but to spend more on compliance—both for professional talent and for systems—observers say. “The beauty of the independent-firm business was that the primary expense was compensation to advisors, which is a variable expense,” Grant says. “But it’s to the point now where the regulatory environment has forced fixed expenses higher, and that’s not healthy.”

In particular, some industry execs worry about sales of non-traded REITs and business development companies, a staple at many independent firms. The products generate large commissions, but are illiquid and could cause problems with regulators and clients alike if yields falter.

Liquidity events among some non-traded products have created a “false sense from some advisors that these products are liquid,” says Russell Diachok, chief executive at Geneos Wealth Management Inc., which has 275 advisors and about $100 million in revenue.