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