Consolidation among smaller and mid-sized firms has become a fact of life in our industry, and acquisitions are a staple of media coverage. What has received less attention has been the number of transactions in which the smaller firm seeks out a deal specifically to get out of the broker-dealer business and become an independent branch of the acquiring firm.

Increasingly, smaller firms are taking a closer look at the elements of the business they originally found so energizing and re-thinking whether the independence that comes with running their own broker-dealer really serves their interests in this new, more stringent regulatory environment.

As long as they are able to keep their teams, operating structures and brands intact, more and more of them are concluding that a different model – functioning as a super OSJ (Office of Supervisory Jurisdiction) under a larger firm – is actually a much better fit with their goals.

Father and son: Ron and Brian Kovack co-founded Kovack Securities, an independent broker-dealer in Fort Lauderdale, Florida.

How can independent broker-dealers who find themselves in a similar position determine whether the transition to super OSJ status is the right move for them? Here are a few key factors to consider:

Service culture: Do your diligence here to make certain the firm you’re seeking to pair up with has a service culture at least comparable to, if not better than, the one your advisers valued from you.

Ask yourself: Will I be just as proud to represent my team as a branch of this new firm as I was when we were independent? And how will the new firm treat me and my advisers once we become, in effect, their clients?

Value-added features: Basic compatibility between platforms, tools and resources is clearly important. Joining a larger firm, however, can be an opportunity to recharge your firm’s value proposition for your affiliated advisers by bringing them access to expanded service offerings, investment menus, advisory platforms and a wealth of other options.

Prospective super OSJs should try to balance their firm’s desire for a “small firm feel” with the potential advantages of scale.

Geographic overlap: Is there significant overlap between where you and your advisers are located versus the footprint of the potential acquirer? Put simply, if you’re aiming to transition to be a super OSJ where the acquirer does not have much overlap with your advisers, they will be much more likely to see you and your team as a true vehicle for recruiting and for future growth.

Custodial relationships: Does the broker-dealer that might acquire you have the same custodial relationships that you have? If they do not, this likely will mean your advisers will need to re-paper all of their client accounts, which could bring on a number of unfortunate effects ranging from unnecessary logistical obstacles to advisers deciding not to come along with the move to the new firm to even out the loss of clients.

Ownership stability of the acquirer: It is not unheard of for an acquirer to end up itself being acquired not long after the smaller firm has made the difficult decision to relinquish their broker-dealer status.

If this were to happen, the change in ownership for the larger firm might well force you and your team to, in essence, start over again and search for a new partner firm.

Many smaller to mid-sized firms understandably are seeking ways to address the more onerous aspects of being a broker-dealer while remaining in business and renewing their focus on what attracted them to our industry in the first place: advising clients and building their books of business.

If the right acquirer comes along, becoming a super OSJ – rather than getting absorbed into a monolithic, large firm with thousands of employees – may be the best possible path forward for such firms.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access

Brian Kovack

Brian Kovack

Brian Kovack is president and co-founder of Kovack Securities, an independent broker-dealer based in Fort Lauderdale, Florida.