Two Roads For Small B-Ds

“Our thinking is the exact opposite,” he says. “We’d be more apt to be buying than selling, because a whole generation of advisors is preparing for retirement.

“We’ve built a fairly robust compliance program given the narrow scope of our [broker-dealer] business,” which is limited to packaged products, Treece adds. “It seems to work fairly well. We’re able to address issues with regulators. We could probably roll up some small firms or reps into a system like ours.”

Buying producers in bulk through a transaction makes some sense, given that one-on-one recruiting is a tough game for small independents. Few can offer the incentives larger firms do, and advisors tend to prefer the perceived safety of larger operators, recruiters say.

Potential recruits worry most about small firms’ ability to pay for regulatory costs, fines and arbitration awards, says recruiter Jon Henschen of Henschen Associates LLC in Marine on St Croix, Minn. They fear that smaller dealers could be forced out of business or sold as a result of a regulatory screwup. “Larger firms can afford more mistakes,” Henschen says.

It’s easy to understand the concerns of advisors. Last year, fines imposed by Finra grew 125%, to $135 million, up from $60 million in 2013, according to the law firm of Sutherland Asbill & Brennan.

“The bar has certainly been raised by enforcement,” Chipman says. “What we’re seeing [industrywide] is that once an item goes to enforcement, it’s definitely game on. They’re in it to win.”

“We see regulators basically … looking for B-Ds to write big checks even for the most minor infractions,” Grenier says.

If the regulatory atmosphere gets even more intense, “We’d have to think very seriously” about dropping the B-D, Treece says. “There are a lot of services we can provide under a B-D, [but] the regulatory demands would be significantly less” without it.
 
Small Charm, Big Growth  
Lest you think all the headwinds small broker-dealers face mean they can’t thrive, think again. “We’ve had a spectacular growth over the last five years,” Grenier says. “Our revenues are up two and a half times from 2009, and assets have almost tripled.”

His firm, Bolton Global Capital, recruits almost exclusively out of the wirehouses. The big traditional firms do many things that irk their producers and prompt them to leave, like cutting pay or consolidating offices, he says. “We can provide custom solutions the bigger firms can’t—for technology and compliance solutions with specific procedures,” Grenier says.

Like most smaller firms, Bolton Capital relies on word of mouth among advisors to attract the right kind of talent. “Last year was our best year ever for revenue and Ebitda,” says Don Bizub, chief executive at Western International Securities Inc. in Pasadena, Calif., a $60 million revenue firm.

He, too, is able to land some wirehouse reps by offering a personal touch. That’s something the head of a big firm just couldn’t do, he says. “It does make a difference, especially if you’re recruiting without writing huge checks [because] having a direct relationship with [management] might be very important” for some advisors.

“Firms that offer a really solid platform, individualized service, research help, business help and a real connection with people have a tremendous opportunity,” agrees Robert Seawright, chief investment officer and chief information officer at Madison Avenue Securities Inc., a San Diego-based firm with about 150 reps.

Seawright mentions that he recently spent a half hour with one of the firm’s brokers working out an issue with a client’s portfolio. That’s something he could never do in his past life as a successful Merrill Lynch rep, he says.

Access to key people is critical, says Henschen, who recruits for a number of small firms. Brokers wanting a new firm call him all the time because the “go-to people” at their broker-dealers are no longer there.

“For small firms, it’s more about service than services,” Henschen says, explaining that the best broker prospects for boutique firms don’t need or want the bells and whistles found at large firms.

Bizub, an industry veteran, says the business has never gotten any easier or less expensive. But instead of fighting against the ever-growing demands, he suggests that B-Ds just accept the changes and use technology to their advantage.

“You have to continue looking at what you’re trying to deliver, what the advisor experience is, and how to leverage that relationship with advisors in a way that a large firm just can’t,” he says.