08.15.18

FINRA's Inaugural Industry Snapshot: Ranks of Registered Reps Waning

by: Rich Blake

Seeking to shine some statistical light on the broker/dealer and registered representative space it oversees, the Financial Industry Regulatory Authority published its first-annual Industry Snapshot report on Augsut 9. The 32-page report showed, among other things, a slight decrease in the overall number of registered representatives and member firms over the past couple of years, particularly among smaller firms. Overall, FINRA counted some 630,132 registered reps as of year-end 2017. That's down from a recent peak of 643,322 reached in 2015. That total fell to 635,902 in 2016 and, as noted, fell again in 2017. The highest total of reps captured by FINRA was 672,688 in 2007.

FINRA defines small firms as those with 150 or fewer reps. Industry members from these types of firms in recent years (2013–2016) comprised 11 percent of the total number of reps; however, in 2017, these small-firm-affiliated reps fell to 10 percent of the total.

In terms of numbers of broker-dealer firms, FINRA counted 3,726 in 2017. That number is down from 3,835 in 2016 and 3,943 in 2015. According to Ben Marzouk, a financial services attorney at Eversheds Sutherland, “These numbers reflect a recent trend towards consolidation in the brokerage industry, with the larger firms making the strategic decision to merge with or acquire smaller firms in order to gain economies of scale.”

Small firms still comprise the bulk (3,353) of the 2017 total (3,726). One of the most striking takeaways from the report is that in spite of a drop-off in the numbers of reps, and despite grumbling over rising compliance costs, the average broker-dealer firm was more prosperous in 2017 compared to prior years. Aggregate pre-tax net income for FINRA registered firms was $38.2 million in 2017, up from $26.9 million in 2016. Revenues in 2017, $309 million up from $277 million in 2016.

Fewer Firms

The notion of increasing compliance burdens is often mentioned in wider discussions of industry consolidation. In 2007, back when FINRA was created as an amalgam of two prior regulatory entities (one associated with the National Association of Securities Dealers and the other with the New York Stock Exchange) the newly created regulatory organization had counted more than 5,000 member firms, or around 1,300 more than there are today.

In the past, FINRA executives have said publicly the decline is partly due to increased regulatory demands. Speaking earlier this year, Susan Axelrod, senior advisor to FINRA’s CEO Robert Cook, pointed to a crackdown on high-risk firms. “FINRA has been acutely focused on high-risk or recidivist brokers in the past few years," Marzouk said, "so the industry consolidation is likely a result of both the compliance burdens and targeted enforcement focus.”

Dual Hats

At a time when some industry coalitions and regulators are trying to make a clearer distinction between brokers and advisors, FINRA's data on "dual representatives" is particularly timely. Dual representatives, meaning FINRA-registered representatives who are also registered as investment advisors, accounted for less than one-third of registrants in 2007. Today, around 40 percent of securities industry registrants wear two hats. FINRA said the Snapshot Report is "designed to increase awareness and understanding about the broad range of firms, individuals and trading activity that FINRA oversees."

The FINRA Snapshot, according to Marzouk, “is part of a concerted effort on FINRA’s part to be more transparent about its membership and the compliance burdens associated with FINRA membership.” Its publication stems from transparency goals of the FINRA360 organizational-improvement initiative.