Start a stock brokerage firm by following these 9 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your stock brokerage firm. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
STEP 1: Plan your Business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How long it will take you to break even?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a stock brokerage firm?
Startup expenses vary, but FINRA will require at least $100,000, but may require up to $150,000 in capital reserves for your firm. Add to this the cost for state registration, consultants, salaries for your employees, and deposits for clearing firms, and you may find starting your own brokerage firm in your state can cost between $200,000 and $300,000 or more.
What are the ongoing expenses for a stock brokerage firm?
Ongoing expenses are mostly regulatory, including licensing and compliance training and testing (continuing education). However, there are also the normal office expenses, including utilities, paper and office supplies, and labor costs. In total, these costs can range from $2,000 to $5,000 per year for a very small firm, and typically cost up to 35% of total revenue for mid to large firms .
Who is the target market?
Preferred clients are high net worth or ultra high net worth clients. Minimum assets of $500,000 to $1 million are preferred. Poor clients are those with few or no assets to manage.
How does a stock brokerage firm make money?
This business makes money primarily by gathering assets under management (AUM). Brokerage firms typically charge a fee as a percentage of these assets. In addition to the fee, some brokerage firms also charge a flat fee per account.
How much can you charge customers?
A brokerage firm typically charges a fee against assets under management. For example, a broker-dealer may charge 2% of assets under management. On a client portfolio worth $100,000, this would amount to an annual fee of $2,000. Brokerages may also charge a flat fee for financial planning services. For example, a comprehensive financial plan can cost clients between $2,000 and $10,000. Modular financial plans can cost between $500, and $1,500.
Finally, a brokerage can charge clients a per-hour fee for consultations that fall outside of the normal scope of financial planning work. College planning would be an example of services that fall outside of conventional financial planning. While financial planning does recognize the role of planning for a child's education, usually this area is treated as supplemental to the core planning services, which include retirement planning.
In-depth college planning may involve researching schools, financial aid programs, helping parents set up 529 plans and alternative funding for college, researching grants and loans for parents and preparing a customized solution for their child.
How much profit can a stock brokerage firm make?
Average profit margins in the financial services industry hover around 14%, with some firms making as little as 5% and others, 40% or more. Ensemble firms average 20% profit margins.
How can you make your business more profitable?
Specialization can make a huge difference in income potential. Advisors and brokerage firms that cater to specific types of clients can charge more money. Another way brokerages can earn more is by specializing in specific types of investments and then charging more money for advice about those investments.
For example, an investment firm that specializes in precious metals and mining companies can gain a competitive advantage over others who only deal with more mainstream investments. Investors looking for these types of alternative investments are also usually more willing to pay more for specialized advice on these investments.
What will you name your business?
Choosing the right name is very important. Read our detailed guide on how to name your business. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.
After registering a domain name, consider setting up a professional email account (@yourcompany.com). Google's G Suite offers a business email service that comes with other useful tools, including word processing, spreadsheets, and more. Try it for free
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC prevents you from being personally liable if your stock brokerage firm is sued. There are many business structures to choose from including: Corporations, LLC's, and DBA's.
Form Your LLC
Read our Guide to Form Your Own LLC
Check out the Top Business Formation Services from our friends at StartupSavant.
You should also consider using a registered agent service to help protect your privacy and stay compliant.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Find the right bank for you, read our review of the Top 5 Banks for Your Small Business
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
Federal Business Licensing Requirements
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a stock brokerage firm. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For more information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Certificate of Occupancy
A stock brokerage firm can be run out of a storefront. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease office space:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a stock brokerage firm.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build office space:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for you business’ location to ensure your stock brokerage firm will be in compliance and able to obtain a CO.
STEP 7: Get Business Insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
How to promote & market a stock brokerage firm
Marketing your business is usually done in stages. Since it’s almost impossible to start your own brokerage firm without having previously worked for another broker-dealer, most principals already come to their own business with a book of business. Marketing usually involves reaching out to existing clientele for referrals. However, compliance-approved marketing materials may also allow you to do targeted direct mail, online advertising, and email marketing.
How to keep customers coming back
Charge less in fees or offer more services than other firms. Since broker-dealers are prohibited from making explicit service or investment return claims, you must get creative in how you differentiate yourself. For example, you could offer potential customers free supplemental services that you used to charge money for. You could also give clients the option of a free concierge service, where they have greater access to you during off-hours.
STEP 9: Establish your Web Presence
A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.
Start A Stock Brokerage Firm In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
This business is ideal for individuals who are good with math and finance, have a passion for helping others meet financial goals, and are good with money. This business may require long hours, especially in the early years of the business. And, while weekend and holidays are typically “non trading days,” many brokerage firm owners do work weekends completing paperwork or meeting with clients.
What happens during a typical day at a stock brokerage firm?
Day-to-day activities of a brokerage firm owner include contacting clients, overseeing employees, possibly managing special high net worth client funds, preparing financial plans for his book of business, meeting with compliance officers, approving marketing campaigns, meeting with internal and external wholesalers, and running financial analyses.
What are some skills and experiences that will help you build a successful stock brokerage firm?
You must be a Registered Investment Advisor before you can make any investment recommendations to clients. You also need to become a fiduciary for all investment accounts you manage. State exams may be part of this process, but most investment advisors are regulated at the federal level, directly under the Securities and Exchange Commission.
Knowledge of financial modeling, risk management, and investing is essential, as is portfolio management. Managerial experience is required by the Financial Industry Regulatory Authority (FINRA). If you do not have an experienced Principal on your management team, it’s unlikely your application for your own broker-dealer will be approved.
What is the growth potential for a stock brokerage firm?
Growth potential for a brokerage firm depends entirely on assets under management. Large firms, like Merrill Lynch hold trillions of dollars in assets. However, small firms may only hold several million. Brokerages are typically run by a manager with several brokers or investment advisors working for the firm.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a stock brokerage firm?
Focus on a niche market and outcompete your competition by offering value-added services. It’s not enough anymore to advertise your investment services. Clients today expect full-service financial planning.
How and when to build a team
Building a team is never necessary, beyond your core admin team, but may be done when you outgrow your ability to service existing clients. A typical mid-sized brokerage firm will employ at least a dozen investment advisors. Even a small brokerage will need, at minimum, a compliance officer and possibly several principals with experience running a broker-dealer firm, and support staff to process paperwork and make appointments.