The Importance of Affiliating with a Well-Capitalized Broker-Dealer

Affiliating with Well Capitalized Broker DealerMany advisors will remember the turmoil in the markets in 2008 and 2009, and the impact that it had on some of the biggest Wall Street houses, such as Bear Stearns and Lehman Brothers. Over the last few years, many independent broker-dealers have experienced a different type of turmoil, but one that nonetheless has resulted in the closing of over 30 independent firms. In almost every case, these firms were forced to close because they lacked the financial strength to continue in business and meet their outstanding obligations. Many of these obligations arose from adverse awards related to customer complaints from the sale of alternative investments that failed to perform, such as Provident, DBSI and MedCap Funding. As any financial advisor affiliated with one of those firms can tell you, the impact on the advisor’s business of having to transition clients through such a proceeding can be incredibly stressful.

As a result, we believe every financial advisor needs to understand the financial condition of the firm with whom he or she is affiliated, or is considering affiliating with. Because no financial advisor wants to be in the position of having to explain to their clients why the firm they chose to associate with is no longer in business, here are three very important questions you should ask, whether to your existing firm or to any prospective firm:

  •  What is the firm’s net capital and excess net capital?
  • What type of errors and omissions insurance does the firm carry, including what types of claims are covered and the types of limits?
  • Does the firm make markets and carry its own inventory, and if so, in what types of securities?

Net capital, and excess net capital, represents some of the principal measures of a firm’s financial strength. Simply put, a firm’s net capital is equal to the owner’s equity section of its balance sheet, reduced by certain items as required under SEA Rule 15c3-1. Those items typically involve and require that firms reduce their owner’s equity by items that cannot be immediately converted into cash, such as prepaid assets, furniture, fixtures and equipment, and goodwill. Additionally, the SEC also requires that a percentage of the value of investments held by the firm (including a firm’s proprietary trading and investment account(s)) be reduced based on their relative liquidity. Excess net capital relates to the amount by which the firm’s net capital exceeds the statutorily required amount as determined by FINRA.

Net capital is important because it signifies a firm’s ability to withstand potential adverse awards in excess of insured losses, market downturns, negative operating results, and significant losses in the firm’s proprietary trading accounts. This is exactly what happened to several broker dealers that sold significant amounts of the aforementioned alternative investments.

A lack of financial strength can also be signified by a broker-dealer that tends to underpay its employees and advisors amounts that they are owed, as well as the vendors with whom it does business.

Summit Brokerage Services is operated by a management team with over 150 years of combined experience serving the needs of independent financial advisors.  With one of the strongest balance sheets for any firm of its size, Summit Brokerage represents the ideal firm for those financial advisors interested in spending time with their clients, and not worrying about the viability of their independent broker-dealer.

For more information on Summit Brokerage Services, visit or contact us at (800) 354-5528.

Stay Connected

Subscribe to Summit Brokerage

Personalized Industry Newsfeed For You

Thank you. You are now subscribed.


Thank you. We will get in touch with you shortly.