Growing Your Business
Effective Strategies For Increasing The Bottom Line
by Warren Forest
Building any successful business takes countless hours of hard work, dedication and sometimes just plain old good luck. But, like the old adage says, more often than not, luck has little to do with your success, because you make your own luck.
The basic cues for building a successful brokerage operation are the same as other businesses. But, the brokerage industry, like other highly regulated businesses, have additional hurdles that must be overcome. Regulation has a price, and it is a price that is often hidden, but, one that directly affects the bottom line in many ways.
Of course, the direct costs of regulation are easy to identify. More expensive audits, higher priced fidelity bonds, increased SIPC assessments and generally higher expenditures to pay all around. But, there are also unknown outlays associated with additional regulation that are harder to identify.
One of the major unseen expenses, is the opportunity cost of more regulation. As the regulatory burden gets larger on a company, the individuals responsible for overseeing it have less time to devote to other areas, specifically selling securities.
The less time that one has to devote to sales and marketing, the less money one will be able to earn. The equation to solve this dilemma then is relatively simple. As your time to sell, as a managing producer, decreases, you must find effective ways to increase your sales and marketing efforts.
NASD Rule 2200 deals with Communications with Customers and the Public. This rule basically governs what you can say and how you say it. In depth knowledge of this rule is important, because one of the effective internal ways to grow is to advertise, and if you do not understand the provisions of NASD Rule 2200, you may be subject to large fines, as well as, sanctions.
Advertising has always been an effective way to increase sales. As the old saying goes, if you want people to ignore you, then do nothing. Getting the word out about products and services has always been a timeless way to increase interest in your business.
Because of NASD Rule 2200, advertising in the securities business presents challenges unique and quite different than advertising for any other business. It can be costly, and carries both direct costs and hidden costs, that are difficult to assess. While it is something to seriously consider, advertising by itself, should never be viewed as the primary way to develop a brokerage business.
Another time-tested way to enhance your bottom line is to develop and conduct seminars, which can both educate and cultivate new business prospects. Holding seminars establishes credibility, and is an excellent way to build a lasting rapport with customers.
Seminars also are subject to the requirements covered in NASD Rule 2200, as they are considered communications with the public. Again, rules and regulations must be followed so that you do not end up spending your time answering regulatory requests, and therefore, not selling, or in a worst case scenario, paying more in fines than you made through increased sales efforts.
Many companies have expanded their business opportunities by developing new product lines and offering additional services. For example, one may want to add the ability to sell options to their product mix, or, add a service such as investment banking.
FINRA Rule 1017 deals specifically with changes in ownership, control and business operations. This rule generally requires that if a product, or service, that is going to be added to the business mix will have a material effect on earnings, the specific product, or service, will need to be approved by FINRA before it can be added. The approval process for adding products and services can be especially complex and time consuming.
In general, one must demonstrate adequate systems and procedures, experienced and qualified personnel, and necessary capital to conduct the proposed business, before FINRA will approve it. Adding a product or service, will generally take approximately ninety days to get approved by FINRA.
Advertising, seminars and other methods of sales development such as direct mailers, or cold calling, as well as, adding additional products and services, are all internal “business building” methods that can effectively increase the bottom line.
Sometimes, however, rather than building internally and starting something from scratch, it makes more sense to look externally for growth which means that instead of building it, you are could buy it. They say that everything has its price, and certainly the brokerage business is no different than any other business in this respect.
When it comes to buying to increase your business, there are several options. You can buy an existing business. That’s right, many have grown through the acquisition of other brokerage houses. Purchasing can offer a relatively quick solution to business doldrums, but it is never instantaneous business gratification. Again, that is due to FINRA Rule 1017 which requires thirty days pre-notification before any sale can occur. Once pre-notification is made, it could take up to six months for the transaction to be approved by FINRA.
One other time-tested way to increase brokerage business is to acquire branch offices. These are often referred to as “franchise branches,” and are usually considered Offices of Supervisory Jurisdiction, or OSJ branches.
