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Broker/Dealer Expenses

Broker/Dealer Expenses

00:00 01 July in Articles Written by Jon Henschen

by Jonathan Henschen, CFS and featured in ProducersWeb
July, 2006

We get deluged by questions about fees Advisors are paying, looking for references to what is normal for them to be paying on a particular expense imposed by their broker/dealer. To be certain, there are some firms that are not reasonable on what they charge; approaching ugly on the scale of what is fare to charge an Advisor. We’ve put together a list of common expenses incurred by Advisors by Independent Broker/Dealers as a reference to what is average in our industry and what the trends for these expenses are evolving toward.

Errors & Omissions Insurance

We’ve all seen a substantial spike up on E&O costs over the last four years. The good news is these costs are finally stabilizing, unless of course, your firm has had substantial arbitration activity. Some firms have E&O Insurance as high as $6,000 annually but typical cost are running $1700 to $2100 with a $5,000 deductible. Your insurance should include coverage fixed insurance as well as Advisory. Firms have mixed opinions on whether prior acts coverage is necessary but ultimately, you’re better off safe than sorry. You may be surprised to know that numerous firms make E&O Insurance a profit center. Unless we have another substantial down market in the near future, you can expect E&O rates to remain flat or even decrease.

Ticket Charges

My generalizations on ticket charges are based more on clearing firms like Pershing and NFS since they have the lion share of the Independent market. Other clearing outfits like Bear Stearns may average higher or lower than Pershing & NFS.

Stocks – Four years ago the typical ticket charge on stocks was running at $25 per trade. Today that average is down to $20 with this downward trend continuing.  For Advisors doing institutional trading or large stock volume, numerous broker/dealers can offer a flat ticket charge with no cents per share on listed stocks. The ugly part of cents per share is when broker/dealers impose the charge on OTC stocks.
Bonds– As with stocks, we’ve seen a downward trend on bond ticket charges. Five years ago $50 per bond was the norm while today; $35 per bond is where we’re averaging. Here to, with institutional bond traders or advisors doing large amounts of bond trades, a flat bond charge is available through numerous independent broker/dealers.
Mutual Funds – Many firms have been going out of their way to drop the ticket charge on MF. Several years ago $20-22 was the norm while today we’re seeing $16-$18 commonplace. Further downtrend is expected going forward. Mutual Fund Systematic Deposits, Withdrawals and Dollar Cost Averaging- Here are the groups of charges that drive many Advisors to run their Mutual Fund business direct at the Mutual Fund Company. A few firms have started to not charge for these but most are still charging $3 per transaction on average. The hope by all advisors is that these charges go the way of the dinosaur.

Postage & Handling Fees – First class postage, Envelope and a Confirmation Letter—that will be $9, thank you! Please, the norm is running at $3-$4. I’m still waiting on something close to reality on this charge.

Rep Directed Advisory Platforms

For Advisors that feel they can manage their clients’ assets at a lower cost with better performance than third party managers, there’s good news. For years we’ve seen the administration fee on self-direct Advisory platforms at 25 basis points and tiering down form 25 bsp. with larger amounts of assets. The good news is there are now numerous firms doing this administration for 5 to 10 basis points which includes pass-through of Mutual Fund trails. As we see further pricing pressures on Advisory management fees, Advisors will seek out these lower administrative costs.

Compliance Fees

Over the last two years, broker/dealers have had to add numerous compliance staff positions to keep up with the ever increasing regulatory requirements. With these added expenses broker/dealers have to either suck up the expense, lower payouts or as many firms have now done, implement a per month compliance fee. Another way these fees have been covered is by firms raising their all-inclusive monthly or weekly fees. We seem to have been through the worst of this compliance quagmire, so let’s hope the witch hunt is over. As a side note, it is interesting to know that in a day when broker/dealers often do compliance for all the reps catering to the lowest common denominator, that of all the Advisors, only 5% have had a yes answer on their compliance record over the last 5 years and 41% of the 5% had 3 or more yes answers.

Consolidated Client Statement

We have three primary players with the most common being Albridge. In the early days of Albridge its use was typically $150 to $200 per month. Today, $100 to $150 has become the typical charge. Investigo currently runs in the $70-$120 range while Advisor Assistant can be had for $40-$75 per month. Once again, for some firms their charge on these statements is a profit center.

Technology Fee

Besides charging a compliance fee, another common fee that has been growing is a technology fee which is for a combination of Consolidated Client Statement and new technology costs. Implementing back-office technology like Laser App, Laser Fiche & Web ops are combined with on-line trading platforms and consolidated client statements to give you an all in one tech package that runs in the $75-$200 per month range for those that charge it.

On-line Trading Platform

Basic level trading platforms at some of the clearing firms like National Financial are provided at no cost to the broker/dealer yet Advisors are still being charged $35-$45 per month. Fortunately, there are numerous firms that don’t charge for your basic on-line trading hookup. If you need streaming quotes and various research tools, you’ll pay no matter who you are with.

My intentions in this article were not to come off as a scrooge toward broker/dealer profit centers but rather show perspective as to what is fair and reasonable. Broker/dealers should and need to be profitable but at the same time brokers need cost efficiencies in running their business. Often time’s advisors have little reference as to what is fair and reasonable and where costs are trending. If this article shed some light on those issues, I’ve done my job.