Is the Grass Really Greener?

6: On rep-directed advisory accounts, our administrative fee starts at 25 basis points. On all-inclusive wrap accounts, our cost is 40 bps. Are these charges high compared to other firms?

Unbundled advisory platforms (separate ticket charges) have seen a decline in administrative charges, with 10-15 basis points being a common starting point. For all-inclusive wrap fee accounts, we see costs averaging out at 25 bps with a cap on trades in the 80-120 basis-point range annually.

A trend we've seen over the last two years is firms offering lower administration fees. However, these firms then pocket 50% of the 12b-1 fees on non-qualified mutual fund advisory assets. Or they may charge a per-account fee, which makes advisory accounts under $150,000 in assets rather expensive.

The best pricing value we are seeing on unbundled advisory administrative fees are firms that charge as low as zero, with five bps increasingly common. Pricing value for all-inclusive wrap fee accounts at mid-sized BDs is as low as 10 bps with no cap on trades. The best we saw at large broker-dealers was 19 bps with no cap on the number of trades.

7: Do all broker-dealers check their reps' credit history every six months?

We've heard complaints from advisors at one particular broker-dealer that was doing hard credit checks every six months. Several advisors complained that the hard checks resulted in their credit score dropping between 25 and 50 points. After a storm of complaints from their advisors, this firm changed policy to doing soft credit checks (for more on credit checks, please see sidebar above).

8: When my BD performs an audit, they want to look at my tax return and checkbook, as well as my spouse's. Are other BDs being this intrusive?

It is commonplace during rep audits to look at a rep's checkbook. However, we've only seen one broker-dealer that required looking at a spouse's checkbook, and that was done in response to litigation they had to pay over lack of supervision. Tax return audits are a more recent trend, with the objective being to uncover undisclosed outside business activities.

Another reason broker-dealers are auditing tax returns is to preclude the possibility that during an arbitration, regulators will assume the broker-dealer has audited tax returns, arguing that if they have not done so, they have failed to adequately supervise. With a minority of broker-dealers auditing all their reps' tax returns, most limit audits to only the situations where they feel it's warranted.

9: My firm requires me to have my personal brokerage accounts held with the broker-dealer's clearing firm. Is it true when they tell me it's required of them in order to track and supervise what we are doing?

Over the last three years, an increasing number of firms have required their reps to run their personal brokerage accounts through the broker-dealer's clearing firm. The reasons for this requirement are varied, with one firm requiring reps who are also investment advisors to run accounts through the broker-dealer for personal trading supervision. Their reasoning is that if an advisor trades in their personal account in a stock that's also purchased in one of their clients' accounts at a better price (intentionally or unintentionally), they need the ability to enter trade corrections to adjust the share price so the client receives the most favorable price. If the accounts are held away, they can't process trade adjustments and corrections.

Even though many broker-dealers still allow representatives to custody their personal brokerage accounts away, for many the window is being shut by compliance tracking and the requirements of the fiduciary standard requiring that clients get the same or better pricing on stock trades.