Because the branch owner/OSJ principal is responsible for a greater portion of the compliance burden, OSJ offices receive extremely large payouts. Depending on the number of branches permitted to be added, the size of the branch acquisition and business mix involved, adding a branch office may or may not require FINRA approval. If the addition of the branch falls under the provisions of FINRA Rule 1017, the approval process can take up to six months.
The least involved way to add business, is to take on additional individual registered representatives. Typically, as long as a brokerage house has the ability to add on a number of new individuals, and the new individuals are not introducing new products or services, prior regulatory approval is not required.
Of course, verifying prior earnings and background checks to review for disciplinary and employment history need to be conducted at a minimum. Many times, signing bonuses, or “up-front’ money is paid to experienced producers.
More often than not, the return on investment, for “up-front” money paid is not realized, and is a strategy that we do not usually recommend. There are other options to induce a producer to join a firm that can have just as good an effect as a cash payment, without costing nearly as much.
Building any successful business takes logic, determination and proper planning. Because of the nature of a regulated business, all of the above is true, plus the additional task of satisfying regulatory officials.
When building your business, whether or not it requires FINRA approval to do so, first impressions are critical. Regulators want to be certain beyond any doubt that the managers of the business, have what it takes to operate any new ventures successfully. This industry imposed requirement is certainly crucial, because knowledge and expertise are often the only difference between success and failure.
No one can be expected to do it all alone. If you have any questions, we at Broker Dealer Place, Inc. (407-774-2000), along with our sister company, Forest Brokerage Advisers, Inc. (407-696-9600) are here to help!
Posted by: editor March 23, 2012
Outside Business Activities and Private Security Transactions
Which Hat Are You Wearing and When?
by Warren A. Forest
Two of the areas that the regulators are increasingly focusing on are ‘Outside Business Activities’ and ‘Private Securities Transactions.’ Not only are Outside Business Activities and Private Securities Transactions common in our industry,
but they are two situations frequently prone to abuse.
Numerous Registered Representatives today wear several hats. In addition to serving as a securities salesperson, individuals may sell non-securities products such as real estate, or fixed insurance products. Many licensed persons may also be working with Registered Investment Advisors (“RIA”). Certainly in economic slowdowns, it becomes more common for people to seek several sources of income.
In other businesses, it does not matter if individuals have two or more jobs. For the most part, as long as you perform competently in each position you hold, companies you provide a service for do not care what you do outside of company time.
However, the same does not hold true when it comes to the securities industry. Not only do individuals have to notify their Broker/Dealer (“B/D”) about all of the business activities they are involved in separate from their securities work, but the B/D must conduct an investigation to confirm the outside activity does not impede, or give the perception of impropriety to customers.
Likewise, all registered persons must notify their B/D in advance, if they are engaging in private securities transactions. That is, if they are representing, not just selling, securities through anyone other than the B/D that they are registered with.
FINRA Rule 3270 deals specifically with Outside Business Activities of Registered Persons. The rule requires any registered individual to provide prior written notice of the activity to their member firm.
The rule goes further by requiring the member B/D, once they have received the written notice to evaluate the outside activity, and determine whether it will interfere with, or compromise, a registered person’s responsibilities with the
member Broker/Dealer. It also requires the member firm to determine whether the Outside Business Activity will be viewed by the public as part of the member firm’s business.
Many times the distinction between a Registered Representative’s job at a brokerage firm is clear cut from their duties at another outside job. However, there are times when the difference is not easy to discern, especially when the Outside Business Activity involves an RIA.
B/D’s and RIA’s are conceptually different in their operating methods. Typically, B/D’s offer securities, and are transaction based. They sell various products and charge a commission or markup/markdown for each transaction. RIA’s offer advice or manage money for their clients. They charge a fee based upon the amount of time spent offering their advice, or as a percentage of the assets they are managing.
B/D representatives are responsible for ensuring that their recommendations are suitable for their customers. RIA representatives are held to a higher standard, since they are considered fiduciaries, which require them to operate considering their client’s best interests, based upon all of the information they know about their customer.
Now that all sounds good in practice, but when you are wearing different hats, you better be sure your customers know which hat you are wearing when you are offering various products and services. The problem becomes quite challenging because many times, even relatively sophisticated customers, simply don’t see, or understand, the difference between a B/D or an RIA.
