There are two common topics in CFAI that are not congruent with what I have observed in my career. I work as an analyst at a small registered investment advisory firm managing private wealth portfolios.
First question:
CFAI indicates that client brokerage is to be used for the benefit of the client AND that the use of client brokerage may be dictated by the client to purchase goods and services for that client.
What is NOT covered is what ‘brokerage’ exactly is. ‘Brokerage’ isn’t even in the glossery. I have some buy-side experience and here is what I have observed:
On a ‘self-directed’ platform - like Interactive Brokers or Scottrade or any of the other ones out there - a transaction charge (also called a ticket charge) is billed to the investor when they buy and sell (e.g. $7 per trade or $0.01 per share). Is this ‘brokerage’? If so, then either all of these broker-dealer platforms are in violation of the standard OR I don’t understand their business model because in many cases this is the only money they collect from their customers.
Going ‘up a level’ from self-directed platforms, many individuals work with an advisor and that advisor is a representative of a custodian, broker-dealer, or mutual fund company. So this advisor may be on Merrill Lynch or LPL or the American Funds and the advisor may solicit clients to buy a particular product, usually a mutual fund. There is sometimes a ticket charge for executing the trade, which is kept by the custodian/BD, and usually either a front-end sales charge, a back-end sales charge, or a trail (annual fee collected) which goes to the advisor. These sales charges are how the advisor gets paid, they pocket this $ as income. Is this considered ‘brokerage’ and, if so, a violation?
One more level up would be an advisor that takes discretionary control of the assets. They buy and sell in the account on behalf of the client, sometimes generating ticket charges (which are kept by the custodian, not distributed to the advisor) and the advisor charges a ‘wrap-fee’ or advisory fee (usually a % of assets under management). Would this be considered brokerage?
So bottom line, at the retail level many investors pay several fees to financial professionals to ‘buy’ their shares. These financial professionals derive their entire living from these fees - which, by necessity, pay for both the operating expeneses and their own salaries which do not directly benefit clients. Is this entire business model a violation of the code? Does anyone working in private wealth management or as a registered investment advisor have insight into this?
Second question:
CFAI talks about seeking best execution for clients by choosing the ‘best’ broker-dealer. Our firm is registered with one broker-dealer and our FINRA license hangs with that broker-dealer. We can not legally use another broker-dealer or trading platform - that would be considered ‘selling away’ and a compliance violation. So … whats that about?