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Out of the 4,380 broker dealers, about 3,100 broker dealers have 150 or fewer financial advisors (71%), 2,650 have fewer than 25 representatives (61%) (micro broker dealers) and 450 have between 25 to 150 representatives. We have recently done research and found that about 40% of the micro broker dealers are not retail broker dealers but are set up to transact many other types of business such as: investment management, mutual funds, institutional business, private placements, REITs, investment banking, foreign business, trading, and mergers and acquisitions.7 In 2010, out of the 20 broker dealers, reported to have gone out of business, 9, or 45% had no retail reps8. & independent broker dealer

When referring to broker dealers closing down, these firms should be segregated from the data to show a more accurate picture of the retail broker dealer landscape and to help us better understand how the retail IBDs are doing. This would greatly reduce the reported number of IBDs, on the retail side, who have exited the business.

We have recently done research and found that about 40% of the micro broker dealers are not retail broker dealers but are set up to transact many other types of business such as: investment management, mutual funds, institutional business, private placements, REITs, investment banking, foreign business, trading, and mergers and acquisitions & broker dealers.

Profit Margin Compression

In the past few years, many IBDs have gone through profit margin compression from decreased revenues as well as increased costs. There are several reasons for profit margin compression: 1. Increase in costs associated with compliance and accounting costs as a result of the Dodd-Frank regulations, 2. Decreased trading volumes from the 2008 financial meltdown, 3. Revenue lost from margin loan interest and money market fees, 3. Increase in competitive pricing, i.e. payout to the financial advisor, as a result of competition between IBDs, and 4. Cost of implementing technology. Profit margin compression has been more bothersome for the smaller and micro retail broker dealers, who do not have scale to offset the increase in expenses. This has caused some net capital issues, especially with the micro broker dealers. In response to margin compression, some of the small and micro broker dealers have looked at several options: 1. Do nothing and weather the storm, 2. Sell their firm to larger broker dealer, 3. Merge with a similar sized broker dealer, or 4. Close up and let the representatives joining multiple broker dealers. However, we are speaking to most small broker dealers where it is business as usual, and a few that are exploring their options. They are watching costs, and recruiting new financial advisors to increase revenues & Independent broker dealer list.

At many of the micro broker dealers, the owner or one of the partners of the firm is usually involved in other corporate functions, such as compliance or the back office operations in addition to being a producer, in order to be profitable. The majority of these firms are continuing to weather the storm without any plans to close up shop.

In most cases, the small and micro broker dealers are working in standard securities, and insurance products, steering away from alternative investments, as well as other products which may pose compliance risk. This has been their norm for years and they will continue to deal with FINRA’s increase in fees.

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