After all both B/D’s and RIA’s deal in securities, and the representative that the customer deals with is often offering investment advice in both situations. While there is a duty for a registered person to inform their B/D whenever they have an outside business activity, it is critical that the customers involved also know the difference whenever two regulated entities, for example, when a B/D and an RIA, are involved.
The reason is simple, to establish responsibility, and limit potential liability. If customers don’t know exactly which hat their representative is wearing, innocent parties may be held liable for another entity’s transgressions.
FINRA Rule 3040 deals with private securities transactions of an associated person. Similar to FINRA Rule 3270, it requires an individual to notify their B/D of any security activities that they are involved in, outside of the direct jurisdiction of the B/D they are registered with.
One important aspect of FINRA Rule 3040 is if the B/D approves of the private security transaction, they must record the transaction on their books and records, and supervise the associated person’s participation in the transaction, as if the transaction were executed on behalf of the member. Clearly, when a B/D can be held liable for the activities which occur outside of their direct control, the stakes can become quite high, quickly.
So what should firm’s and the persons associated with them do? The answer is relatively simple; communicate clearly with all parties involved. Make sure you memorialize all of your communications regarding any Outside Business Activities, and/or, Private Securities Transactions, in writing.
The communication regarding Outside Business Activities and Private Securities Transactions must occur at the beginning of the relationship between a registered person and a company, anytime there is a change in a registered person’s situation, and at least annually thereafter. Registered persons/firms should notify their customers at least at the establishment of the relationship, and whenever there is a change in a registered person’s situation.
When companies and their respective customers clearly understand which hat their representative is wearing, and when the representative is wearing it, the potential for misunderstandings and miscommunications will be significantly
reduced. In place of those pitfalls, there will be more satisfied customers that clearly know the products and services being offered to them, together with companies and representatives that definitely know the roles they play in their customers’ lives.
Posted by: editor February 14, 2012
B/D HOUSECLEANING 101
by Warren Forest
As our new year freshly unfolds before us, it is a perfect time to assess the past and plan for the future. By any measure, we have experienced a challenging year. The economy has taken its toll on virtually every business enterprise. Broker/Dealers and Investment Advisors certainly have seen their share of adversities.
Not only have business opportunities lessened as investors have fewer resources at their disposal, but the regulatory landscape has gotten bleaker. Both state and federal regulators are imposing more and more requirements such that the
“regulatory burden” is a very heavy load for financial service firms to carry.
One of the first things to do is decide whether to stay in the game, or not. Do we continue to suffer the slings and arrows of outrageous fortune, or take aim against the sea of troubles, and by opposing, end them?
Many times owners of financial service firms especially small companies, are surprised to learn their companies have value. All financial service firms, even dormant inactive ones have value. If you are contemplating closing your company, you may want to explore selling it first.
We have spoken to many people who were not aware that their Broker/Dealer had value, and was saleable, and filed a BDW (Broker/Dealer Withdrawal request.) And, while a BDW is a request to withdraw from FINRA membership, once it is submitted it CANNOT be withdrawn. We at Broker Dealer Place, Inc. are specialists at selling financial service companies. Before you decide to close your business, you may want to talk to us about assessing other options available to you.
If you decide to “take aim against a sea of troubles,” and persevere with your efforts, now is the best time to start the year off right with Broker/Dealer house cleaning. Annual audits for most companies will be due very soon. Make sure that you have a qualified PCAOB CPA firm preparing your audited financial statements.
One new development concerning audits is that FINRA is now requiring them to be submitted electronically. If you send a hard copy audit report to FINRA, it will not count as being submitted.
Take the time now to make sure you are set up for the electronic filing.
Review all of your documents such as Form BD, Form U-4′s, and FINRA contact information, and update your records as needed. Check your Customer New Account Forms for accuracy, and reach out to your customers. This can be a great marketing opportunity, and also ensure your customer records are all up-to-date, which is a regulatory requirement.
Your 3012 Certification, annual review of operations, branch office examinations, and AML audits should be completed, or in the process, for the prior year. Make sure you have updated all of your FINRA contact information electronically on Web CRD. If you are a small firm, you should make the “limited size and resource” notification to limit your heightened supervision obligations.
