Registered representatives with a Series 6 or Series 7 license are mandated to register with a broker-dealer firm to sell securities to the public. These companies have three types: full-service (sometimes known by the older term "wirehouse"), discount brokerage, and independent firms. While the first two types of broker-dealers generally assert more control, independent broker-dealers (IBDs) often provide those who work for them—registered representatives, financial advisors, and so on—with greater freedom in how they do their business. Though the lines among the brokerage types are blurring, independents are still appealing for this reason to experienced investment professionals who can afford to pay their own overhead and marketing expenses.
Key Takeaways
- Independent broker-dealers (IBDs) offer significant business management flexibility, unlike the greater structure of full-service and bank broker-dealers.
- Financial professionals at independents like registered representatives and financial advisors have access to a broader range of investment products, helping them to provide more personalized portfolios.
- Typically, they have higher commissions, but advisors handle more business expenses and personally have to find their own clients.
- Prominent IBDs include LPL Financial, Raymond James, and Commonwealth.
Understanding Working for Independent Broker-Dealers
IBDs are securities brokerage firms that are independently owned and operated; they are not part of a big Wall Street firm or a bank. Because they are not affiliated with any specific investment or insurance company, they give you and other representatives wider leave to offer more diverse investment options to their clients. This diversity can help you construct more personalized and effective client financial portfolios.
Independents need to recruit and train financial advisors, registered representatives, and others who provide financial advice and products for retail clients. Those affiliated with independent broker-dealers have more flexibility and entrepreneurial prospects than those who work for the wirehouse firms.
Once affiliated, you then have the backing of their broker-dealers for licensing, compliance oversight, trade execution, account clearing, technology support, and access to proprietary products (if available). This lets you focus on serving and acquiring clients, not back-office work.
A major benefit of an IBD affiliation is greater independence in seeking out niche markets. You can customize packages for your clientele without the constraints of a big firm. At the same time, IBDs ensure you follow regulations related to investments, insurance, alternative assets, and more.
| Working at Independent vs. Wirehouse Broker-Dealers | ||
|---|---|---|
| Aspect | Independent Broker-Dealers | Wirehouse/Bank Broker-Dealers |
| Business Model | A high degree of autonomy allows you more flexibility in managing your business. | A more structured environment, with representatives often following the broader strategies and policies of the parent company. |
| Products | Wide range of products from various sources because of lack of affiliation with specific providers. | Product offerings may be influenced or restricted by affiliations or proprietary products of the parent company. |
| Clients | Independents often emphasize personalized service and tailored financial products, appealing to clients seeking a more customized approach. | Client relationships may be more standardized, emphasizing products and services that align with the company’s offerings. |
| Compensation | You may have a variety of compensation models, often including higher payouts or fee-based arrangements. | Compensation may include a combination of salary, bonuses, and commissions, often tied to the performance and products of the parent company. |
| Compliance and Oversight | Subject to regulations but may have more leeway in operations because of their independence. | Strict compliance and oversight, adhering to the policies and procedures of the larger organization and its regulations. |
| Support | You may need to source your support services or partner with third parties. | Typically, you have access to extensive in-house support, resources, and training by the parent company. |
| Building Clientele | You often need to build your own client base instead of being given leads. You can also cater to a niche market or a broader range of clients seeking independent advice. | You may receive leads and client referrals from the parent company. You often serve a wide client base, sometimes focusing on more affluent clients because of the brand and reach of the parent company. |
| Technology and Infrastructure | You may need to invest in your own technology and infrastructure or use third-party services. | You benefit from the advanced technology and robust infrastructure of the parent company. |
A "broker-dealer" is defined by regulators as a person or firm in the business of tradingsecuritiesfor its own account (as principals) or on behalf of its customers (as agents).
Wider Offerings
IBDs were established for financial advisors and registered representatives with securities licenses requiring comprehensive back-office support. This support includes compliance, trade execution, and other essential operational needs. These firms are typically geared toward seasoned financial professionals—including financial advisors and registered representatives—who generate strong revenue streams from a sophisticated client base.
