Joe Romano’s firm is a good example of what small broker-dealers are up against.

Last year in March, the Department of Labor began an exam at his firm, Romano Brothers & Co. in Evanston, Ill., that went in fits and starts over a period of 18 months.

The DOL was looking at 30 profit-sharing plans the firm manages, says Romano, president of his family-owned firm, which has been around for 55 years. “It concluded with a three-page letter that basically said, ‘You’re good,’” he says.

Shortly after the DOL began its exam, Finra started its routine cycle exam, followed two weeks later by the SEC’s investment advisor examiners. In August, the SEC’s broker-dealer exam unit came in. And don’t forget the two separate Finra sweep inquiries last year Romano had to respond to.

None of the regulators found any problems, “but between providing documents and the back and forth, it’s very time intensive,” Romano says. “It’s stressful [with] gotcha-types of questions [and] issues that get examined into oblivion. … I really wonder where we are going with this” type of oversight.

The regulatory pile-on has made it “more and more expensive for small firms to comply,” adds Shawn McLaughlin, chief executive at McLaughlin Ryder Investments in Alexandria, Va., and a member of Finra’s small firms advisory board. “It’s an expensive business to be in.”

And if anything like the DOL fiduciary rule comes to pass, B-Ds will face even more challenges.

The DOL and other regulators are “pushing firms in a direction they’re not best suited for,” says Wendy Lanton, chief operations and compliance officer at Lantern Investments in Melville, N.Y.

Small firms have lots of traditional commission-based brokers and accounts, she says, and “you can’t take a salesperson who’s transaction-oriented and has a deep relationship with their clients and push them into managed accounts.”

Smaller B-Ds with their transaction-heavy business mix for the most part plan to retain their commission business should the DOL rule go into effect, and would try to work with the DOL’s best-interests contract exemption under the rule. “Every single one of your customers [would need] to sign” the BICE, Lanton says. “That’s very challenging” with a clientele that’s not used to signing contracts.

Lanton adds that small firms can’t afford to train and revamp their sales forces to comply with the host of rules and product changes that are forcing more assets into level-fee accounts. She worries about transactional reps playing a role they’re not suited for—becoming portfolio managers and holistic wealth managers.

Oftentimes, DOL rules could clash with the SEC’s. “If the DOL had its way, every account would be level fee,” Lanton says. “Then the SEC would have a field day … saying [those fee accounts] need to be appropriately managed.”

With the DOL rule delayed, another issue has resurfaced: the cost of getting certified audits. “The No. 1 thing I hear about from other small dealers is the PCAOB audits,” McLaughlin says.

Under the Dodd-Frank Act, financial statements filed with the SEC must be performed by an accounting firm certified by the Public Company Accounting Oversight Board. Brokerage firms say auditors certified by the PCAOB cost several times what a normal CPA would charge, and since small firms generally don’t custody assets, there’s little risk of the Madoff-type fraud certified auditors are designed to stop.

“In our case, the audit went from $4,000 to $15,000 a year,” says Carrie Wisniewski, president of BD Compliance Associates Inc. in Lilburn, Ga., and head of Bridge Capital Associates, an investment banking firm. “And [PCAOB auditors] don’t even prepare the audit. … I send [financials] to the auditor with supporting documentation, and they sign off on it,” she adds.

Romano, a Finra board member, has on his own initiative met with PCAOB executives and SEC staff about working out an exemption for small firms, an initiative that has been in the works for years but gone nowhere.“That has been very frustrating,” Romano says. The regulators “just don’t see it the way firms see it.”

Of late, cybersecurity and elder-abuse issues have also gotten the attention of regulators, and pose additional risks for B-Ds. Independent B-Ds, with their remote offices, have always been challenged with compliance, concludes Joel Beck, a former Finra lawyer now with the Beck Law Firm in Snellville, Ga.

“Supervision is becoming more of a challenge,” he says, “especially for smaller firms [that] don’t have a big staff.” The regulatory pressures continue to push some smaller operators over the brink.

Jim Biddle is one. In December, Biddle folded up his Chula Vista, Calif.-based B-D, the Securities Center Inc., and joined Western International Securities Corp. of Pasadena, Calif., as an OSJ.

“I’ve gotten rid of the Focus reports, the Finra exams, [PCAOB]-certified audits—all of that,” Biddle says. “I’m 76 years old, and it’s time.”

Wisniewski, the compliance consultant, sees other B-D owners like Biddle who want out. “But there’s also a growing trend of small firms that shut down and hire us to start an RIA for them. It’s just so much easier.”

Aging advisors and owners will drive some firms to sell out or seek younger reps to take over, according to Newport Beach, Calif.-based succession consultant David Goad “We’re going to have a huge percentage of assets turning over” in the next decade, says Goad, and smaller firms have the biggest challenge in retaining assets.

“What [small firms] spent the last decade doing is competing for that older advisor, because those are the biggest and most profitable,” Goad says. But the result is, they just added to their demographic problem of too many older reps, he says.

Outlook? Actually, Not Bad
The headwinds small firms face may seem insurmountable, and for some they are. But once you get past the complaints about regulatory overload, many small-firm execs say the outlook for their businesses is actually not bad at all.

For one thing, most broker-dealers have robust advisory units along with their traditional brokerage business. Those assets under advisory fees are growing and producing more evergreen revenue.

Also, small boutique and family-run firms appeal to those clients and advisors who do not want to deal with the bureaucracy and impersonal flavor of larger firms. “I think we can run circles around our competitors because we give very personal service,” says McLaughlin, whose firm has 12 advisors and four support staffers.

Plus, the firm has been in business 35 years, and his advisors are longtimers. “Clients appreciate an advisor who has integrity [and] stays in one place,” McLaughlin says.

“At small firms, customers are very sticky,” Lanton agrees. “They’ve been with their rep a long time, and our reps have been here a long time.”

Romano says his advisors are now working with the fourth generation of clients. “We’re not the fastest grower, but our assets tend to stay.”

Small B-Ds also strive to offer something unique to clients.

In an age of packaged products and automated accounts, Romano Brothers manages portfolios of individual securities. “Our value proposition is to eliminate the middle man—less selling of products and money managers and more individual stocks and bonds,” Romano says. “It’s more work for us, and more labor-intensive … but in the end we feel clients get a better product for lower fees.”

Steve Distante, chief executive of Vanderbilt Financial Group in Melville, N.Y., bills his firm as “The Sustainable Broker-Dealer.” Distante says that in the last year he’s grown revenue by about 50% and assets by 100%, growth directly due to his specialty in impact and ESG (environmental, social and governance) investing. Investors and advisors alike are attracted to the firm’s mission, he says, especially younger people.

Many of them are not buying houses yet, but they also don’t want to simply invest in the market using the usual investment options found within retirement plans, Distante says. When younger generations see that their investments can have a positive social impact, “people get more inspired in their future.”

And as far as recruiting goes, small firm owners say a lack of size can help. “We’re in Alexandria [Va.], a small town, and we know each other in the advisory community,” McLaughlin says. “[Advisors] have knocked on my door, not happy at a wirehouse.”

“I think small firms always have a competitive advantage for recruiting, once advisors get it out of their heads that they have to be at a big firm,” Lanton says. For those who want to grow their businesses the way they want to, “we let them do that—they’re in charge of their own destiny.”

B-D execs say small firms, too, can control their own destinies. The key is gaining some scale, keeping expenses down and making sure their shops are good places to work and do business.

“It’s difficult—you have to be on top of it,” McLaughlin says. But worth it. “It’s what gets me out of bed in the morning. … Giving clients advice, and when they follow that advice and are successful, it’s a great feeling.”