Minimum Fidelity Bond coverage increases this year. All B/D’s now must have at least a $100,000 Fidelity Bond in place. There is a hidden “kicker” as well. If you do not structure your deductable properly, you may find yourself surprised
with a charge to your net capital!
As the brokerage business becomes increasingly complex, your oversight is paramount. And, the beginning of the new year is a perfect time to start your house cleaning.
No one can be expected to do it all alone. If you have any questions, we at Broker Dealer Place, Inc. (407-774-2000), along with our sister company, Forest Brokerage Advisers, Inc. (407-696-9600) are here to help!
Posted by: editor January 15, 2012
It’s Not Too Late To Be In CE Compliance
by Warren Forest
You only have one month left! That’s right, there are just thirty days for you to complete your “Firm Element” continuing education (CE) sessions.
BD University, located at http://brokerdealerplace.com/bdp/continuing-ed, can help you accomplish this. Our CE platform has recently been upgraded to provide hundreds of relevant classes. It is affordable, user-friendly, customizable, and FINRA compliant.
Ongoing education is vital to every profession. Due to the complexities of the brokerage industry, CE is particularly involved. One of the reasons is that member firms face at least three layers of regulation, the U.S. Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the individual state securities administrators, and all of these regulators required a uniform standard that was acceptable to all parties.
A second reason is that while there exists situations common to all registered representatives and Broker/Dealers, each Broker/Dealer is unique unto its own, and has specific needs that must be satisfied. In 1995, the NASD, now known as FINRA, initiated Conduct Rule 1120, which made CE mandatory. The regulators and member firms took the cue and created a uniform standard applicable to all registered members of the profession, known as the Regulatory Element. However, they also created another CE system which required each firm to develop and design a unique specific training program, known as the Firm Element.
The Regulatory Element is administered by FINRA, and affects only registered persons. Firms need only insure that their reps participate in computer generated Regulatory Element sessions at the required time intervals.
The Firm Element, however, is designed and administered by each FINRA Member Firm. What makes the Firm Element daunting is that FINRA does not inform its members just how they should design a Firm Element Program, nor do they let them know how frequently they must hold their sessions.
But rest assured, if the Firm Element is not done properly, or as often as the regulators deem fit, a member firm may be subject to adverse regulatory actions. This could translate into fines, sanctions, or even suspensions from the business.
A Firm Element Program must be designed to take into account the specific educational needs of each broker/dealer. In order to accomplish this management must annually complete a ‘Needs Analysis’ that serves to outline the Firm Element Program for the current year.
The Firm Element introduced a new concept called a ‘covered person’. This is any person, whether they are registered or not, that has contact with the investing public. All covered persons must attend Firm Element training sessions. Therefore, a non-registered receptionist has to participate in these sessions, while a registered trader, who has no public contact, is Firm Element CE exempt, and does not have to attend any sessions.
Registered Representatives may view the Firm and Regulatory Elements as a necessary evil, or just another compliance burden. CE is mandatory, but every registered rep should view this requirement in a positive light. After all, you would not want to entrust your physical health to a professional who had out-of-date skills. Your clients’ financial health is equally as important as their physical health. By staying informed and educated with current knowledge, as a financial professional, you will keep your clients financially healthy, which should lead to increased sales, production, and professional satisfaction for you.
If you have not done anything about your Firm Element CE, it is not too late. Simply contact Broker Dealer Place at 407-774-2000, to set up your CE program, and stay compliant. BD University offers a comprehensive product that lifts the Firm Element burden entirely. Member firms and registered reps can utilize BD University’s tools to create a ‘Needs Analysis’ and Firm Element program that will both satisfy the regulators and effectively educate covered persons.
Posted by: editor November 30, 2011
Arbitration – A Case Study
By Warren Forest
As a securities industry panelist, I recently heard an arbitration which involved two middle-aged claimants, a husband and wife, both retired. They submitted their claim against a large bank Broker/Dealer and the two registered representatives that handled their account.
