How to Start an Investment Bank/Brokerage Firm without Being a Licensed Broker?
I have a dilemma. I am not a licensed broker or a financial advisor. I have a bachelor's degree in Political Science with a minor in Business Administration. I'm also working toward an MBA. I've been investing and studying finance for a decade. I own several web domains for investment and banking services and I would like to put them to good use in the very near future. I want to start my own brokerage firm and eventually grow it into a chain of brokerages and investment banks. I have a unique business plan that I expect will be very popular and extremely beneficial for society and the American economy.
Supposedly I have to be sponsored to take the Series 7 exam. I have no interest in working for another firm just so I can start my own firm. What are my options? Can I start a firm and then have my own firm be my sponsor? Somehow I get the feeling that FINRA is not going to go along with that idea, but it doesn't seem right that they would prevent me from doing so. Wouldn't that be a very substantial barrier to entry that would have devastating effects on market efficiency and the ability of new firms to compete with existing firms and bring new products and ideas to market? Are entrepreneurs like me not allowed to form a competing firm without being sponsored by the firms that I intend to compete with? Doesn't that seem like a conflict of interest and an unfair advantage for existing firms? I don't mind going through training and passing certification exams. If necessary, I could eventually hire someone who has experience as a broker-dealer and a general securities principal, and then I could work with them until I take the Series 7, but I would find it very strange and unwise of the SEC and FINRA if it is impossible to form a brokerage or an investment bank without first essentially getting permission from (i.e. being hired by) the very same banks that I intend to compete with.
I have another problem too. I am a disabled veteran. I will probably never be able to work full time again. I believe I am able to form a business, supervise a team, hire professional managers, set the organization's goals and strategy and then serve on the Board of Directors to provide ongoing oversight of the management though, so long as I have good people working for me and with me, which I will. That is what I would like to do, but given my situation, it is extremely unlikely that any outside firm is going to hire me for a 15 hour per week position so I can get my Series 7 and the my Series 24 certification, even if I thought it made sense for me to work for a competitor in order to form my own firm, which is a proposition that I certainly do not agree with or understand the logic behind, if that is indeed the requirement and there is no alternative.
So what are my options? How can I go about forming a small local brokerage that encourages rural communities and small towns to invest, with the intent of hiring a professional full-time manager ASAP (preferably within 2 years after forming the company and being licensed to operate)? I suppose I could find someone who is already a licensed broker-dealer and ask them to manage the company and perform the broker-dealer functions from the start, but I would prefer to at least get to the point where we have $5 million or so worth of assets under management before I attempt to recruit someone who has been in the business for a decade, so that I'll have more chips to bargain with, and so the offer will be more appealing to the candidate than it would if I were asking him to build the firm up from scratch before we even have a website or apply for our business license. Otherwise, I imagine I'll have to have quite a lot of money to offer the candidate up front, in order to persuade them to join our project. My partner and I have a fair amount of our own capital to start with, but I would rather not have to offer our first manager a quarter million dollars out of our personal savings as a sign-on bonus, in addition to all of the other start-up costs, when I am quite confident that my partner and I could do their job for the first year until we get everything up and running (that's the plan anyway). We're both experience professionals who have handled our share of responsibilities in life, just not in finance yet. I used to be responsible for 5,000 people's lives, so I think we can manage five million dollars, 50-100 portfolios, and all of the requisite paperwork responsibly, promptly and thoroughly, especially if we hire a few good, well-organized helpers. If I start the firm and build it up to the point that we have $5M-$10M AUM, over a hundred portfolios with steadily increasing rates of growth, a high-quality website with several thousand visitors a month from all across the geographic region we service, and a unique business model that that our customers and the general public are quite pleased with, then I think I could offer our new CEO more compensation in stock options than in cash, and perhaps I could pay him his salary out of last year's income rather than my own savings, which would obviously be a much better scenario for both the prospective new manager and for the firm.
How might I go about getting the firm started without either hiring someone who already has a decade of experience before we even form the business, or getting sponsored by one of our competitors to get the licenses that I would need to form a small town brokerage? Hopefully there are several options that I haven't thought of, which more experienced professional like yourselves could offer.
Any solutions you might have for this dilemma would be extremely helpful and highly appreciated.
Thank you.
$5M AUM? Is that a level where you can be profitable?
It's the soonest that I would like to consider hiring on a full time manager. If it's just me an a partner, we have no debt and very little overhead, then it won't take much income for to be profitable. Of course, it also depends on the services we offer and the commission we charge. I take your point though. You're right, we would need more than that to operate a profitable brokerage, even a small town brokerage with just a few employees. But I suppose that means you also take my point, that it would be better to at least get to this point before I ask you to come run by brokerage for me.
I think (1) you’re underestimating how much AUM you will need and (2) how long it will take you to get there.
You need to have an impressive network to get to $5M AUM in a short period of time. Otherwise it’s going to take you a bit and who knows what will change in that time.
Ok, that really doesn't have much to do with what I asked though. The topic of discussion was the requirement for having to have an existing firm (or one of its current or former agents) sponsor the creation of a new firm, why that is a bad policy, and if there is any alternative.
Dude...what
Do you have a more constructive comment to add?
Hi -
I appreciate your frustration and possible confusion. The brokerage industry is highly regulated and there is a substantial regulatory infrastructure that must be in place before you can start. You should look on the internet for the FINRA membership requirements. You probably will understand why forming a broker is an expensive and complicated process.
If all you want to do is advise assets for a fee, you might look at becoming a registered investment adviser, or an adviser representative. However, as an adviser you cannot receive commissions. But, you can form your own business and keep a portion of the advisory income that you generate. The other portion of the advisory fee that you share with the adviser, is for the infrastructure that they provide, including compliance. Then, if your business takes off, you can grow it as you wish and move to another adviser or become registered yourself. In other words you can have your own independent business under the umbrella of a much larger adviser.
I recommend that you get on the internet and buy a few magazines that are geared for retail IAs or BD reps. They should have plenty of ads offering services that you may be interested in.
Good luck!!!!
If you're trying to manage portfolios of OPM then you don't need to start an entire investment bank, only a wealth management / financial advisory firm. Some smaller firms would probably help you set up shop (think Edward Jones, Raymond James, etc.) as long as you can build your own book of clients.
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