Before launching your own broker-dealer, it’s important to consider the following question: how much does a broker-dealer license cost?
Understanding the required capital investment is a crucial step in this journey. This guide will break down the various costs involved. It will also help you evaluate whether launching your own broker-dealer is the right choice for your business by providing a comprehensive overview of broker-dealer license costs and your alternatives.
Continue reading to uncover all about broker-dealer license costs, including the cost to launch and the cost to maintain a broker-dealer.
Key Takeaways
- Knowledge is power: Understanding broker-dealer license costs is vital for anyone considering owning their own broker-dealer.
- Consider regulatory complexities: Acquiring and maintaining a broker-dealer license involves carefully navigating regulatory expenses. These include fees for FINRA membership, licensing exams, state registrations, and legal expenses.
- Explore alternatives: You don’t have to acquire your own broker-dealer license. Affiliating with an existing broker-dealer like Finalis offers a viable market entry option without the steep initial and ongoing costs of owning your own broker-dealer.
Broker-dealer license costs: what you need to know
Before diving into the costs, it’s essential to understand what a broker-dealer license entails. A broker-dealer is an individual or firm that buys and sells securities on behalf of clients (broker) and for its own account (dealer). A broker-dealer license is mandatory for anyone looking to operate legally within the securities industry. This includes professionals like investment bankers, placement agents, M&A advisors and business brokers who intend to earn success fees on securities transactions.
Initial and Ongoing Broker-Dealer License Costs
To break down costs, let’s work under the assumption of an investment bank that chooses to establish a broker-dealer firm with six affiliated representatives — three senior investment bankers and three investment banking analysts and an estimated $5,000,000 in annualized success fees earned.
a) Cost to launch a broker-dealer
Do broker-dealer license costs involve significant initial expenses? The process includes legal costs, registration fees, and setup expenses for compliance infrastructure. Let’s break down the key expenses involved in launching a broker-dealer.
General costs
The costs of obtaining a broker-dealer license can vary widely based on the type of registration and the number of states in which you plan to operate. Some important costs include:
- FINRA Membership: The New Member Application (NMA) process incurs a fee that varies based on the firm’s size and scope.
- Licensing Exams: Exam costs differ depending on the size of the broker-dealer.
- Legal Expenses: Hiring legal counsel to assist with the NMA process can be a significant expense.
- State Registration: Each state imposes its own broker-dealer registration fee that varies from state to state.
Compliance and legal costs:
Launching a broker-dealer requires navigating a complex regulatory landscape that includes both FINRA and state-level requirements. Compliance, licensure, and ongoing training are resource-intensive, which diverts attention from core business activities. If your team lacks extensive regulatory experience, starting from scratch can quickly drain your resources without yielding immediate results.
Additional compliance expenses:
Maintaining compliance with regulatory standards incurs additional costs, including:
- Legal fees: Engaging a securities attorney is essential for managing regulatory requirements. The complexity of your operations will determine the cost.
- Compliance consulting: Many firms hire consultants to establish and maintain compliance programs. The cost depends on the organization's size and the scope of the services provided.
Estimating initial broker-dealer license costs
According to Finalis' broker-dealer cost calculator and previous estimates, the cost to launch a broker-dealer is around $56,000.
This estimate includes:
- Regulatory consultant fees
- Legal expenses
- Financial supervision
b) Cost to maintain a broker-dealer
Once established, maintaining a broker-dealer involves significant annual and monthly expenses, such as regulatory fees, audits, and compliance costs, which can be substantial — especially for larger firms.
What do recurring costs of maintaining a broker-dealer involve?
- Ongoing regulatory maintenance fees: Beyond the initial broker-dealer registration, there are ongoing costs for maintaining your broker-dealer license.
- FINRA annual fees: These include the Gross Income Assessment (GIA) Fee, which is based on your firm’s revenue and starts at $1,200 annually.
- State renewal fees: Similar to the initial registration, each state requires annual renewal fees, typically ranging from $100 to $500 per state.
Maintaining a broker-dealer involves ongoing monthly and annual expenses that are critical to ensuring compliance and effective operation as a FINRA member.
Estimating maintenance broker-dealer license costs
Given the initial assumption of six members of a firm (three of these senior bankers, and the other three junior bankers), these are the estimated costs to maintain a broker-dealer:
A) Ongoing broker-dealer maintenance expenses (monthly): $25,324. This includes:
- Compliance supervision (Series 24 Holder)
- Financial supervision (FINOP)
- E&O insurance policy
- Fidelity bond
- SEC/FINRA independent financial auditors (PCAOB Rule 3526)
- Legal support on broker-dealer matters
- FINRA Exam, information request, and inquiries
- 3120 annual audit & certification
- Due diligence / KYC software
- Anti-Money Laundering audit
- Financial audit
- Continuing education software
- E-mail surveillance software
- State registration fees (Firm)
B) Total ongoing monthly variable expenses: $2,100. This includes:
- Additional compliance expenses (per registered senior banker)
- Additional legal expenses on broker-dealer matters (per registered senior banker)
- Additional insurance premiums (per registered senior banker)
- Additional compliance expenses (per registered non-senior banker)
C) Total Projected FINRA Commissions Fee (Annual): $8,128
Total Annual Cost of Setting Up and Maintaining a Broker-Dealer
Assuming a six person firm producing $5,000,000 in success fees, the total annual cost of setting up and maintaining your own broker-dealer comes to $393,218.
If we add the total monthly additional assumed expenses of $11,560, the total annual assumed cost would be $531,938.
Final, Important Consideration
Opportunity cost is a real thing when it comes to managing the complexity of the evolving regulatory and compliance world. Dozens of banks with their own Broker Dealer function have been unwinding their broker-dealer this summer to outsource it so they can reclaim their time to focus on business development, building their firm's brand and deepening their relationship with buy side audiences.
In our estimates, we did not factor in the lost time for partners at a firm with their own broker-dealer who are inevitably brought into establishing and maintaining compliance policies, supporting FINRA audits and requests, and ensuring their compliance personnel are meeting all requirements to protect their firm.
Time truly is money so you need to understand if you are willing to trade your time building your firm or managing deals for supporting compliance matters instead.
How can Finalis help?
In summary, the cost of obtaining and maintaining a broker-dealer license can vary significantly based on factors such as firm size, operating jurisdictions, and service offerings. Based on our assumptions, the estimated annual costs for a six person investment bank are $531,938, which includes both startup and maintenance expenses.
Given these costs, it may be worth exploring alternatives that provide a more affordable entry point into the securities industry. Finalis offers the opportunity to launch your own investment bank, placement agency, or M&A advisory without incurring the high expenses associated with launching your own broker-dealer. If you’re looking to enter the securities market with a reduced financial burden, consider Finalis as your broker-dealer.
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