The claimants, in their Statement of Claim, alleged all of the usual wrongdoings against the company and their reps. Fraud, misrepresentation, unsuitability, and negligent supervision were asserted. At first glance, this case seemed unremarkable, but it quickly became apparent that there was more to it than met the eye.
The first indication that this case differed from most was the types of investments that were involved. Many cases that I have heard involve highly speculative investments. Often, there are illiquid investments involved, and, frequently, the accounts have a very high rate of turnover.
This case exhibited none of those traits. Because the claimant lost a significant amount of money when he attempted to day trade tech stocks years earlier, he changed his investment strategy. After that humbling and costly experience, he only invested in brokered CD’s and conservative mutual fund investments.
The portfolio he brought to the bank brokerage was about as vanilla of a portfolio that one would find, and the pattern of investing that occurred continued to be extremely conservative. The broker continued to recommended CD’s and mutual funds only. At the time that the recommendations were made, the investments carried Morningstar ratings of at least four, if not five stars.
At the beginning of their testimony, the claimant made a very emotional statement that influenced the panel. They shared that they were suffering from a terminal condition, and had but a very short time to live.
The evidence seemed to indicate that the brokers and the brokerage house did everything and more, that I advise my consulting clients to do in order to prevent and successfully defend themselves against adverse arbitration actions. The rep stayed in close and frequent contact with his clients, and he kept fastidious notes about the client meetings and telephone conversations they had. The recommendations that were made based upon the evidence presented appeared to be entirely suitable given the claimants’ investment objectives, risk tolerances and time horizons.
When we looked at the holding period of the account, it seemed clear as to what happened to cause the portfolio to lose value. It was not that the recommendations were flawed when they were made. It was not that the broker had a greedy objective, and wanted to maximize his commissions. Simply stated the market crashed. Only the investments that lost money were unsuitable, the other investments in the portfolio that retained or increased value were perfectly fine.
It is not a requirement that public panelists have any industry knowledge or experience. Yet, this is currently balanced out by the fact that the third panelist is an individual with in-depth industry experience. However, since FINRA recently made a rule change allowing all public panels, hearings will be decided by panels that may have absolutely no understanding of the specific investments involved in the case.
During the course of the hearing it quickly became apparent that the two public arbitrators had absolutely no knowledge or understanding of even the most basic investments, let alone the investments involved in this case. They did not know the difference between a Broker/Dealer and a Registered Investment Advisor, or a discretionary and non-discretionary account. Indeed, on their individual Arbitrator Disclosure Reports, it indicated that both public panelists have “no skill” in Security information.
Many times during the hearing we needed to break in order to discuss the nature of the recommendations, the types of investments and the role of Broker/Dealers and registered representatives versus investment advisors and their agents. Without this critical understanding the public panelists would be hard pressed to render an effective decision.
At the conclusion of the hearing, and as deliberations began, it was evident that there was dissension amongst us. The public panelists wanted to render a large award in favor of the claimants, and wanted to hold the broker fully responsible. It seemed that the full consensus needed to render a unanimous decision would be impossible to achieve.
To the credit of my public panelists, they felt as bad about this outcome as did I. We decided that more discussion would be helpful to see if we could come up with an award that all would be comfortable with. At the end of our second deliberation session we did just that. Our final decision is not one that we individually would have made, but by agreeing to disagree, we have an award that addresses the arbitrators concerns. The claimant will receive something to mitigate the loss, and the registered representative will be held faultless.
While we did not render the award I alone would have given, our joint decision restored my faith in the process. We all had the chance to fully explain our positions, and heard what we each had to say. This communication enabled us to craft a difficult award that addresses many issues to our collective satisfaction.
This case, from the very beginning, was all about communication; the communication that occurs between a registered representative and their customer, as well as with the arbitrators. As the evidence was presented, it was clear that while they talked to each other they were not really hearing. And at the deliberation table, it was clear that members of the panel heard or understood things differently.
Arbitration is a process fraught with hazard and peril. Even when one thinks their case is perfect and cannot fail, you will need to guess again, because fail it certainly can. If you can resolve your case without it going to an arbitration hearing, then make every possible effort to do so. If resolution is impossible, then do everything that you can to make sure you effectively communicate your case.
Posted by: editor June 28, 2011
« Previous Entries