Steps to Starting Up an Independent Broker Dealer

So you want to become a broker-dealer? Well, you can either join and existing firm or you can start your own firm. To accomplish the latter requires a lot of work, but it does have the potential to pay off in a big way. (For more, see: What's a 'Broker-Dealer' and Why Should You Care?)

Going into business for yourself involves substantial risks and rewards. Think of it as a speculative play whereby you're investing in a startup — only that investment is actually in yourself and the people around you, rather than in a management team you know little about. That might make this sound like an easy decision but keep in mind that you are doing all the work, especially in the early days, to keep the business running. When investing in someone else's startup, the workload is much lighter; it just involves initial research and monitoring of quarterly and annual reports. (For more, see: In Context of a Startup, What is Sustainable Growth?)

The biggest advantages to starting your own broker-dealer are that there is no unnecessary bureaucracy, you have the freedom to do things your own way, and there is potential for significant wealth. (For related reading, see: Decline of the Independent Broker-Dealer.) That last point likely will motivate most readers, but getting there won’t be easy. You will need a scalable business, experienced management personnel able to lead and successfully navigate through difficult times, capital, and the correct licenses and memberships, including:

1. Licenses to sell investment products
   
2. Financial Industry Regulatory Authority (FINRA) membership
   
3. Securities Investor Protection Corporation (SIPC) membership
   
4. Approved Form BD from the Securities and Exchange Commission (SEC)
   

In order to get started, you will need at least $50,000 to $100,000 in capital. You will need $100,000 to $150,000 if your broker-dealer will trade for its own accounts. Experience also plays a big role. It will be much easier to succeed if you already have been an independent contractor. Otherwise, the risk is elevated. (For related reading, see: Working for An Independent Broker-Dealer vs. a Big Bank.)

If you’re currently an independent contractor and you’re still on the fence, how much do you net annually? Take that answer and apply it to the human side of the equation. For example, is that enough capital to risk without altering your lifestyle? Whether you admit it or not, lifestyle plays a tremendous role. You’re still going to want that summer vacation, luxury car and nice house in a good school district, even if it requires the most dangerous word in the financial universe: Debt. (For related reading, see: Does My Debt-to-Income Ratio Affect My Credit Score?)

People who live with minimal debt often are happier. If you already keep personal costs low and you’re doing well at your current broker-dealer, then it makes for an easier transition. The best approach, of course, is to build capital from your current position while also cutting personal costs. Your available capital will pile up quickly, which will lead to a less risky venture in your own broker-dealer. FINRA essentially wants to know that your capital will cover net capital requirements plus the first six months of expenses without any income. FINRA wants to keep the industry strong. Therefore, it only will approve applications backed by necessary capital and strong and experienced management. (For more, see: FINRA: How it Protects Investors.)

To give you a more basic idea of startup expenses, consider this shortlist:

• FINRA registration
  
• State registration(s)
  
• Consultants
  
• Employees
  
• Deposits to clearing firms
  

That might be a short list, but expenses can be overwhelming — especially the unexpected ones. One key to success is to employ a management team that is good at keeping costs low without sacrificing growth potential; this is a fine line that very few people have the ability to toe. (For more, see: How Does a Strong Value Chain Management Team Help a Company?)

Not to deter you from this venture, but you should also know that most new broker-dealers lose money in their first year, with the average range between 10% and 20%. However, it takes the average business in any industry three years to be profitable. Therefore, this shouldn’t act as a deterrent. As long as you surround yourself with people who possess poise, leadership and problem-solving skills, odds of success will be high. Just be sure to balance out the team with sales-oriented brokers and experienced management. (For more, see: Unexpected Challenges for Self-Employed Finance Professionals.)

Sticking with the people theme, you’re going to need two principals and one financial operations principal — with one year of direct experience and two years of indirect experience — if you want to be approved by FINRA. Principal officers must be registered with FINRA, take qualifying exams, and be fingerprinted. (For more, see: Initial Registration — Series 63.)

After filing your Form BD via the Central Registration Depository operated by FINRA, the SEC will have 45 days to decide if you’re approved. If you receive good news, your order granting registration will not be effective until you become a member of a self-regulatory organization, or SRO. (For related reading, see: Can I Take Series 6 Exam Without Being Sponsored?)

Form BD allows the SEC to review your personal and professional information and background, review information on your business partners and employees, and helps them determine if there are any conflicts of interest. The SEC wants to see high professional standards, fiscal responsibility, details on the types of securities that will be sold, organizational and operational structure of the business, and a list of states where products will be sold. (For related reading, see: The SEC: A Brief History of Regulation.)

Since there is so much information, this can get confusing quickly. Let’s back up a minute and take a look at what is required to become a member of FINRA:

• Form BD
  
• Forms U-4 and U-5 (used by broker-dealers to register with or withdraw their registration from the SEC, SROs, and jurisdictions)
  
• Comprehensive business plan
  
• Copies of agreements with banks, clearing agents, and service bureaus
  
• Sources of capital
  
• Description of supervisory system
  
• Written supervisory procedures
  
• Anti-money laundering program
  
• Description of firm’s continuing education program
  

All of the above information can be overwhelming, and FINRA has a reputation for ongoing requests for documentation and constant back-and-forth communications. However, if you get through the approval process and then plan your work and work your plan, the potential rewards for a successful broker-dealer are exceptionally high. (For more, see: 9 Tips for Growing a Successful Business.)