If you want to become a broker-dealer, you can either join an existing firm or start your own company. If you choose to work for someone, you may be investing in a management team about which you know very little. But the payoff is that the workload is much lighter. But if you decide to go out on your own, be aware of what's involved. It's almost like investing in your own startup, which requires a lot of work, time, patience, and money. One benefit is that you know who's heading up the firm—you. So, if you aren't afraid of a lot of hard work—not to mention the time and money you'll have to sacrifice—you're probably ready to open your own broker-dealer firm. Keep reading to find out more about what's involved in achieving and growing a successful broker-dealer firm.
Opening your own broker-dealer firm can be a rewarding and challenging venture.
Ask yourself whether you can afford to sacrifice the capital needed.
You'll need to demonstrate experience, line up principals, and file the necessary forms in order to be approved.
Benefits of Going into the Broker-Dealer Business
Just like any other venture, there are some obvious benefits to going into business for yourself as a broker-dealer. First, there's the absence of bureaucracy that comes with working for someone else. Bureaucracies often lead to more formal and rigid systems that leave little room for innovation, putting rules in place that companies must adhere to strictly. Going into business for yourself also gives you the freedom to do things your own way. And don't forget, there's also the potential for significant wealth. This last point will likely motivate most readers, but getting there won’t be easy. You need a scalable business, experienced management personnel able to lead and successfully navigate through difficult times, capital, and the correct licenses and memberships, including:
- Licenses to sell investment products
- Financial Industry Regulatory Authority (FINRA) membership
- Securities Investor Protection Corporation (SIPC) membership
- An approved Form BD from the Securities and Exchange Commission (SEC)
Before You Get Started
If you’re an independent contractor and still on the fence about branching off on your own, figure out how much you net annually. Take that answer and apply it to the human side of the equation. For example, is that enough capital to risk without altering your lifestyle? Whether you admit it or not, lifestyle plays a tremendous role. You’re still going to want that summer vacation, luxury car, and that nice house in a good school district, even if it requires the most dangerous word in the financial universe—debt.
People who live with minimal debt often are happier. If you already keep personal costs low and you’re doing well at your current broker-dealer, then it makes the transition much easier. The best approach, of course, is to build capital from your current position while also cutting personal costs. Your available capital will pile up quickly, which will lead to a less risky venture in your own broker-dealer. FINRA essentially wants to know that your capital will cover net capital requirements plus the first six months of expenses without any income. FINRA wants to keep the industry strong. Therefore, it only will approve applications backed by necessary capital and strong and experienced management.
To give you a more basic idea of startup expenses, consider this shortlist:
- FINRA registration
- State registration(s)
- Deposits to clearing firms
Although the list is short, the expenses can be overwhelming—especially unexpected ones. One key to success is to employ a management team that is good at keeping costs low without sacrificing growth potential. This is a fine line very few people have the ability to toe.
Not to deter you from this venture, but you should also know that most new broker-dealers lose money in their first year, with an average range between 10% and 20%. Keep in mind that it takes any business three years to be profitable. Therefore, this shouldn’t act as a deterrent. As long as you surround yourself with people who possess poise, leadership, and problem-solving skills, the odds of success may be in your favor. Just be sure to balance out the team with sales-oriented brokers and experienced management.
First things first, you'll need money. How much you need to get started depends on how you intend to function. Just getting started requires capital of at least $50,000 to $100,000. If you intend your broker-dealer to trade for its own accounts, that amount increases to anywhere between $100,000 to $150,000
Experience also plays a big role. You'll be more successful if you've already worked as an independent contractor. Otherwise, the risk is elevated. Think about it, would you trust your money with someone who had little to no experience trading?
You’re going to need two principals and one financial operations principal—with one year of direct experience and two years of indirect experience—if you want to be approved. Principal officers must be registered with FINRA, take qualifying exams, and be fingerprinted.
After filing Form BD via the Central Registration Depository, the SEC has 45 days to decide if you’re approved. This form allows the SEC to review your personal and professional information and background, review information on your business partners and employees, and helps it determine if there are any conflicts of interest. The SEC wants to see high professional standards, fiscal responsibility, details on the types of securities that will be sold, the organizational and operational structure of the business, and a list of states where products will be sold. If you receive good news, your order granting registration will not be effective until you become a member of a self-regulatory organization (SRO).
Once approved, you must become a member of a self-regulatory organization (SRO) before your order granting registration goes into effect.
The sheer volume of information can make things very confusing. Let’s back up a minute and take a look at what is required to become a member of FINRA:
- Form BD
- Forms U-4 and U-5 (used by broker-dealers to register with or withdraw their registration from the SEC, SROs, and jurisdictions)
- A comprehensive business plan
- Copies of agreements with banks, clearing agents, and service bureaus
- Sources of capital
- A description of the supervisory system
- Written supervisory procedures
- Completion of an anti-money laundering (AML) program
- A description of the firm’s continuing education program
The Bottom Line
All of this information can be overwhelming. FINRA has a reputation for ongoing requests for documentation and constant back-and-forth communications. However, if you get through the approval process and then plan your work and work your plan, the potential rewards for a successful broker-dealer are exceptionally high.