Introduction
The SEC’s Division of Economic and Risk Analysis (DERA) recently released a comprehensive review of broker-dealer activity from 2010 through 2024. While the findings highlight industry-wide consolidation, shifting revenue models, and increased concentration among the largest firms, the most pressing impact is on smaller broker-dealers. The report noted that small firms face a disproportionate regulatory burden, shrinking revenue opportunities, and unique supervisory challenges that threaten both their financial viability and long-term role in the marketplace.
Consolidation and Market Share Pressure
Over the past 15 years, the number of registered broker-dealers has declined by nearly 30%, from 4,758 in 2010 to 3,341 in 2024. Despite the contraction in firm count, industry assets have grown, but they are now concentrated in the hands of a very small number of firms. Two percent of broker-dealers control 94% of all industry assets.
For smaller broker-dealers, this trend underscores the difficulty of competing in a market where scale drives efficiency. The median broker-dealer employs only 11 people, compared to 142 at a median clearing or carrying firm. In this environment, smaller firms struggle to allocate resources across compliance, supervision, and client service, without the benefit of scale.
Revenue Model Challenges
Additionally, revenue pressures are acute for smaller broker-dealers. Traditional commission-based income has nearly collapsed, declining from 18% of total industry revenue in 2010 to just 5% in 2024. Similarly, revenue from investment company share sales dropped from 8% to 3%.
Larger firms have managed to offset these declines by pivoting to fee-based advisory services, trading gains and revenue, and margin interest. For smaller firms, however, that shift is more difficult. Many lack the infrastructure to operate advisory platforms at scale, or the client base to generate meaningful fee revenue. As a result, smaller firms often remain dependent on commission income or niche products, an approach that exposes them to heightened regulatory scrutiny under Reg BI and Form CRS.
The Weight of Regulatory Burdens
Compliance obligations represent one of the most significant barriers for smaller broker-dealers. Firms in the bottom quintile of asset size reported regulatory compliance costs of 5.5% of assets, compared to only 0.3% for the largest firms.
These costs are largely fixed, and they consume a far greater proportion of smaller firms’ resources. Principals of small firms often must choose between dedicating funds to compliance systems or investing in growth initiatives. This tension increases the risk of supervisory lapses and heightens the need for careful documentation and outsourcing strategies.
Supervisory and Operational Constraints
Smaller broker-dealers also operate under significant supervisory strain. With lean staffing, oversight responsibilities frequently fall on the firm’s principals, or a small compliance team. These individuals must juggle client service, business development, and regulatory oversight on a daily basis, and they are roles that larger firms spread across entire departments.
The challenge is not only one of bandwidth, but also of regulatory perception. While regulators devote significant oversight resources to the largest firms due to their systemic importance, smaller firms are still expected to maintain the same level of compliance rigor, despite limited personnel and operational resources.
Geographic and Competitive Realities
The broker-dealer industry remains geographically concentrated, with New York accounting for nearly 30% of broker-dealers by count, and over 70% of industry assets. For smaller firms located outside of financial hubs such as New York, Illinois, Florida, Connecticut, and Texas, the competitive pressures are magnified.
To remain viable, many regional and boutique broker-dealers must specialize in underserved markets or alternative investment products. While specialization can create competitive advantages, it also introduces greater business risk if client demand shifts or regulators target those niches for heightened scrutiny.
Key Takeaways for Smaller Broker-Dealers
According to the SEC’s report, smaller broker-dealers face several pressing challenges that directly impact their ability to remain competitive and compliant. The areas of greatest concern include long-term sustainability, revenue diversification, and the growing demands of compliance and supervision.
- Long Term Sustainability Requires Specialization. To succeed over the long run, smaller firms must identify and focus on niche areas, whether in products, services, or client relationships, where they can establish a competitive advantage. Without this specialization, sustaining growth in a market dominated by larger players becomes increasingly difficult.
- Revenue Diversification is Critical. Firms that rely too heavily on commission-based income face significant risk in today’s evolving marketplace. Expanding into advisory models and other specialized product lines can create more stable revenue streams. Importantly, this diversification must be built on a foundation of strong compliance practices, with specialization serving as a key driver of both stability and growth.
- Compliance and Supervision Must Be Strategically Managed. Smaller firms often lack the resources to absorb the mounting regulatory costs associated with compliance. To address this, they can turn to outsourcing, adopt compliance technology, and implement robust vendor oversight. These strategies not only help mitigate cost pressures but also strengthen the documentation and supervisory processes that are particularly critical when principals themselves hold primary responsibility for supervision.
Ultimately, the SEC’s observations make one thing clear – smaller firms cannot afford to approach these challenges reactively. Specialization, diversification, and strategic compliance management are no longer optional, they are survival strategies. The question for every firm is not whether these steps are necessary, but how quickly they can adapt before larger competitors and regulators leave them behind.
The SEC’s latest broker-dealer report highlights a shrinking marketplace where 2% of firms control 94% of assets. For smaller broker-dealers, survival hinges on specialization, revenue diversification, and strategic compliance management before regulators and competitors leave them behind.