Smaller broker-dealers are facing two divergent paths.

One path leads to a dead end, a route being followed by aging B-D owners who, faced with expanding regulatory costs, are looking to get out of the business. The other road, traveled by B-Ds looking to survive, offers opportunities to acquire advisors and assets from firms that exit the business.

“The sad fact is that a lot [of small B-Ds] won’t be around in a few years because they don’t have the money” to keep up with compliance costs, says Joel Blumenschein, president of Freedom Investors Corp. in Brookfield, Wis., which has about 75 reps.

The latest statistics from the Financial Industry Regulatory Authority show that the long-term decline among B-Ds continues. Through April, Finra had 4,040 member firms, down more than 14% from 4,720 in 2009.  

As firms shut down, their reps will be looking for new homes, Blumenschein says—an opportunity for surviving B-Ds. To that point, Freedom Investors has more than doubled its rep count over the past three years amid the fallout.

When contacted by Financial Advisor magazine in May, Blumenschein had just received a message from a business broker, calling with “another [broker-dealer] looking to be bought,” he said.

“There are plenty of B-D sellers,” confirms Steve Chipman, chief executive at Foothill Securities Inc. in Santa Clara, Calif., a 230-rep broker-dealer. Because of regulatory burdens, sellers are just saying, “‘No mas,’” Chipman says.

Meanwhile, small firms that plan on sticking around are discussing how they might combine or merge some of their operations, he adds. “The fear is, you don’t want to be swallowed up,” he says. “There’s a lot of talk among firms like, ‘Hey, we’re not in trouble, but where could we fit together? What can we do together that would be accretive [to earnings]? Maybe we could keep one of the B-Ds, or combine the IAs.’”

Those kinds of discussions “have happened more in the last three years than ever before,” Chipman says.
Scale Fallacy
Not everyone is convinced that smaller B-Ds will have to bulk up to build scale.

Tina Maloney, chairman and majority owner of Winslow Evans & Crocker Inc. in Boston, whose firm has about 50 employee advisors, gets calls from potential acquirers like everyone else.

“Everyone is for sale at some price,” Maloney allows, but unless B-Ds have substantial assets, “I just don’t see these very small firms being acquired,” she says. “There’s no sense purchasing a small firm without huge assets [and then] picking up all their compliance issues.”

Ray Grenier, chief executive at Bolton Global Capital Inc. in Bolton, Mass., is in the same camp. “I don’t lose any sleep over these [huge] firms combining all these [acquired] B-Ds, with the hope that it will work out,” says Grenier, who has 75 producing reps with assets of around $5 billion. “There’s not a compelling case for scale that we can see.”

Clearing costs for smaller firms are not much more than they are for larger competitors, Grenier says, occupancy expenses should be about the same, and payroll is equivalent or even lower for the little guys.

Larger firms may be able to spread out the costs of marketing and recruiting, but that advantage might be offset by the higher costs from supervising a lot of smaller producers, he adds. A three-man shop like Treece Financial Services Corp. in Toledo, Ohio would seem an obvious candidate to be bought out, but that’s not the case, says Dock David Treece, a partner at the firm.

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