AFA Financial Group LLC, based in Calabasas, California, recently became
the second independent broker-dealer to close up shop in under two months;
GunnAllen Financial was shut down by FINRA in March when it could not
meet its net-capital requirements. Now, industry analysts are predicting
other small, independent broker-dealers could soon follow suit.
Independent broker-dealers are facing difficult times due to a number
of factors including investor lawsuits, rising compliance and insurance
costs, and advisors and clients jumping ship.
Many of these broker-dealers are facing numerous arbitration claims related
to the offering of
private placement deals like Medical Capital and Provident Royalties. GunnAllen’s
troubles were partly a result of lawsuits related to investments sold
by its brokers, including Provident Royalties. In AFA’s case, the
firm was hit with a number of arbitration claims this year, many of them
related to the sale of Provident Royalties.
The cost of doing business for many of these broker-dealers is also going
up; E&O insurance and FINRA and SIPC fees are on the rise. According
to AFA’s president, Morrie Reiff, the firm simply could not keep
up with its errors-and-omissions (E&O) insurance payments after being deluged with arbitration claims
related to the firm’s offering of Provident Royalties.
As small brokerages struggle to stay afloat, industry analysts expect
more of them to fail or merge with other firms this year. Especially vulnerable
are broker-dealers with 100 or fewer representatives (which account for
almost 90% of independent broker-dealers).