A New Breed of Firm – the Independent Broker-Dealer

In the traditional Broker-Dealers, also referred to as “wirehouses”, registered representatives are employees of the firm and they generally offer financial advice and the firm’s approved products and services to the customers they serve.  However, the last decade has been witness to the explosive growth of a new type of firm, the Independent Broker-Dealer (IBD).  Under the IBD business model, registered representatives are generally not employees of the firm, rather they are independent contractors who own their own businesses as franchisees.  Investment News reports that currently there are more registered representatives affiliated with IBD’s than traditional wirehouses.  It reports that seven IBD’s each have over 4,500 registered representatives – Edward Jones (14,500), LPL Financial, LLC (14,377), Lincoln Financial Network (8,885), Raymond James Financial Services, Inc. (8,326); Ameriprise Financial Services, Inc. (7,668), AXA Advisors, LLC (4,765), and HD Vest Investment Services (4,597).  The top three firms in terms of revenue together generated over $9.7 Billion in revenue last year.

One reason for the growth of the IBD business model is undoubtedly the greater freedom for the brokers and higher commission payout percentages paid to them by the IBD’s.  Where traditional wirehouses generally payout 40-60% of gross commissions to their registered representatives (the payout percentage general increases for “high producers” of gross commissions and fees), IBD’s have payouts ranging from 80-95%.

The problems we have seen in numerous arbitrations and claims involving IBD’s, is the lack of institutional control, compliance and supervision of the registered representatives.  Where the traditional brokerage branch generally contains dozens of registered representatives, a branch office manager, on-site compliance officers, and a centralized clearing station, i.e., a cage, where incoming and outgoing correspondence, deposits, withdrawals, sales literature, etc. are reviewed and approved by supervisory personnel, the IBD is often a one-man office with none of these added protections for investors.

In the IBD arrangement, the supervisors and compliance personnel (which the securities regulators require for any broker-dealer), are often located hundreds of miles away from the registered representative being supervised.  The periodic inspections (again an industry requirement) are often pre-planned (ostensibly, so the supervisor doesn’t travel to the IBD only to find the registered representative unavailable), which allows a broker to “sanitize” the branch of any incriminating evidence of misconduct and/or illegal sales practices. This can create a dangerous situation for IBD customers if the registered representatives has motives other than the best interests of his or her clients.

Though IBD’s may offer some advantages over traditional wirehouses, we believe it is more important than ever to investigate the background and history of independent registered representatives affiliated with IBD’s.  Useful information on all registered representatives, including previous customer complaints, bankruptcies and other required disclosures, is made available online by FINRA and other regulators.  If you have questions concerning your investments or investment professionals, call MihalekLaw for a free consultation.