Broker-Dealer, Investment Advisor, or No License? How to start your research journey on regulatory licenses

You can’t talk about fintech without talking licenses

When thinking about building your investing app, there’s one thing that you must consider: regulatory licenses. The concept of getting licensed is foreign to most of us as developers and entrepreneurs in the tech industry. At the end of the day, regardless of how you refer to your app, if your app leverages financial services even a tiny bit, you want to think about licenses and regulations.

In this article, we provide a high-level framework so that you know where to start your research journey.

Broker-Dealer, Investment Advisor, or No License

Many of us have touched or heard of successful investing and trading apps like Robinhood and Stash. Many of them have broker dealer licenses under FINRA and/or investment advisor licenses under SEC.

Here is a high-level description of each license:

• Broker-Dealer: “A Broker-Dealer is in the business of buying or selling securities on behalf of its customers or its own account or both” (Definition is from FINRA website)
• Investment Advisor: “Any person or firm that, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses regarding securities” (Definition is from SEC website)

Typically, if you see a “trading app” that focuses on allowing users to make sole decisions of what stocks they buy, that app falls under the broker-dealer category. On the other hand, if you see an “investing app”, which focuses on guiding users to allocate his/her money in certain ways or into certain stocks, that app falls under the investment advisor category.

Unlock features and benefits through license acquisition

Let’s dig deeper into what those licenses allow you to do in practice, when building your investing app.

When talking with developers and entrepreneurs who are building apps on Alpaca Broker API, we get asked many questions about whether they can do this or that by having a license or without a license. It is extremely difficult to comment on those questions with accuracy because there are so many details that could impact the answer. In reality, you may want to innovate and do new things and may be pushing boundaries in order to execute new features and business ideas. With that said, your own research does matter and it can go very deep!

Here’s a high-level chart to categorize what you can and cannot do based on FAQ during the conversation with developers and entrepreneurs.

*Investment advisors typically charge a fee rather than trade by trade commission.

Let’s do some quick research on licenses

Although I added a simple high-level charting above, it’s always best to do your own research. After understanding the basic license framework as above, it’s time for you to start looking at the apps that you got inspiration from and are aiming to innovate and disrupt. :)

For any apps and companies that you do research for, you always want to be thorough, just like how you would check out Crunchbase if you wanted to know more about startups.

First, you always want to check out the footer of the app landing page. And if you can’t get what you are looking for on there, you’ll want to look at the disclosure section.

This is what you should see. You then notice the word “FINRA.” You should feel pretty confident that the firm is registered with FINRA.

Secondly, there are a couple of websites that you want to bookmark so you can look deeper into broker dealer and investment advisor registration of the companies. The following websites will provide you with a lot of information: FINRA Broker Check for broker dealer licenses, and SEC Investment Advisor Public Disclosure for investment advisor licenses. I personally go to FINRA Broker Check to look up other fintech startups and industry players at least a few times a week.

BrokerCheck - Find a broker, investment or financial advisor

BrokerCheck is a trusted tool that shows you employment history, certifications, licenses, and any violations for brokers and investment advisors.

Find a broker, investment or financial advisor

You can search for any firm on FINRA Broker Check:

If the search results show that entity name, that means that they hold a FINRA broker dealer license.

This is when you consult your lawyer

You now understand the high-level license framework when building your own investing app. And now you know how to do research looking at industry websites getting information about the apps that you get inspiration from. But at the end of the day, which licenses you need or don’t need comes down to your own unique case. There are many consequences that come with noncompliance. In order to reduce such risks, you need to understand the frameworks and do proper research.

Ultimately, you should get advice from the lawyers who are experts in this fintech field, where they have up-to-date knowledge about licensing requirements, as well as how other innovators are handling it.

We at Alpaca work very closely with a law firm specifically on this matter and talk about this very frequently. Please let us know if you are interested in getting connected to the expert law firm that we work with.

Please note that this article is for educational and informational purposes only All screenshots are for illustrative purposes only.

Brokerage services are provided by Alpaca Securities LLC ("Alpaca"), member FINRA/SIPC, a wholly-owned subsidiary of AlpacaDB, Inc. Technology and services are offered by AlpacaDB, Inc.