Overview of the Independent Broker-Dealer Industry
I.
What is an Independent Broker-Dealer?
Broker-dealers are specialized financial services companies that trade securities for their own account or on
behalf of their customers. Broker-dealers are regulated under the Securities Exchange Act by the Securities
Exchange Commission (SEC), a unit of the US government. Some regulatory authority is further delegated to the
Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. Many states also regulate
broker-dealers under separate state securities laws known as “blue sky” laws. In the traditional “wirehouse”
broker-dealer, the firm employees are financial advisors who offer the firms products and services to members
of the investing public. However, another very successful broker-dealer business model exists – the
independent broker-dealer model which offers its services to financial advisors operating as independent
contractors. For more than 30 years, the independent broker-dealer (IBD) community has been an important
and active part of the lives of American investors providing comprehensive and affordable financial services.
The IBD business model focuses on comprehensive financial planning services and unbiased investment advice.
IBD firms also share a number of other similar business characteristics. They generally clear their securities
business on a fully disclosed basis; primarily engage in the sale of packaged products, such as mutual funds and
variable insurance products; take a comprehensive approach to their clients’ financial goals and objectives; and
provide investment advisory services through either affiliated registered investment adviser firms or such firms
owned by their financial advisor.
II.
Essential Characteristics of IBD Firms
Financial advisors of IBD firms are self-employed business owners and are classified for tax purposes as
independent contractors. The financial advisor has the primary relationship with the investor. The fundamental
value proposition of the independent financial advisor is his local reputation, community ties and personal
brand. Independent financial advisors are also able to select from a broad array of products to select those that
are suitable to achieve the investment objectives of each client. Lastly, financial advisors typically take a
comprehensive financial planning approach to meeting client needs.
III.
Differences between Wirehouses and IBDs
The chart below compares and contrasts some common characteristics between IBDs and the typical Wall
Street firm.
Employee status
Type of Product
Location
IBDs
Advisors are selfemployed business
owners
Wide range of
products which are
seldom proprietary
Independently
owned and
operated local
businesses
Wirehouse
Advisors are
employees of the
firm
Wide range of
Large offices
products and
usually located in
services, often
major cities
heavy on proprietary
products
B/D Firm Type
Type of Client
Can provide services
from middle class to
high net worth
individuals
Primarily high-net
worth clients (i.e.
$250,000 or more
in investable assets)
IV.
Important Role of IBDs
The IBD business model focuses on offering financial solutions to Middle America. Most IBD clients are
individuals who have tens or hundreds of thousands of dollars to invest, not millions. As a result, IBDs offer a
wide range of investment products and have the ability to scale their advice to meet the needs of all investors
and not just high net worth investors. Since IBDs typically do not offer proprietary products, they can offer
accurate information on each product based on the client’s interest and risk tolerance.
V.
Growth of the IBD Channel
The independent channel is a growing segment of the financial services industry as financial advisors move from
wirehouse, regional and insurance based broker-dealers to IBDs. In fact, approximately 201,000 financial
advisors – or 64% percent of all practicing registered representatives – operate in the IBD channel. This
percentage is expected to continue to grow in the years ahead. The following chart graphically depicts the flow
of financial advisors:
VI.
Conclusion
Financial advisors are flocking to the IBD channel because it provides them with the unique opportunity to own
and operate a small business dedicated to serving clients without a heavy reliance on proprietary products.
Main Street investors are the primary beneficiaries of this important industry trend by providing them local
access to competent financial advisors offering a wide range of suitable products to meet their financial
planning needs.