Facts About Independent Broker-Dealers

Registered representatives who carry a Series 6 or 7 license is required by law to register with a broker-dealer in order to sell securities to the public. These clearing companies generally position themselves in one of three basic forms: as either full-service, discount or independent firms.

While the former two types of broker-dealers generally maintain a fairly high level of control over their reps, independents usually allow their brokers almost complete freedom in how they do their business, which is appealing for many experienced producers who can afford to pay for their own overhead and marketing expenses. 

Independent broker-dealers were created to accommodate financial advisors who carry securities licenses and need back-office support for services such as compliance and trade execution. These firms typically cater to more experienced advisors who generate high streams of revenue from a sophisticated client base.

Most advisors in this category no longer need managers to supervise them and usually don’t want to be required to sell proprietary products by their firm’s marketing department. Many independent broker-dealers offer a much more comprehensive array of products and services under their umbrella than discount or full-service firms. While most firms of any kind will offer mainstream products such as mutual funds, annuities, unit investment trusts, low and midlevel automated portfolio management and retirement accounts, independent firms can often provide access to high-level money management platforms not available to the general public, alternative vehicles such as hedge funds, oil and gas partnerships and turnkey investment or savings programs designed to cater to a specific market segment such as medical professionals.

Other alternatives such as venture capital, private placement offerings, and overseas holdings are also available to clients who qualify.

Another major advantage that independent broker-dealers offer to planners is a much higher payout on commissions. Many discount brokers pay their reps a flat salary with perhaps a bonus for production targets that are achieved at either the branch or office level. Full-service firms often provide some sort of base salary with a commission structure layered on top. The commission percentages in this sort of arrangement usually range anywhere from 30% to 60%, depending upon the advisor’s production level, tenure, and form of relationship with the company. Those who work as independent contractors usually receive a higher payout that those who are directly employed by the firm. Of course, the planners and brokers who work at these firms typically have little or no overhead, with the company providing office space, business cards, marketing, and administrative support and other necessary amenities. 

Independent firms usually offer commission payouts in the 80%-95% range, thus allowing reps to earn substantially more from the same amount of business. Of course, they also do not provide full-service support to their brokers, so those who are trying to decide which type of company suits them best will need to get a clear picture of their out-of-pocket expenses that they will pay if they go the independent route.

Although independent broker-dealers do not tell their reps how to run their businesses, they are still required by FINRA and the SEC to provide compliance oversight to ensure that all pertinent regulations are followed. Many firms will also provide additional clearing support to assist with account management and recordkeeping, although this service may come at a price. Reps may have some level of choice in the services that they decide to use and pay for.

Although there are many independent broker-dealers in the marketplace today, some of the largest and most well-known firms include LPL Financial (LPLA), Raymond James (RFJ), Royal Alliance, Commonwealth, Cambridge, First Allied Securities, and Securian Financial. There are also some firms who straddle both the full-service and independent models, such as Ameriprise (AMP), Lincoln, AXA, Wells Fargo (WFC), Northwestern Mutual and Waddell & Reed.

Independent broker-dealers are often the best choice for experienced planners who have established practices because of their superior commission payouts and minimal supervision. Reps who choose to use them need to be certain that they will be able to generate sufficient revenue under this business model to pay their own overhead. For more information on independent firms, visit LinkedIn's (LNKD) website for the National Association of Independent Broker-Dealers.