In 2018, there were over 17,000 investment firms in the United States alone. For someone familiar with stock trading, this might not come as a surprise. Investing in the stock market is nearly a hobby for some individuals. 

When you begin to consider starting your own brokerage firm, understand that there are steps necessary to correctly get from ideation to legal, operational entity.

What are Brokerage Firms and What Do They Do?

You can think of brokerage firms as a sort of middleman in the investment world. Brokerage firms move securities from an individual to a public company. They also hold the retirement funds for both individuals and companies.

It helps to understand what the main functions of a brokerage firm are on a daily basis. Overall your business will be handling funds and security transactions for clients. This breaks down into the simple day to day tasks that can include client relations, financial plan preparation, and running financial analyses. 

Getting Your Brokerage Firm Started

Brokerage firms can be considered highly regulated in the sense that you can’t throw up a website and claim to be a broker. Secure the right registrations and certifications to keep yourself out of legal trouble. Not to mention, by following guidelines you can avoid hefty fines.

Get Properly Registered

If you would like to operate within your state only then can you avoid the Securities and Exchange Commission (SEC) registration. For firms planning to operate across state lines, however, registering with the SEC will be mandatory.

Other registrations required of investment firms are memberships with the Financial Industry Regulatory Authority, known as FINRA, and the Securities Investor Protection Corporation, known as SIPC.

Have All Personnel Register with FINRA and Pass Securities Exams

Unless you plan to somehow be a one-man firm, you will need to hire on managers and employees. You should also expect to bring on partners. All of these personnel will need to become registered with FINRA. In order to qualify exams known as Series 7 must be passed by each individual. Upon passing they will be a licensed securities representative.  

Become an Exchange Member or Join Through Agreement with a Floor Broker

Those starting a new brokerage will have to wait for a vacancy in a stock exchange. Leasing options are also available if the seat owner wishes to temporarily relinquish their spot. If neither of these options works for your plans, you have the alternative route of setting up through a member broker. In this case, all business will be conducted through the member broker.

Setup Infrastructure for Operations and Transactions 

Stocks don’t trade themselves. You will need to purchase and set up computers, a website, and stock trading software to be used for daily operations. Clients will expect to easily access their information through an online portal. 

Consider the size and breadth of your planned company. There is no need for a software system equipped for the largest of firms if you have a small team. Whereas, it’s never wise to stretch your software’s abilities too thin. 

By properly setting up the previously listed registrations and certifications you are guaranteeing that you are protected against the FINRA and SEC’s rules and regulations.

Is a Brokerage Firm the Right Business for Me?

Starting a business is a time and money investment. Go into opening an investment firm by first considering if this is the right business for your skillset and experience. 

A brokerage firm likely isn’t the best option for a creative writing major but would suit someone with strong financial knowledge and math skills. Also prepare yourself for long hours, even past the point of owning an established firm. 

One bonus of owning a brokerage firm is that you will generally get all holidays off that are considered banking holidays. The only tradeoff here is that many financial advisors will stay open on weekends in order to meet with clients.

How Much Does it Cost to Open an Investment Firm?

Expect to be investing over $200,000 just into opening your investment firm. This can scale up past $300,000 depending on your state. These startup costs are used to pay for deposits, registrations and employee salaries.

Is it a surprise that an investment firm requires an investment to open? Perhaps not. Either way, startup costs will be a major determining factor for individuals considering this business model.

Other Steps Necessary to Create a Brokerage Firm

The nitty-gritty was covered in more detail above. With stock brokerages, there is an intimidating amount of vocabulary to pick up on. However, starting any business comes with a handful of similarities. 

Keep the following in mind when founding your brokerage:

  • Form a Legal Entity to Prevent Personal Liability
  • Register for State and Federal Taxes
  • Secure Business Insurance
  • Open a Banking Account for Your Business
  • Plan and Implement a Marketing Strategy

You need licensing and permits, but those aren’t the magic behind bringing in clients or operating a business smoothly. Do not forget these key factors in getting your brokerage firm started on the right foot.

Breaking Into Share Market App Businesses

A new interesting trend that is spreading globally with the rise of technology are share market apps. These apps are popping up as alternatives to physical brokerages or as ways to supplement communication with a financial advisor. 

With over 2.1 million apps in the Google Play store alone, it is little surprise that the investment industry has found its place amongst the numbers.

Taking Your Next Steps Toward an Investment Brokerage Business

Now you know a general breakdown of what a brokerage firm is used for and the steps needed to get one started. It’s time to decide if this is the best business model for your current situation. Check out our blog for more information on investment firms.