Finra has recently requested comments on potential changes to rules covering outside business activities and private securities transactions, the effectiveness of its rule governing agreements with clearing firms, and rules dealing with suitability and churning.
Notably, Finra has proposed to drop a 24-year-old requirement for broker-dealers to supervise the independent RIA firms run by their registered reps. It’s been a challenge for firms to supervise independent RIAs they have no control over, and many are cheering on the proposal.
Robert Hamman, president of First Asset Financial in Salina, Kan., is one proponent of the change. The supervision requirement has “really been an impossible thing to do, but [it] leaves the B-D open to huge liability for something they do not get much money from,” he says.
How to handle hybrids will continue to be an issue. The hybrid channel has been the fastest-growing area in recent years, and that looks as if it will continue. In a March report, Cerulli Associates said that 25% of independent broker-dealer reps with $500 million or more in client assets seriously considered opening an RIA in the past year.
Reviewing rules is helpful, but Brown thinks Finra needs to focus on its own inefficiencies. He says he recently had to respond to eight pages of questions about one trade done a year ago by a B-D client.
“Finra has enormous amounts of data, but it doesn’t get shared,” Brown adds. “I’ve sent eight, nine pages of information to a district [office], then gotten the same inquiry from the Washington [D.C.] office.”
Given the compliance load, Henschen thinks firms with fewer than 100 reps will have a tough time surviving. “I hear this repeating chorus [from small firms] that the whole Finra thing has gotten out of hand,” he said.
Survival Strategies
Given that challenging background, one might think the small B-D model is dying. But small firms are finding ways to compete.
For one thing, larger competitors can’t always accommodate the way advisors and their clients want to do business. “I think we can give a little more personal attention, and can manage each portfolio more closely to the desires of investors,” Hamman said. “At large firms, they get dumped into a model, into one of 10 slots.”