It’s like déjà vu: Another small independent broker/dealer that sold problematic private placements has bitten the dust. Today I spoke to the president and founder of the 26-year-old firm, Edward Milkie, who said the firm’s liabilities related to Provident Royalties, an allegedly fraudulent private placement, definitely hindered profitability.
“Had it not been for having to fight Provident along the way, we probably could’ve recruited and gotten our revenues back up to where they needed to be, and we might still be here,” Milkie said.
As first reported by WealthManagement.com yesterday, Dallas-based Milkie/Ferguson closed up shop and moved 26 of its brokers over to Berthel Fisher & Co., which has had its own troubles with alternative investments.
While Milkie/Ferguson had to pay a few fines related to other things, the most prominent thing the firm faced was Provident. When the firm closed and moved to Berthel, there were no pending liabilities related to Provident, Milkie said.
Milkie is not alone. Many small IBDs have been going under due to large liabilities they face related to alternative investments that have gone bust, including Provident, Medical Capital and DBSI.
Being a small firm, Milkie also couldn’t sustain his employee model, which he had in place since the start of the firm. And he wasn’t about to cut payout.
“My brokers for the most part were W-2 employees,” Milkie said. “I paid office expenses, I paid secretarial, I paid health insurance, I paid part of the 401(k). I paid what you would see if you walked into a Merrill Lynch office. And in 26 years, we never cut our payout. We started at 50 percent payout and would go all the way to 75 percent payout if a broker hit certain production levels.
“Through the years, that model just became prohibitively expensive. Being the small firm like we were, my expenses got up to the point where I was running costs that were averaging probably $150,000 a month. So that’s $1.8 million a year. We had lots of people that were doing well under $200,000 and some that were doing under $100,000, that other firms would’ve pushed out of the business, and I never pushed anyone out of the business.
“We were keeping 32 or 33 percent of the revenue we generated. It just wasn’t feasible. We either had to get much bigger or make a major change.”