April 25, 2019 | ARTICLE | BY KELLY LYNCH

As a technology provider to independent broker-dealers, we know that cost, regulatory pressure and information consolidation are three themes that dominate operational decisions around the trading, execution and ongoing maintenance of customer accounts. The focus on consolidation—consolidating all client accounts along with the numerous types of underlying investments onto a single platform—is not only driven by a desire for greater operational efficiency but also regulatory pressure. After an audit, regulators may conclude that a broker-dealer firm could potentially enhance their oversight and controls if everything was consolidated onto a single platform.

After hearing this message from regulators, the next logical conclusion for many firms is that they must move everything, including their direct-held mutual fund positions, to a conventional brokerage system. After all, there is comfort in knowing that a brokerage system can provide consolidation through a seamless, off-the-shelf solution that checks many of the regulatory boxes.

Peeling Back the Layers

However, if advisory firms dig further, they will realize that typical brokerage systems may not be the best solution for all customers—particularly for those relatively small, mutual fund customer accounts. Traditional brokerage platforms are too big a hammer for the nail—an overly complex solution for the problem trying to be solved. The following considerations, in addition to the makeup of the firm’s client base, are important:

  • Cost: Customers will likely incur new costs as a result of moving to a brokerage account —statement fees, transaction fees, inactivity fees and so forth. How will customers react to these new fees at a time when most customers anticipate that fees will go down rather than up?
  • Complexity: Customers may not react favorably to the complexity that a traditional brokerage system introduces to things as basic as account statements and access. One firm we spoke with had so many questions from frustrated clients after moving their direct mutual fund accounts over to a brokerage account that they had to unravel their decision…and do some major damage control to retain customers.
  • Lack of flexibility/control: When broker-dealer firms shift customers to legacy brokerage platforms, they may have less control over the client and rep experience.
  • Data access: While firms can view customer data at the custodian, accessing that data for business reasons such as sales reporting or commissions may no longer be straightforward.
  • Regulatory issues: While regulatory pressure may be the very motive for switching to brokerage, broker-dealer firms must also consider regulatory issues that a brokerage account can introduce. One example is best execution. In some cases, customers may no longer be getting the best deal after the advisory firm has been locked into a contract with said brokerage provider. And again, advisory firms must factor in the additional fees clients will likely incur due to higher trade and execution costs associated with brokerage.

Know Your Options

At one point, a traditional clearing brokerage service was the best alternative for IBDs and other advisory firms looking to consolidate customer accounts and eliminate direct-at-fund (“check and app”) business. Today, that may no longer be the case and we encourage advisory firms to know their options before going blindly to brokerage.