Small Brokerage Firms Under Fire

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Life as an independent wealth manager is tougher than you might think from seeing all the headlines about brokers fleeing wirehouses to join independent firms or hang their own shingle. If you're inclined to jump, here's a look at the emerging risks.

Cost pressures, compliance issues and competition for top-producing advisors and clients are taking their toll on small independent broker/dealers, RegisteredRep reports. Firms at greatest risk of failing or being absorbed by a larger player are those with 100 or fewer representatives - which make up for nearly 90 percent of independent broker/dealers.

Two recent shutdowns, of AFA Financial Group in Calabasas, Calif., and Tampa-based GunnAllen Financial, stemmed from lawsuits over fraudulent private placements. Both firms faced devastating financial consequences due to investments sold by their brokers. And at least six broker/dealers in Massachusetts have received subpoenas from state officials over sales of two alleged Ponzi schemes, Medical Capital Holdings and Provident Royalties. Smaller firms are most vulnerable to large-scale lawsuits or regulatory probes because they are less likely to have sufficient insurance or afford increased cost of coverage.

Advisors that had no contact with fraudulent vehicles face increased compliance and insurance costs too. Lon Dolber, chief executive of American Portfolios, an independent with 700 advisors and $12 billion in client assets, told RegisteredRep:

Compliance is going to be more in vogue. Reps are going to have to do more. And small firms have to do the same amount of compliance big firms do, but they don't have the capital to do it. So small firms are likely to have problems.

And although independent wealth management firms have been gaining ground on wirehouses, it hasn't been a one-way street. Despite Wall Street's well-known problems, larger firms succeeded in luring some big advisors away from smaller ones in 2009.

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