Independent firms may be booming, but there are some rough spots to overcome. Stability, consolidation and regulatory problems are just a few.
Forging Stability There are two questions about stability in the independent world--does the broker/dealer have enough capital behind it, and will it be around tomorrow?
"Some small broker/dealers have 200,000 dollars in the bank," says Marshall Leeds, CEO of JWGenesis Financial Services in Boca Raton, Fla. Such firms will have to merge or add capital, which can potentially change the nature of their operations.
Larry Papike, a San Diego recruiter who runs Cross Search, points to a recent example of instability. "One year ago, there were 650 brokers with Sunpoint Securities," he says. "They had a huge net capital violation [caused by fraud]. The broker/dealer shut down, and they were all out of business."
The instability of its broker ranks can also weaken an independent. Big upfront bonuses cause reps to move where the money is. "An issue is the dash for cash," says Dick Miller, president of Walnut Street Securities in St. Louis. "People go from firm to firm. It's hitting independent firms harder than most."
Changing Size and Scale Independent firms used to be characterized by their lack of proprietary products and cozy feel. Neither element necessarily remains today.
"A lot of independent firms have developed proprietary products instead of having a universal platform," says Tom Sboto, executive vice president of Round Hill Securities in Alamo, Calif. Such products have the same effect on independent reps' businesses as wirehouse products, he says.
"Wrap programs are proprietary," Sboto says. "They encompass the rep putting so much money in that it's difficult to transition to another firm."
Reps complain, too, that consolidation of independent firms with insurance companies means the firms have gotten as big as wirehouses. "Some reps with larger independent firms are feeling like numbers and wanting to go to smaller firms," says Mitch Vigeveno of Turning Point, a Clearwater, Fla., recruiter.
The expanded firms sometimes provide spotty service to brokers. "A broker calls in to operations, gets voice mail and a call back in a day or two," Papike says. "The customer calls, and the broker can't get back to them in a timely manner."
Overcoming Regulatory Trouble Regulatory issues may present the biggest challenges for independent firms, according to Hy Cohen, president of Royal Alliance Associates in New York. "I would venture a guess that the majority of the independent world is not where they should be from a regulatory perspective," he says.
"We bit the bullet two or three years ago," Cohen adds. "We are down 400 to 500 reps. We asked them to leave or they left. We decided to raise the bar."
Royal Alliance got in trouble with the SEC in 1997 for failure to supervise. Just like wirehouses, "independents are 100 percent responsible and liable for reps," Cohen says. "They have to make sure every trade is a good one, suitable to the investor. When you think about how we're structured, it's challenging."
Royal Alliance's solution was to put a regional manager system in place. "We pissed off a lot of reps," Cohen says. "We're telling them, 'You're not as independent as you thought.'"
From the trends cited by indie firm leaders in this story, it seems that statement may ring increasingly true.
Going independent is not for everyone, and the independent firms aren't shy about saying so.
A rep has to be entrepreneurial and willing to take on the responsibilities of a business owner. "If a person is not a self-starter and needs to be motivated, then it's not for them," says Marshall Leeds, CEO of JWGenesis Financial Services in Boca Raton, Fla.
To gauge potential reps, Raymond James Financial Services uses a entrepreneurial scale from 1 to 10, says Chet Helck, executive vice president in Atlanta. "To be an independent contractor, you have to be a seven or eight."
Some independent broker/dealers contend that wirehouse reps aren't independent material. "I think a typical person in a wirehouse likes to be an employee," says Hy Cohen, president of Royal Alliance Associates in New York. "They're more comfortable in an office where somebody pays the light bill and the rent. If you go independent, you have to worry about all that stuff. I'm not convinced a high percentage of wirehouse reps have that mentality."
This year, Russ Alan Prince, a financial industry consultant in Shelton, Conn., surveyed 877 wirehouse brokers on the topic of going independent. Only 13.2 percent expressed a strong interest in setting up their own shop, he says.
Of the 116 who were interested, 82.8 percent wanted to be more competitive, 73.3 percent were looking for increased compensation, 55.2 percent were after decreased restrictions and 13.8 percent desired greater product access.
