Of course, there are daredevils who have been known to dive from 36 feet into a kiddie pool. But not everybody has the talent to do it.

Diving into the broker-dealer space poses similar problems lately. The profit margins for small independents are getting shallower, while larger firms take market share. Their clients are invested in short-term investments with shallow returns. The rep ranks that might bring in new assets seem to be growing thinner. For some smaller firms, getting money out of this space has been harder than trying to drink breath off a window.

If that makes some smaller B-Ds sound like fish gulping for water, they are, and worse yet, some have stopped breathing altogether. According to Finra's count, the number of its member firms dropped by a net 122 between the end of 2010 and 2011. The number at the end of the year was 4,456 firms, down almost 11% from the end of 2007.

All the financial services companies have seen their share of bloodshed in the last few years, but independent broker-dealers have seen their problems compounded-at a time when their fees are vulnerable to market swings, they've also been forced into a technology arms race that requires deeper pockets than many have. Like the rest of the financial services business, some of their names have been tarnished (unfairly, the B-D advocates say) for questionable investments like private placements and auction rate securities passed around during the financial crisis.

Profit margins in this space, already in single digits, say participants, have eroded as a result of lower income from interest rates (which is likely to continue), shallower investment pools (as people remain heavily invested in cash), less profit sharing on products (such as mutual funds and money market funds) and the need to make higher payouts to attract talent. Tiburon polled some CEOs in this space and one likened running a broker-dealer to the grocery store business as far as margins were concerned.

If there's room to swim, there's not a lot of oxygen in the water. "The margins in the retail business have always been slim, but they are even more slim today and it's got to do with the fact that communication among the people in the industry is much greater than it was years ago," says Frank McPartland, the COO of JHS Capital Advisors in Tampa, Fla., a firm with $2 billion in assets under management. "Everything is in print or everything's on the Internet. So advisors try to find the absolute best deal, and that puts pressure on [broker-dealer margins]. And to be in the business today you have to be very sensitive to the regulatory environment and stay ahead. There's a cost to that."

If all these problems with business models weren't enough, the B-Ds have faced the wrath of the consumer and an increased regulatory apparatus aligned against them trying to find another Bernard Madoff. That means examiners spend weeks at a time in B-D offices, squeezing five-year-old e-mails out of computers.

Mark Astarita, a partner with Beam & Astarita, a New York law firm that represents some 30 broker-dealers, says the SEC, Finra and the states have been more aggressive with smaller B-Ds, which don't have as much money for in-house counsel. "Have you ever seen Finra fine or sanction a senior executive at a large firm?" he asks. "They just don't do it. When was the last time they fined a senior executive at Merrill Lynch? But they will jump on the opportunity and insist that an individual at a smaller firm take a fine or suspension, personally, where at a larger firm it would be at the firm level. Individuals can't afford to fight Finra."

A Finra spokesperson responds: "For 2011, 25% of large firms were disciplined, while only 4% of small firms were disciplined."

"From what I've seen looking at why some of the firms have gone out of business, it hasn't really been a squeeze per se," says Alex Barned, the chief distribution officer at Questar Capital (owned by insurer Allianz). "It's been a lot of these bigger regulatory hits." Some firms, he says, "haven't been able to take that one sudden shock to the system." He notes substantial arbitration settlements over troublesome financial products as being particularly problematic, forcing firms to close.

Recruiters and consultants say 2008 and 2009 offered recruiting bonanzas from wirehouses, which were hemorrhaging assets, but those companies have regained their footing, and recruiters say they are holding on to their brokers with more aggressive retention packages. Because the pool of reps, in aggregate, is also shrinking (suggests Finra data), the two trends together mean reps can demand more money up front.

It's a seller's market. Good for reps. Bad for B-D profit margins.

"Firms that were not in a great position before the crisis obviously are feeling the heat even more," says Alois Pirker a research director at the Aite Group in Boston. "So this year you'll see more M&A going on-strong firms buying weaker firms." In this environment, he says, firms that are strong like LPL will be using their heft to buy those firms that haven't built such scale.

"If you choose to affiliate with a smaller independent broker-dealer," says Bing Waldert at Boston research firm Cerulli Associates, "I think you have to ask some hard questions about the financial strength of that broker-dealer."

The answer to these problems is, obviously, more recruitment, bigger clients and bigger acquisitions-as well as the ability to build out technology platforms so that more recruits come and help along the virtuous circle. JHS Capital just grabbed Paulson Investment Co., from its Portland, Ore., parent, an acquisition that will add 75 advisors to its current 98 and raise its assets under administration to about $3.1 billion, McPartland says. And the firm is looking for another target.