Don’t count out small broker-dealers

Smaller broker-dealers may offer their financial advisers fewer bells and whistles than their larger counterparts, but for many…

Smaller broker-dealers may offer their financial advisers fewer bells and whistles than their larger counterparts, but for many advisers, smaller firms offer advantages and a cultural element that no longer exists elsewhere.

On the other hand, given today's regulatory environment, many advisers who were once lured by the intimacy of smaller broker-dealers are opting for the perceived stability of their larger counterparts. At the same time, some smaller firms are finding it tougher to compete against the deeper pockets of larger firms.

But the reality is that a firm of any size can get into regulatory trouble or merge with another, leaving its advisers seeking new homes. Advisers do need to be cautious but not necessarily count smaller firms out.

A host of established, well-capitalized smaller firms are still thriving.

Smaller firms may, in fact, be a better fit for advisers whose practices have a particular focus. They are more likely to accommodate less common business practices and may even provide a specialty niche platform. Advisers with a specialty or niche business may find that larger firms are less flexible and more conservative from a compliance standpoint, as a byproduct of their needing to manage a larger number of advisers.

Smaller firms typically provide more direct access to decision makers and more-personalized service. Advisers may often feel like bigger fish in the pond, so when they have special situations that require assistance, they may have an easier time working with their broker-dealer to find a solution customized to their needs.

On balance, the plight of the smaller broker-dealer is a popular media topic, as firms find it harder to compete in today's regulatory environment. Broker-dealers of all sizes are forced to expend more time, resources and money to comply with more rules and regulations.

There are additional costs, which have a substantial negative impact on firms that are thinly capitalized.

The popularity of larger firms can be attributed not only to their perceived stability but their ability to invest capital in technology and services. For example, while most broker-dealers use clearing services such as National Financial Services LLC or Pershing LLC, larger firms often make substantial investments in enhancing those systems with added features, deepening the robustness of their tech platforms.

Practice management and marketing departments at larger firms may offer services such as succession planning and marketing tools.

Many advisers, however, need a specialized fit to align their business with a similar unique or niche firm.

Consider the example of an adviser with whom we recently worked who had a big book of business and a longtime goal of setting up a hedge fund. Although the adviser was impressed with the many special services available at larger broker-dealers, none of them would allow their advisers to run a hedge fund.

A smaller firm with a niche focus was able to accommodate him, though. Similarly, advisers who are interested in offering alternative investments are likely to find that larger firms won't have as many products available.

We recently worked with an adviser group that held regular client seminars with an alternative-investment-product sponsor. Larger firms wouldn't allow them to do it, but we were able to find a smaller firm with the flexibility to allow this practice.

BALANCING ACT

Balancing the perks and limitations of both larger and smaller firms involves doing your homework and asking the right questions.

For example, looking into a firm's excess net capital and making sure that it has enough in reserves to cover any current or pending arbitration costs is important to ensuring the stability of the firm. This can be done by checking for any potential arbitration on finra.org and checking the firm's financials at sec.gov.

Also important is asking the owners about long-term plans for the business.

Based on your individual situation, a small broker-dealer may or may not make sense for your business. As with any major career or life decision, choosing the right broker-dealer for you and your business is a balancing act, and it is wise to act with caution, weighing the potential rewards with the risks.

Your business attributes are unique, and you owe it to yourself and your business to find the broker-dealer that best accommodates your needs.

Jodie Papike (jodie@cross-search .com) is executive vice president of Cross-Search, a third-party, independent-broker-dealer adviser and executive placement firm.