Regulatory Alert — FINRA’s 2021 Industry Snapshot Points to Challenges for Broker-Dealer Model
The Financial Industry Regulatory Authority (FINRA) recently published its 2021 Industry Snapshot, an annual statistical report on member brokerage firms, registered representatives, and related market activity that FINRA regulates (Snapshot Report). As reflected in the Snapshot Report, and following in line with recent findings, the ranks of FINRA broker-dealer firms continue to decline, along with the total number of affiliated registered representatives nationwide. These reductions are countered, however, by upward trends in the number of registered investment adviser (RIA) firms, investment adviser representatives (IARs), as well as dually registered stockbrokers and IARs.
FINRA, a Self-Regulatory Organization (SRO) authorized by Congress and supervised by the Securities and Exchange Commission (SEC), oversees more than 600,000 brokers across the United States and uses advanced technology to analyze billions of daily market events. As an SRO, FINRA’s stated mission is to protect investors and safeguard market integrity. Among other things, FINRA establishes basic protections for investors, qualifies and licenses persons who sell securities products, and requires that securities products sold to investors be suitable for individual investors’ needs. Starting in 2018 and in furtherance of its transparency goals, FINRA began publishing an annual statistical report providing an overview of the broker-dealer industry, designed to increase awareness of the firms, individuals, and trading activity that FINRA oversees.
Notable findings within this year’s Snapshot Report include the continued decline in the number of FINRA-registered broker-dealer firms (including dually registered firms) – down 2.3 percent (from 3,517 in 2019 to 3,435 in 2020), with a concurrent 1.1 percent drop in the number of registered representatives (from 624,674 in 2019 to 617,549 in 2020). Of the universe of registered representatives, the Snapshot Report notes that almost half (299,613 in 2020) were dually registered with broker-dealer and RIA firms. Looking back several years, the numbers of broker-dealer firms and registered representatives demonstrate a steady decrease, down from 3,835 and 635,625, respectively, in 2016. In contrast, there has been a steady rise in RIA firms over the same five-year period, increasing from 29,081 to 30,888, corresponding with an increase in IARs.
Geographically, the distribution of FINRA-registered firms by headquarters in 2020 remained heavily concentrated in the Northeast, especially in New York, New Jersey, Connecticut, and Massachusetts, as well as in California, Illinois, Texas, and Florida. Distribution in terms of number of brokerage firm branches follows a somewhat similar pattern, with added presence in the Midwest and Southeast.
The declining numbers of broker-dealers and affiliated registered representatives are significant because they illustrate an evolving industry due, in large part, to technology. With the advent of online discount brokerage services, retail investors have become increasingly comfortable with using self-directed brokerage accounts – relying less on interaction with individual brokers. In addition, zero-commission stock trades, pioneered by online-only brokerages such as Robinhood, have become an industry norm over the last couple of years, with larger full-service discount brokerages such as Fidelity and Charles Schwab following suit. The demand for individual investment advisory services using an RIA remains strong, however, although the RIA industry could also see some impacts from new online “robo-advisors” that assist investors in crafting portfolios according to an algorithm at a reduced fee.
The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including SEC, FINRA, and state-level developments. If you have a question regarding this recent announcement or any other industry matter, you may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, confidential consultation.