Professionals looking to work at IBDs often have the experience and expertise that make having close supervision unnecessary. They also tend to prefer the freedom to offer a wide range of products rather than being limited to proprietary offerings dictated by a firm’s marketing department. IBDs are thus distinguished by providing a more extensive array of products and services, more than what is typically available through discount or full-service brokerage firms.
While most broker-dealers offer mainstream financial products like insurance, mutual funds, annuities, unit investment trusts, automated portfolio management products, and retirement accounts, independent broker-dealers can go further. They can grant access to select money management platforms not readily available to the general public, along with alternative investment vehicles such as hedge funds, oil and gas partnerships, and bespoke investment or savings programs for specific clients, like medical professionals.
In addition, IBDs may have access to exclusives like IPOs, private placement offerings, and overseas holdings for clients who have the qualifications. This is a more expansive range of offerings for those affiliated with IBDs to offer their clientele.
Potentially Higher Pay, More Overhead
Another advantage is higher commissions. Many discount brokers pay their reps a flat salary with a bonus for reaching production targets at the branch or office level. Full-service firms usually offer a base salary with commissions on top. The commission percentages depend on production level, tenure, and the relationship with the company. Those who work as independent contractors usually receive higher pay than those directly employed by the firm. Of course, those working at these firms typically have little or no overhead, with the company providing office space, business cards, marketing, administrative support, and other necessities.
Independent firms commonly offer higher commissions than other brokerages, thus allowing reps to earn substantially more from the same amount of business. They also do not provide full-service support for their reps, so those trying to decide which type of company suits them best will need to get a clear picture of the out-of-pocket expenses to pay when going this route.
Although IBDs do not tell their reps how to run their businesses, they are still required by the Financial Industry Regulatory Authority and the Securities and Exchange Commission to supervise compliance with all relevant regulations. Many firms also provide additional clearing support to assist with account management and recordkeeping, although this service may come at a price.
Key Players
Although there are many IBDs in the marketplace, some of the largest and most well-known firms include the following:
- LPL Financial (LPLA)
- Raymond James (RFJ)
- Osaic
- Commonwealth
- Cambridge
- First Allied Securities
- Securian Financial
- Kestra Financial
- CMD Investments
- Kingswood Capital Partners
Some firms straddle the full-service and independent models, such as Ameriprise (AMP), Lincoln, AXA, Wells Fargo (WFC), Park Avenue Securities, and Northwestern Mutual.
How Do Independent Broker-Dealers (IBDs) Make Money?
IBDs generate revenue through transaction-based commissions, fees for assets under management, service charges to advisors, and revenue sharing from product sponsors. Many IBDs have a hybrid model combining multiple streams rather than just charging trading commissions. Those working for an IBD can earn income from commissions or loads on the sale of products, fee-based services, or as a percentage of assets managed.
What Is the Difference Between Independent Broker-Dealers and Registered Investment Advisors (RIAs)?
IBDs and RIAs differ mainly in their business models and the services they offer. IBDs are involved in trading securities for clients and may offer a wide range of financial products, often operating on a commission-based model. RIAs, meanwhile, primarily provide advice, manage investments, and typically have a fee-based model, charging a percentage of assets under management or a fixed fee. RIAs are fiduciaries, legally bound to act in the best interests of their clients, while IBDs follow a suitability standard, ensuring investments are suitable for their clients but not necessarily the best option.
Do Those Affiliated with an IDB Have Restrictions on What They Offer?
Those affiliated with IDBs generally have more freedom in the products and services they offer compared with those at wirehouses or bank broker-dealers. They aren't usually limited to specific products or services, allowing them to cater to diverse client needs. However, they must still follow all regulations and ensure the suitability of their offerings for their clients.
Some IDBs may restrict the investments and products their advisors can sell. There are also geographic restrictions since broker-dealers must register advisors and registered representatives in states where they operate.
The Bottom Line
IBDs are often the best choice for experienced investment professionals who have established practices because of their high commissions and minimal supervision. Reps who choose to use them need to be sure that they will be able to generate enough revenue under this business model to pay for their overhead.
Article Sources
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Securities and Exchange Commission. "Commission Interpretation Regarding Standard of Conduct for Investment Advisers."
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