Overview of Regulatory Compliance and Market Challenges for the Broker-Dealer Industry
For the last several years, the broker-dealer industry has faced a number of challenges, including maintaining regulatory compliance and broader market difficulties especially from the economic impact COVID-19 has had on the securities industry. These challenges have caused the number of registered broker-dealers in the industry to steadily decline.
2021 FINRA Report on Registered Investment Advisers and Broker-Dealers
In 2011, the number of registered broker-dealers both dually registered as an investment adviser and broker-dealer and broker-dealer only firms were 4,455 with a reduction to 3,435 in 2020 per the latest Financial Industry Regulatory Authority (FINRA) 2021 report. The industry has seen a decline in the number of registered firms every year for the past ten years. While the number of broker-dealer firms have been declining steadily, the number of FINRA registered representatives, the individuals involved in broker-dealer sales, have seen fluctuations over the past ten years indicating the industry itself may be seeing a shift and not a reduction overall.
The reasoning for the decreases in broker-dealer firms from year to year have been speculated by experts and has been addressed by both FINRA and the Securities and Exchange Commission (SEC). Some experts attribute the declining number of broker-dealers to increased regulation and the related costs associated with regulatory compliance. Most notably the SEC or FINRA examines approximately 55% of all broker-dealers annually. Those regulatory costs as a percentage of firm revenues are usually much higher for smaller broker-deals (those with 1-150 registered representatives). From 2016 through 2020, the vast majority of the decreases in broker-dealer firm registrations have been firms that were smaller.
Advantages of Registered Investment Advisors
Experts have also speculated that other financial services industries have been becoming more popular such as Registered Investment Advisors (RIA). Although playing a much different role in the financial services industry, RIAs are subject to less regulation. While broker-dealers are subject to oversight by FINRA, the SEC as well as by state regulatory agencies, RIAs are not regulated by FINRA. As previously noted, 55% of broker-dealers are examined by either the SEC or FINRA annually whereas 40% of the RIAs have never been officially examined.
Broker-Dealer Industry Consolidation
Other experts point to consolidations as the reason for the decrease in broker-dealer numbers. Due to the increased regulatory environment for broker-dealers, mergers and acquisitions have become more efficient and profitable in consolidation. This theory is supported by the more consistent number of FINRA registered representatives over the past five years. In most instances during mergers and acquisitions of broker-dealer firms, the registered representatives are likely to be retained or work with a new firm.
Keiter’s Financial Services Industry Team partners with Broker-Dealers to successfully navigate the new, changing, and challenging compliance requirements specific to this industry. Contact us | 804.747.0000. We are here to help.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.