To offer securities to the public, registered representatives with a Series 6 or 7 license are needed by law to register with a broker-dealer. These clearing businesses often categorize themselves as one of three types: full-service, discount, or independent.
While the first two types of broker-dealers generally maintain a high level of control over their reps, independents typically give their brokers almost complete freedom in how they conduct business, which is appealing to many experienced producers who can afford to pay their own overhead and marketing expenses.
Independent broker-dealers were established to serve financial advisers who have securities licenses and need back-office services such as compliance and trade execution. These businesses often cater to more experienced advisers who produce high-volume income from a discerning customer base.
Most advisers in this category no longer want supervisors to monitor them and generally do not want to be compelled by their firm’s marketing department to offer proprietary items. Many independent broker-dealers provide a considerably broader range of goods and services than discount or full-service organizations. While the majority of firms of any kind will offer mainstream products such as mutual funds, annuities, unit investment trusts, low and midlevel automated portfolio management, and retirement accounts, independent firms can frequently provide access to high-level money management platforms not available to the general public, alternative vehicles such as hedge funds, oil and gas partnerships, and turnkey investment or savings programs designed to cater to a specific market segment such as the military.
Other options for qualified customers include venture financing, private placement offers, and offshore ownership.
Higher Payouts, Higher Overhead
Another significant benefit that independent broker-dealers provide to planners is a substantially bigger commission payment. Many discount brokers give their salespeople a basic wage plus a bonus if they meet production objectives at the branch or office level. Full-service organizations often provide a basic pay with a commission structure on top. In this kind of agreement, commission rates often vary from 30% to 60%, based on the advisor’s output level, longevity, and type of connection with the firm. Those who operate as independent contractors often earn more than those who are directly hired by the company. Of course, the planners and brokers who work at these organizations often have little or no overhead, with the company providing office space, business cards, marketing, and administrative assistance, among other things.
Independent businesses often provide commission rates ranging from 80% to 95%, enabling salespeople to make much more from the same amount of business. Of course, they do not provide full-service assistance to their brokers, so individuals looking to determine which sort of organization is ideal for them should have a clear image of their out-of-pocket expenditures if they choose the independent path.
Although independent broker-dealers do not direct their representatives how to operate their companies, FINRA and the SEC require them to offer compliance supervision to verify that all relevant requirements are followed. Many businesses may also provide further clearing assistance to help with account administration and recordkeeping, but this service may be charged. Representatives may have some say on the services they use and pay for.
LPL Financial (LPLA), Raymond James (RFJ), Royal Alliance, Commonwealth, Cambridge, First Allied Securities, and Securian Financial are some of the biggest and most well-known independent broker-dealers on the market today. Ameriprise (AMP), Lincoln, AXA, Wells Fargo (WFC), Northwestern Mutual, and Waddell & Reed are examples of businesses that operate in both the full-service and independent formats.
The Bottom Line
Because of their greater commission payments and limited monitoring, independent broker-dealers are often the best alternative for experienced planners with established practices. Reps who want to utilize them must be certain that they will be able to earn enough money under this business model to cover their own expenses. Visit the National Association of Independent Broker-Dealers’ (LNKD) website for further information about independent businesses.
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