Broker Dealer: Startup Process

[MBrink]

As stated in a previous thread...


"Without giving away too much detail - I work for a company operated by disabled war veterans that specialize in assisting other war veterans with their disability claims. With great success, we assist them all the way to the hearing in front of the judge.

After receiving life altering checks, many claimants have grown to trust us and specifically ask if we can help them make better decisions with the new funds. Unfortunately, our services are limited at that point and we have to refer them to a 3rd party that can better assist.

Our plan is to now bring in a small group of licensed producers that can work with them over the phone with decisions on life and annuities (later exploring other options such as mutual funds). The fun now begins with copious amounts of research to ensure that we can legally follow through with this plan"



I am now in the research and planning phase for securities (Mutual funds and variable) and it seems to be as complex as i feared. I am currently trying to understand the correct licensing needed for both the potential business and the 1-2 required Broker Dealers.

1) I've heard some different advice in regards to whether we will need a series 6 and 63 OR a series 7 and 24. Any clarification on what would be needed?

2) What is the requirement on employees that need to be involved in the business model? My research tells me that we could have one person actually on the phone working with clients (broker- dealer) and one person to oversee the operations and compliance (principal?) Aside from a company CEO, would we just need these two persons to legally operate?

3) The start up costs are a bit vague (in my opinion) when digging through the FINRA website. I see that there is a teir system depending on company size but aside from that, I only see the exam fees.

Any guidance would be much appreciated. Also, please let me know if there is a more appropriate section on the forum for this thread.

Who would have thought that starting a company regulated by the Federal Government would be so difficult?!

 

[DHK]

1) I've heard some different advice in regards to whether we will need a series 6 and 63 OR a series 7 and 24. Any clarification on what would be needed?

The Series 6 is for limited representatives who ONLY sell mutual funds & variable insurance contracts. The series 7 is for general securities representatives.

The Series 63 is generally a state licensing requirement in referencing Blue Sky laws, etc. The Series 65 is for doing fee-based asset management and charging fees for financial planning as a fiduciary. The series 66 is one license that combines the series 63 and 65 into one license and exam.

The Series 24 or 26 is for OSJ - office of supervisory jurisdiction. If you plan to be in a management/supervisory role, the 24 or 26 is required. The series 24 is for general securities supervisors while the 26 is for supervising limited representatives who only sell mutual funds & variable insurance contracts.

Any guidance would be much appreciated. Also, please let me know if there is a more appropriate section on the forum for this thread.

My best advice? I wouldn't start up a broker dealer without having worked for one.

 

[iceco1d]

Pretty well put DHK.

To the OP...

You really can't start up a b/d. B/D's under $200 million in annual REVENUE have been really struggling lately. There is mass consolidation going on, and the regulatory environment is crazy.

You would be better to get your S24, 7, and 66, and affiliate with an indy b/d that will let you run your own show. Perhaps even form your own RIA if you like.

Forming your own RIA is MUCH easier than a b/d (for now...FINRA wants to become the SRO for RIAs as well, so we'll see).

 

[Tahoe Ray]

Pretty well put DHK.

To the OP...

You really can't start up a b/d. B/D's under $200 million in annual REVENUE have been really struggling lately. There is mass consolidation going on, and the regulatory environment is crazy.

You would be better to get your S24, 7, and 66, and affiliate with an indy b/d that will let you run your own show. Perhaps even form your own RIA if you like.

Forming your own RIA is MUCH easier than a b/d (for now...FINRA wants to become the SRO for RIAs as well, so we'll see).

I agree with all of the above. You will need a B/D to write the variable products but you could still work off of a hybrid program...having an RIA to manage investments for a fee and the B/D to place variable annuities, REITs, etc.

Running your own B/D would take away a lot of time from what you're trying to accomplish....

 

[SWM]

Good advice thus far. Spend some time talking to several BDs. Lately, I have seen a push for higher production requirements. Many BDs will not bring on a new person without them being sponsored by a local OSJ.

 

[iceco1d]

You may want to look at "The Professional Alliance." They are a super OSJ for Cambridge. Low production minimums because all of their reps do investments on the side, they are primarily insurance agents, accountants, etc.

Your only issue is going to be finding a b/d that allows you to write indexed annuities outside of their insurance agency (they would pay you out as good, or better, than most IMO/FMOs anyway), AND let you have your own RIA.

Most that I've seen are one or the other (or sometimes, neither).

 

[VolAgent]

If you haven't already, look at ONESCO, Ohio National's B/D. They have very low production requirements which can also be met with insurance production. Their platform may not be the best as they do have an insurance focus, but at least you can get started and have access to the more common products. Also, I don't believe the care about indexed products as long as an OA is filed. Finally, I believe they will handle the OSJ for you, so a 24 won't be needed either.

From what I have seen, any B/D that is focused on investments is going to want experienced producers doing at least 300k+ in GDC or generating equivalent managed money fees. If you don't think you can manage at least that you will lose your shirt as a B/D.

 

[iceco1d]

That $300k is only true at a wirehouse. $150k and you'll be treated very well at most indy bds.

 

[VolAgent]

That $300k is only true at a wirehouse. $150k and you'll be treated very well at most indy bds.

I stand corrected. In either case, the OP would be well advised to try and reach these levels of production as a RR before even thinking about starting a B/D. Even though, I would think it would take millions in GDC to pay the overhead and be able to offer a reasonable payout to the RRs.

 

[iceco1d]

I stand corrected. In either case, the OP would be well advised to try and reach these levels of production as a RR before even thinking about starting a B/D. Even though, I would think it would take millions in GDC to pay the overhead and be able to offer a reasonable payout to the RRs.

Oh, you're right about that! Most indy b/d CEOs say that they need to get to $200 MILLION in revenue (not AUM) in order to not sweat it (cost of compliance, keep up with technology, etc.).

Plus, the b/d's are under a lot of pressure on pricing and revenue. Fees have come down. Commissions have come down. Less people are investing because they've lost a lot of money. Interest rates are low so they aren't making any money on money market funds (because they all suspending 12b-1 fees to keep from breaking the buck). People are doing their RIA business outside the b/d (or dropping the b/d entirely), and doing their insurance business direct.

And on, and on, and on. Starting a b/d is no small task. If you don't have millions in your coffers to get up and running, you're screwed (and even then, ,you need to grow quickly).

My advice would be to hook up with an indy b/d that will leave you alone and has low production requirements.

Cambridge is a great little firm. They have a super OSJs that will give 75% payouts on $50K in revenue.

LPL has Super OSJs that will give 85% payouts on $50K in revenue.

Lots of boutique b/ds out there (Investor's Capital, Harbour Financial, Cantella, Triad, etc.) to look at also.

You can skip looking at Raymond James and Commonwealth though. They are both really great firms, but they don't want guys doing less than $200K.

Hope that helps.