Push For More Transparency Exposes Broker-Dealer Profit Centers

Posted on March 3, 2015 by admin

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 BETWEEN BDS AND VENDORS

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.

MARKUP CHARGES ON CLEARING FIRM COSTS

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.

Goldman Sachs Seeks to Turn Chit Chat Into A Symphony

Posted on March 2, 2015March 2, 2015 by admin

symphony goldmansachs BrokerDealer.com blog update courtesy of extract from eFinancialCareers.com profile of Goldman Sachs foray into displacing Bloomberg LP’s dominance of chat and instant messaging tools used by brokerdealers throughout the world via Symphony

Ever since it became apparent that bankers were using chat rooms and instant messaging for things other than business-like communication with clients and conversations about their weekends, banks have been clamping down. J.P. Morgan, Citi and Goldman Sachs were all said to make instant messaging services out of bounds to some of their traders in the wake of the LIBOR and FX fixing scandals. In turn, banks have been seeking to develop new, compliant, heavily-monitored, systems of their own.

Among these is Symphony, a ‘a cloud-based, compliant platform for instant communication and content sharing ‘ developed by a consortium of financial services firms led by Goldman Sachs. Developed from the instant messaging and chat provider Perzo, which Goldman bought into last year, Symphony is an instant messaging platform that provides regulators with, ‘an unaltered, auditable and retrievable record of all information flows with demonstrable, proven controls and surveillance.’ Based upon open-source customizable code, the product is due to become available across the market this year.

For a full directory of global brokerdealers who may be embracing this new platform from Goldman Sachs, please click here.

In the meantime. this is what a Symphony spokeswoman told us about the company and its plans.

To continue reading the full story from eFinancialCareers. please click here

BrokerDealer Smacked With Price Gouging Penalty-Class Action Award for $850k Against Newbridge

Posted on February 27, 2015 by admin

Brokerdealer.com blog update couresy Bruce Kelly of InvestmentNews from 25 February.

An independent broker-dealer, Newbridge Securities Corp., has reached an agreement to settle a class action suit costing the firm $850,000. The suit filed was filed by Newbridge clients from June 2008 to January 2013. The former clients alleged the firm price gouged clients for postage and handling on securities transactions. In addition to the class action suit, Newbridge Securities Corp., was fined $138,000 by FINRA for failing to buy and sell corporate bonds at a fair price for their customers.

Per Investment News:

The Financial Industry Regulatory Authority Inc. fined the firm $138,000 for allegedly failing to buy and sell corporate bonds at a fair price for their customers. The firm allegedly failed to take into consideration relevant circumstances “including market conditions with respect to each bond at the time of the transaction, the expense involved and that the firm was entitled to a profit,” according to Newbridge’s BrokerCheck profile. The firm did not admit or deny the allegations as part of the settlement.

The firm lost $434,600 on $37.9 million in revenue in 2013, according to its most recent annual audited financial statement submitted to the Securities and Exchange Commission.

In May 2011, Finra CEO and chairman Richard Ketchum raised the issue of postal price gouging by broker-dealers in a speech to industry executives.

Postage and handling fees charged by broker-dealers ranged at the time from $3 or $4 to as high as $75 per transaction, executives said. Some firms had been inflating postage and handling fees after the financial crisis as a way to boost profits.

The issue of postage and handling costs has been hanging over Newbridge for four years. In April 2011, the Connecticut Banking Commissioner fined Newbridge $10,000, alleging that the firm charged a “handling fee” that was unrelated to actual transactional costs and that the firm failed to tell customers the fee included a profit to Newbridge, according to BrokerCheck. Finra in January 2013 fined Newbridge $50,000 over the same issue.

For the entire article from InvestmentNews, click here

Broker-Dealer Enforcement Cases and Developments: Fines & Restitution Record

Posted on February 26, 2015 by admin

Brokerdealer.com blog update is courtesy of the law firm, Morgan Lewis.

In a record year for enforcement, the SEC brought a landmark number of cases, and FINRA imposed an exceptional level of fines and restitution.

This LawFlash highlights key U.S. Securities and Exchange Commission (the SEC or the Commission) and Financial Industry Regulatory Authority (FINRA) enforcement developments and cases regarding broker-dealers during fiscal year 2014. The full 2014 Year in Review is available here.

The SEC

There were few significant personnel changes at the SEC last year. The Commission’s composition was stable in 2014 with Chair Mary Jo White continuing to lead the SEC. The other commissioners are Luis A. Aguilar, Daniel M. Gallagher, Kara M. Stein, and Michael S. Piwowar. Notable changes were made with appointments in two major SEC divisions (Stephen Luparello was named the director of the Division of Trading and Markets, and Stephanie Avakian was named the new deputy director of the Division of Enforcement). New directors were also appointed to lead the Philadelphia and Atlanta regional offices.

The enforcement statistics compiled by the SEC during fiscal year 2014 (which ran from October 1, 2013 through September 30, 2014) set several records. Other aspects of the enforcement program led the Commission to dub fiscal year 2014 “A Year of Firsts.”

