Dan Moskowitz is a freelance financial writer who has 4+ years of experience creating content for the online reading market.
Updated January 02, 2024If you want to become a broker-dealer, you can either join an existing firm or start your own company. If you choose to work for someone, you may be investing in a management team in which you know very little. Although the workload will likely be more manageable, you'll have less control over the organization and direction of the company.
There are many benefits to starting your own firm, though you should be aware of what's involved. Much like investing in your own startup, a new investment firm requires a lot of work, time, patience, and money. On one hand, you'll have control over the firm; on the other, it's a riskier endeavor that requires much more work.
If you've decided an independent firm is the way to go, here's some guidance on what's involved in achieving and growing a successful broker-dealer firm.
Like any other venture, there are some obvious benefits to going into business for yourself as a broker-dealer. First, there's the absence of bureaucracy that comes with working for someone else. Bureaucracies often lead to more formal and rigid systems that leave little room for innovation, putting rules in place that companies must adhere to strictly.
With your own firm, there's also the potential for significant wealth. You'll eventually need to decide what types of fees you wish to charge. If you decide to take a percentage of assets under management, you'll need a scalable business model, experienced management personnel, and solutions to attract and retain clients. While your income may be capped when working for a firm, there's often greater potential running your own.
If you have sufficient capital, you can decide to acquire an existing operation instead of starting a new firm. Though everything may be organized exactly how you'd like, there is the benefit of having a head start on registrations, market presence, staffing, and operations.
Before you start your own broker-dealer firm, there are several questions worth asking to ensure you're on the correct path to creating a successful firm. These questions include but aren't limited to:
If you've decided to acquire an existing broker-dealer firm, many of these requirements will already have been satisfied.
If you are starting your own broker-dealer firm and will not operate your company as a sole proprietorship, you must register your firm as an independent company to limit your personal liability. Some of these requirements include (and are discussed more in-depth later in this article):
Prior to operations, your broker-dealer firm must be registered with several regulatory bodies. In addition to the agencies below, there may be governing bodies specific to your location that have their own requirements.
The broader regulatory agencies to register with include but are not limited to:
Once approved by FINRA, you must become a member of a self-regulatory organization (SRO) before your order granting registration goes into effect.
There's a ton of paperwork to file as part of the process of setting up a broker-dealer firm. FINRA outlines a number of requirements. As part of the application process, the forms you must file include but are not limited to the following:
No, it's not a TV episode of a crime drama. Every employee for whom you file a U4 must be fingerprinted.
If you've made it this far, chances are you know what you're doing. However, you must demonstrate proficiency in order to land clients and retain them.
When developing your broker-dealer firm, don't underestimate the value of marketing, branding, and an online presence. Consider which social media platforms will provide your firm with the greatest exposure. Be prepared to distribute marketing and promotional materials to prospective clients.
On the more technical side, consider applying for a variety of broker dealer exams. There are several required credentials in order to obtain your broker-dealer license including successful completion of the following:
Broker-dealers are required to hold several credentials, and some credentials have prerequisite exams.
In addition, if you wish to sell additional securities or demonstrate further competency to prospective clients, consider pursuing additional exams.
Broker-dealers are required to assemble and maintain a variety of policies. Several policies include but are not limited to:
Broker-dealers are held to a high standard regarding record retention. Firms are required to maintain key data, documents, and a variety of support for many years. In addition, the data must be stored in a specific format and easily distributable to FINRA upon request. Trading data, as well as e-mail and communication data, must be retained.
Broker-dealer firms are required to maintain a fidelity bond. The fidelity bond acts as an insurance policy in excess of the firm's net capital requirement. Broker-dealer firms are also required to have their finances audited annually by a Public Company Accounting Oversight Board-accredited accounting firm.
FINRA implements net capital requirements that a broker-dealer must have on hand to remain in good standing. The net capital requirements vary based on the company's specific business lines.
Broker-dealers usually implement compliance software solutions. These solutions automatically track and maintain reporting requirements, issue deadline and compliance reminders, and monitor employee trading accounts.
FINRA requires all broker-dealers to designate a Chief Compliance Officer (CCO) to ensure company-wide compliance and regulation. FINRA also requires firms to have a Financial and Operational Principal (FinOp) (via the Series 27 exam) to compile reporting and accounting statements. These positions may be outsourced.
Once you submit your application to FINRA, FINRA must review and process your application within 180 days. It may take a substantial amount of time to accumulate and organize all information required as part of the application process.
The application process to be an independent broker-dealer is arduous. In addition to long application forms, there are a number of requirements that must be met before your firm begins operating, in addition to a number of requirements that must be met once your firm has clients.
There are many requirements to becoming an independent broker-dealer. A great starting place is forming your business. Pursue the appropriate business licenses for your local and state governing bodies. Then, consider pursuing memberships to the various required regulatory bodies, like FINRA and the SEC.
All of this information is likely overwhelming. FINRA has a reputation for ongoing requests for documentation and constant back-and-forth communication. 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 firm are high.