Mamas, Don't Let Your Babies Grow Up To Be Brokers

I can attest to the fact that this is happening on a first-hand basis as it affects many of my friends and former colleagues…

From Financial Advisor Magazine:

The lingering downturn is slimming the ranks of smaller and less sound regional and independent broker-dealers.

Like other industries, the broker-dealer business is experiencing “a low-end washout,” says Bing Waldert, a director at consultancy Cerulli Associates. “Tough times are tough on those who aren’t financially sound.”

While no one tracks the number of regional or independent broker-dealers that have gone out of business, analysts who track the industry say that at least a dozen have closed their doors due to insufficient capital or issues with complex investments like private placement in just the last six months.

Overall, the industry has shrunk, but much of that has resulted from consolidation. The Financial Industry Regulatory Authority oversaw 4,676 brokerage firms in May 2010, down from 5,005 in 2007, according to the regulator’s web site. Those numbers include various types of brokerages.

The reality here, before I send you over to FA for the rest, is very simple: a lot of these firms offer absolutely zero value to their clients, they’ve hung on longer than most industry observers would have thought possible.

The industry became bifurcated 10 years ago between those who were in the business of selling “advice” and those who were selling “product”.  Guess who’s winning and guess who’s going extinct?

The larger regionals and independents chartered a course down the middle (hybrid advisors/brokers) and as a result, are coming out of this as the winners.  The wirehouses, well…that’s a separate post.

As for small broker/dealer firms, it is an apocalypse out there.  I know some great guys (and plenty of charlatans) who simply cannot understand where their business went.  Anyone doing strictly brokerage (the buying and selling of products for transactional commissions) has found themselves facing high costs of customer acquisition and retention, fierce competition from online execution providers, increased scrutiny from regulators and a public that has learned how absurd it is to believe that a lone guy using random bits of sell-side research could actually time stock purchases and sales with any consistency.

To make up for the shortfall, many small broker/dealers have turned to private placements.  And we know what the success rate of that stuff is.

Anyway, here’s the article.  Mamas, don’t let your babies grow up to be brokers.


Small Broker Dealer Market Shrinking (FA)

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