Push For More Transparency Exposes Broker-Dealer Profit Centers

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Brokerdealer.com blog update is courtesy of Think Advisor. With a push for more transparency in the brokerdealer industry, profit centers are being exposed.  

There’s nothing wrong with broker-dealers being profitable, but how those profits are obtained could use a good dose of disclosure. Representatives deserve to know that what they are paying is a true cost and what they are receiving is the best possible commission from a vendor.

First, let’s look at the profit centers that are relatively obvious to reps. In addition to the spreads broker-dealers receive from payout grids, there are two other primary sources of broker-dealer profit: revenue sharing and markup.


Revenue sharing happens between the broker-dealer and the product vendors, so it’s of little concern to reps. For example, on mutual funds and variable annuities, broker-dealers will negotiate with vendors to earn basis points (bps) on assets or sales of products their reps sell.

Broker-dealers will typically make 1 to 10 bps on either assets or sales of products, with small firms making only 1 or 2 bps and larger firms making 8 or more. Larger firms also have the ability to make these basis points on both assets and sales as they leverage their scale to obtain more.

On REITs and alternative investments, BDs earn between 1% and 1.5% extra in commissions on those product sales, which is called “marketing reallowance.” You may have noticed the increasingly large REIT and alts presence at BD conferences over the last five years—it’s simply because these vendors are currently willing to spend more to get in front of reps.


Markups, such as ticket charges, are something that representatives recognize as a profit center when they look at their various costs and see that firms differ on what they charge for them. It may not be apparent how much the markups are, or how extensively the costs incorporate overall costs, but reps recognize that there is a spread between clearing firms’ costs and what broker-dealers charge the representative.

For example, a clearing firm commonly charges $1 for postage and handling fees, and the broker-dealer charges between $4 and $7. A stock ticket charge from the clearing firm may be $9, but they charge the rep $19. BD scale is a primary factor in how low a firm is able to negotiate with the clearing firm: Small broker-dealers may be able to negotiate perhaps $12 from the clearing firm on stock ticket charges, while a large broker-dealer can negotiate down to $5.

For the rest of the article on ThinkAdvisor, click here.

BrokerDealers Battle Their Own Regulator: Sifma v. Finra Over Privacy

iStock_000010356316XSmallBrokerdealer.com blog update courtesy of The New York Times’ Susan Antilla.

Finra has proposed a new plan that requires brokerdealers to share extensive information about their clients’ accounts and brokerdealers are not happy about it.

The proposal by the Financial Industry Regulatory Authority, or Finra, is “a troubling and serious threat to investors’ civil liberties and constitutional rights,” Carrie L. Chelko, chief counsel of the Philadelphia financial firm Lincoln Financial Network, wrote in one of hundreds of letters to the agency criticizing the plan.

Finra argues that regular, monthly reports from brokers detailing purchases, sales, margin calls and risk profiles will give it a chance to stop abusive practices before further harm is done.

Finra is considering the feedback on its plan, called the Comprehensive Automated Risk Data System, or Cards, and making changes in advance of seeking approval from its board of governors and forwarding a proposal to the Securities and Exchange Commission, Finra’s chief executive, Richard G. Ketchum, said in a telephone interview.

Finra has often been dismissed as an apologist for the Wall Street firms that finance it, but it has made some efforts since the financial crisis to play a tougher role. It fought the discount brokerage firm Charles Schwab & Company in 2012 after the firm tried to force customers to waive their rights to bring class-action lawsuits, winning its case last April. It also strengthened its standards for brokers who are making investment recommendations, advising them that a product must be consistent with a customer’s best interest. Several powerful investor advocacy groups, includingAARP and the Consumer Federation of America, have applauded Finra’s plan, noting that it would allow agency regulators to match the 21st-century data capabilities of the Wall Street firms it regulates. But the brokerage firms that pay Finra to be their regulator say that keeping so much investor information in one place is an example of regulatory overreach and an invasion of customers’ privacy.

“Not a week goes by without some data breach being reported in the press,” Ira D. Hammerman, general counsel of the Securities Industry and Financial Markets Association, a Wall Street lobbying group known as Sifma, said in an email response to questions about Finra’s plan. “And if Cards is built, the question is when, not if, there will be a data breach.”

In December, the American Civil Liberties Union wrote to Finra to express its “very serious security and privacy concerns” about Cards.

Mr. Hammerman and other critics have said that Finra’s plan would invade investors’ privacy, put personal information at risk, take supervisory authority away from brokerage firms and put small brokers out of business. After Sony disclosed in December that its systems had been hacked, Mr. Hammerman even took the opportunity during a media interview to liken Sony’s predicament to the risks that Cards would pose.

Barbara Roper, director of investor protection at the Consumer Federation of America, said Wall Street was “using every tool in their toolbox.” She added, “Their reaction is so over the top that the only thing I can see is that they just don’t want their regulator to be able to keep an eye on them.”

Given Finra’s reputation among some critics, Ms. Roper said, the aggressive Cards proposal has taken some Wall Streeters by surprise. “The industry sees this as evidence of Finra becoming less of a lap dog,” she said.

Mr. Ketchum said that the proposal would make it possible for Finra to spot patterns that suggest bad behavior by a brokerage firm, a branch office or an individual broker.

Dishonest brokers do not usually take advantage of only one client, Mr. Ketchum said. Instead, “they fall in love with a product or they fall in love with a strategy and they put tons of people in it.” Thus, a comprehensive database that displays all of the activity at a firm or branch can help Finra zero in on abuse, he said.

Ms. Roper said the program would let Finra jump on problems more quickly. “It creates a real deterrent,” she said. “Who’s going to churn an account if it immediately sends off a warning siren at Finra?”

In objecting to Cards, the securities industry has been most vocal about the potential for a vast repository of investor information to be hacked. After perusing the data security objections raised in a first round of comment letters in early 2014, Finra revised its proposal and said that customers’ names, addresses and tax identification numbers would not be included.

To continue reading this article from the New York Times, click here.