In fiscal year 2014, the SEC brought a record 755 cases, a figure likely boosted by the number of open investigations carried over from the prior year. Moreover, the SEC’s actions resulted in a record tally of monetary sanctions being imposed against defendants and respondents.

With respect to its caseload, in what has become a trend, the SEC brought 7% fewer cases against investment advisers and investment companies—130 cases in fiscal year 2014, compared to 140 actions in fiscal year 2013. To contrast, in fiscal year 2014, the SEC reversed its downward trend from fiscal year 2013, bringing 37% moreactions against broker-dealers—166 in fiscal year 2014, compared to 121 in fiscal year 2013. Nevertheless, taken together, the SEC continues to devote significant resources to investigating regulated entities: cases in these areas have represented about 39% of the Commission’s docket in each of the last two fiscal years.

After a sharp decline in 2013, the Commission brought 52 insider trading cases in fiscal year 2014, an 18% increase from fiscal year 2013, but this increased number is still lower than the fiscal year 2012 total. We will see in the coming year how changes to the legal landscape may affect the SEC’s enforcement in this particular area.

FINRA

An interesting enforcement record emerged at FINRA last year. Although it instituted fewer disciplinary cases in 2014, its fines doubled from the prior year. Moreover, the amount of restitution that FINRA ordered in 2014 more than tripled the amount that had been returned to investors in 2013.

Specifically, in 2014, FINRA brought 1,397 new disciplinary actions, a noticeable decline from the 1,535 cases initiated in 2013. Along the same lines, FINRA resolved 1,110 formal actions last year; 197 fewer cases than it had in the prior year. With respect to penalties and restitution, in 2014, FINRA levied $134 million in fines (versus $60 million in 2013) and ordered $32.3 million to be paid in restitution to harmed investors (versus $9.5 million in 2013).

FINRA’s use of Targeted Examination Letters seems to be declining. In 2014, FINRA posted only two letters on its website, versus three in 2013 and five in 2012. Last year’s letters sought information on cybersecurity threats and order routing/execution quality. (In February 2015, FINRA published its Report on Cybersecurity Practices.)

To read the entire article from Morgan Lewis, click here.

The Odds Aren’t In Morgan Stanley’s Favor With Parody Video

Posted on February 25, 2015February 26, 2015 by admin

Brokerdealer.com blog update is courtesy of InvestmentNews’ Mason Braswell.

Morgan Stanley, a leading investment firm specializing in wealth management, investment banking and sales and trading services, just wanted to have little fun at their 2014 branch manager’s meeting. They created a parody to the “Hunger Games: Catching Fire” movie but choose not to show it, for very good reason. Unfortunately for them InvestmentNews obtained a copy of the video and has shared, the news has been catching fire (pun intended) and people aren’t happy.

One senior executive from corporate branding firm, The JLC Group, which counts a number of financial service firms as clients stated, “On the one hand, one could defend the video production as an effort to appeal to a certain employee demographic. On the other hand, whoever enabled the video to be released should have both hands tied behind their backs. Or, MS execs should simply take a cue from the video’s title and fire the manager who was behind this project.”

There’s a grain of truth in every joke, and while a video Morgan Stanley produced last year as entertainment for a branch managers’ meeting was an obvious parody of the “Hunger Game” film series, it provides a unique, behind-the-scenes look at the country’s largest wealth management firm.

The 10-minute video, titled “Margin Games: Manager on Fire,” was ultimately shelved and never shown at the branch managers’ meeting in February 2014. But the video, a copy of which was obtained byInvestmentNews, seems to reflect a cutthroat culture among wirehouse managers and a lack of congeniality between leaders in the field and executives in the home office.

(The video is being presented here in its entirety because it is a parody and individual scenes may not make sense without the full context and plot.)

Starring a number of the firm’s top brass, including Shelley O’Connor, who oversees the firm’s approximately 16,000 advisers, the film has executives in a war room at headquarters, pitting branch managers against each other in a death match resembling the one portrayed in the “Hunger Games” series.

There are moments where managers joke about the coldness of senior leadership: “They’ll have somebody at your desk on Monday,” one manager says to a competitor.

Stereotypes?

Other scenes feature jokes that hinge on racial stereotypes, including having an Asian woman appear as the expert in martial arts who pulls knitting needles from her hair and throws them at a dart board.

The company won’t talk about the video or say why it decided not to show it. A spokeswoman for the firm would say only that the video was never released.

But according to sources familiar with the video who did not want to be identified, Greg Fleming, the president of Morgan Stanley Wealth Management, was involved in the decision. Sources cited different possible reasons for pulling the video, including concerns of human resources personnel about some of the jokes or scenes of violence in the workplace.

Some current and former Morgan Stanley executives who asked not to be identified said the fact that a video was even made that joked about people who were losing their jobs shows the detachment of executives from other employees. In fact, two months after the managers’ meeting,the firm began a reorganization. The firm cut the number of regions to eight from 12 and reduced the divisions from three to two. One of the divisional directors who was featured in the video, for example, left the firm after his position was eliminated. Four regional managers were moved to different roles.

For the complete article and to view the original video, click here.