Wirehouse vs. Independent Broker Dealer Firms: What’s the Difference?

Is there that big of a difference between wirehouse and independent broker dealer firms?

Independent Broker Dealer FirmsAs discussed in a previously published Summit Brokerage blog, “In the consumer services sector of the financial planning industry, consumers are presented with not only a confusing array of specialized terminology and options but also a broad spectrum of different types of financial professionals.” This previously published Summit blog discusses the difference between financial advisors and financial planners. The instant blog covers another common point of confusion within the industry: the difference between wirehouse firms and independent broker dealer firms.

The term “wirehouse” (sometimes spelled “wire house”) is somewhat of an antiquated term; after all, Merriam-Webster’s online dictionary defines it as: “a brokerage firm connected with its branch offices and correspondents by private leased telephone or telegraph wires.”[1] The more modern definition of wirehouse firms is: large, mega-firms with hundreds of worldwide offices that share financial information, prices, and research. In this country, the four largest and most well-known wirehouse full-service brokerage firms are: Morgan Stanley Smith Barney, Bank of America’s Merrill Lynch, UBS, and Wells Fargo.

However, in recent times, many financial advisors and clients alike have been turned off from the big-name wirehouse firms and have been steadily making the transition to working with independent broker dealer firms. Summit Brokerage is an independent broker dealer firm, which was rated as the top independent broker dealer in WealthManagement.com’s fourth annual Independent Broker Dealer Report Card.[2]

While not a fully inclusive list, the following are some of the most important differences between wirehouse and independent broker dealer firms:

  • Employment status of financial advisors: Financial advisors who work for wirehouse firms are considered employees of that wirehouse firm. Essentially, you are growing a business for someone else—your boss (the wirehouse firm that employs you). On the other hand, financial advisors working for an independent broker dealer are considered independent contractors. So long as you’re compliant with the relevant rules and regulations, you can run your independently operated business the way you see fit and are growing a business for yourself.
  • Client “ownership”: If you’re working with a wirehouse firm, while your clients may work with you, these clients don’t really belong to you—their business actually belongs to the wirehouse firm you work for. If you’re an independent broker dealer, you “own” your clients—you can even sell or transition your client book to a colleague or an outside advisor.
  • Product choice: With wirehouse firms, financial advisors typically must use the firm’s often proprietary products. As an independent broker dealer, you have more freedom to choose which products to use according to which products best meet your clients’ needs.
  • Payout potential: Even though financial advisors who work with wirehouse firms typically work with higher net worth clients, their payout could be less since wirehouses can often take up to 60% of your payout. As an independent broker dealer, you typically get to keep 85-92% of your payout.
  • Payment of overhead costs/expenses: If you work for a wirehouse, you don’t pay overhead costs. That’s one reason wirehouses often take such a large percentage of your payouts—part of this payout is used for overhead costs and expenses such as office space, marketing, equipment, and etc. Alternatively, if you work for an independent broker dealer, you’re responsible for paying your own overhead costs and expenses. As such, your ability to control such costs and expenses will affect your revenues.
  • Choosing clients: Some wirehouse firms will only let you work with clients who have a specific net worth or specific amount of investable assets. As an independent broker dealer, you are not limited to such restrictions on what types of clients you can bring in.
  • Your brand: If you work with a wirehouse firm, you become aligned with that firm’s brand. This can be advantageous if the firm has a widely-recognized, excellent reputation; however, things can quickly take a turn for the worst if your wirehouse firm becomes associated with a scandal or some bad press. If you are an independent broker dealer, you are your own brand.

For more information on Summit Brokerage Services and our independent financial advisors, visit www.joinsummit.com or contact us at (800) 354-5528. Let us show you why we were voted as the number one independent boutique broker-dealer firm in the country!

Summit Brokerage Services is part of Cetera Financial Group, RCS Capital Corporation’s (NYSE: RCAP) retail investment advice platform.

This blog and website are for informational, educational and discussion purposes only, and the owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. Summit Brokerage Services, Inc., Summit Financial Group Inc., and any of their affiliated entities and principals are not a law firms or an accounting firms, or substitutes for an attorney or accountant. Although topics may be discussed on this blog that may involve legal, accounting, or investment issues, nothing on this blog shall be deemed to constitute the practice of law, legal advice, investment advice, and/or tax advice. Summit Brokerage Services, Inc., and its affiliates do not, and cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies. The content on this blog is “as is” and carries no warranties. You should consult an experienced professional regarding tax consequences of specific transactions.

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[1] http://www.merriam-webster.com/dictionary/wire%20house

[2] https://www.summitbrokerage.com/@ssets/pdf/Wealthmanagement_2016_Ranking_Final.pdf

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