Small, Independent Broker-Dealers Facing Tough Times

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).


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