“The firms are going out but the reps are finding new homes,” said David Alsup, director of business development for The Compliance Department, a consulting firm which tracks these numbers.
Increasingly high costs of compliance and technology continue to push many broker-dealers out of business. However, Alsup’s study found that many firms who dropped their broker-dealers lines of businesses, retained their RIA status. Many brokers in those firms who dropped their FINRA affiliations, also retained their SEC registrations. Elsewhere, brokers who worked for broker-dealers that disappeared are going on to work for stronger competitors or newcomers.
“The big B-Ds are consolidating and the smaller B-Ds are getting bigger,” Alsup said. “The mom-and-pops are going away. Unless you have a ton of assets under management, you are not going to supervise yourself” to remain in compliance with tighter regulatory demands.
Furthermore, the new broker-dealers that are opening their doors today – many of which are breakaways from larger firms – are better-heeled and better-capitalized than newcomers from previous years, Alsup said.
According to The Compliance Department numbers, there were 5,005 broker-dealers nationally in 2005 compared to 4,499 today, and this decline looks likely to continue for the time being. In the first quarter of the year, 93 broker-dealers closed their doors. This compares with a higher 137 shut downs in the same period last year. At the same time, 44 new brokers opened in the first quarter of this year, down from 57 a year earlier, according to the Compliance Department's data.
In Alsup’s opinion, the decline eventually will stabilize at a core number of firms that will, of necessity, be stronger and larger across the board. He projects the overall number will stabilize at about 4,000 total broker-dealers.
“It’s a gut instinct,” Alsup said, explaining his prediction. “This thing is going to slowly downtick until we finally reach a bottom.”