Top 5 Reasons to Outsource Broker-Dealer Services

You’re an experienced commercial real estate developer with a history of success, proven leadership, and impressive portfolio value, but you feel that your company’s growth is being limited by the capital available from your existing financing network.

Your next project, more ambitious than your last, requires capital that you don’t have readily at hand. You do have some cash available to put towards the purchase as well as access to traditional bank financing, but the project requires significant additional capital to move forward. So, you decide to raise the necessary capital through an exempt private placement. That’s smart! But managing these as a syndicated capital raise isn’t a core business function for your firm. You need another source of capital that is repeatable and doesn’t dilute your focus on your core business—commercial real estate development. So, what do you do next?

Private placements are regulated, and the regulations can be complex. Not following them can become an expensive experience, so you would benefit from regulatory expertise. You’ll also need to find a way to package the opportunity so that it is feasible and attractive to investors if you want the project to be successful. The Securities and Exchange Commission (SEC) has specific rules around the sale of securities—including a broker registration requirement—but no one at your firm is skilled in this area.

You have options, but since you want this to be a repeatable process to fund your company’s growth, you would also benefit from the expertise of professional money managers, registered investment advisors, and independent broker-dealers that can sell your offering. Your strategy is to sell to the sellers—wholesaling. That effort entails building a selling group (syndicate) that will look forward to your next project as a destination for the investments of their clients in the future.

Step one is how are the wholesalers who sell your offering to be compensated? If they are to be compensated based on their sales volume, they are going to need to be registered with a broker-dealer. Those are just the rules.

You have choices for how that happens. You could create your own internal broker-dealer and integrate that function into your organization, but is that hassle worth the expense and risk? Or, you could choose to outsource those operational, regulatory and compliance functions to a managing broker-dealer who will manage and supervise that function of your employees.

For most sponsors, partnering with an external broker-dealer is the most cost-effective and efficient way to comply with regulatory requirements and manage the selling group. The following are five reasons your peers have chosen to outsource these services instead of creating their own, internal broker-dealer:

Broker-dealer services are not your core business

In all likelihood, your main business is not selling securities. It’s developing real estate, creating a new product or technology, or providing services to customers. None of those activities require registration as a broker or dealer. Most sponsors raise capital more than once a year and they primarily raise it to accomplish a specific business purpose.

If that’s the case for you and your firm, why distract yourself with the effort of running an entire separate, complex, and highly regulated business? Instead, you can turn to someone with the expertise and experience to handle the aspects of an offering. A managing broker-dealer has experience in how to manage selling groups and their expectations efficiently with minimal ongoing distraction to the sponsor. In fact, if done well, the managing dealer becomes a strategic partner in your capital strategy. They take on the daunting aspects of diligence, compliance, and regulatory paperwork so that you can focus on promoting your core business.

Reduce your exposure to regulatory risk

The SEC, FINRA—the industry’s self-regulatory agency—and all 50 states regulate broker-dealers. By outsourcing your capital-raising services to a managing broker-dealer, your firm can reap the benefits of regulatory expertise and oversight while avoiding the scrutiny of being a broker-dealer itself. Additionally, by engaging an experienced broker-dealer, you get a second, experienced set of eyes on the offering and share some of the offering and regulatory risk with the dealer-manager.

Supervision for national accounts and wholesale team

The burden of supervising the sales team responsible for marketing your investment product is not insignificant. Regulations for this require everything from monitoring their email, social media, and public appearances to keeping tabs on their registrations and continuing education. Business-related electronic communications, including those made by email, social media, online chats, and more must be captured, monitored, and then maintained on compliant electronic storage.

Reduce your operational overhead

Creating an in-house broker-dealer is an ongoing expense that, at the outset, requires credentialed officers to manage the broker-dealer as well as start-up capital to ensure your staff has completed required exams and registered with each state regulator. In most cases, these are recurring annual costs.

Your in-house broker-dealer must also have at least one Office of Supervisory Jurisdiction, and it may later find the need to create additional branches if staff works from other locations. Your firm would also be required to always maintain a certain level of net capital and would have the obligation of annual financial and AML audits. And, if you’re venturing into alternative investments for the first time, you may find it beneficial to invest in new technology that automates complex alternative investment subscription processes.

Benefit from proven technology solutions

Outsourcing to a managing broker-dealer may also open you up to other service offerings outside the purview of traditional compliance. Some managing broker-dealers, like WealthForge Securities, develop in-house technology solutions that will make your investment process more efficient, leading to a better experience for both you and your investors.

Outsourcing your compliance and rep supervision needs allows your firm to stick to what it does best: buying, managing, and selling real estate.

Learn more about the benefits of outsourcing in the following e-guide:

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