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Independent BD payouts: Hidden costs and charges

Advisors who shop around at prospective broker-dealers soon find that they all have the same sign in the window: We offer generous 90% plus payouts!

And yet, while payouts can appear to be almost interchangeable among potential firms, there’s often a wide variation between the actual net payout. One large independent broker-dealer that regularly touts that its payouts are well above 90%, actually offers a net payout somewhere in the low-70% range. The gap between their net payout and that of some of their smaller IBD competitors can be sizeable.

Mark Elzweig

That’s because unlike wirehouses and regional broker-dealers who use an all-inclusive grid based payout formula, payouts at independent broker-dealers have three components. First there’s the nominal firm payout, typically around 90%. But advisors also pay ticket charges on trades and program fees for their participation in fee-based programs.

There are also monthly fees for compliance, technology and E&O insurance. It's only after carefully reviewing all of these expenses and deducting them from the firm’s stated payout that an advisor can understand what his or her true net payout is at an independent firm. This can then become the basis for an accurate comparison between firms.

It’s important to note, of course, that a firm’s net payout should only be one factor in the selection of a broker-dealer. Big picture items like the financial strength of an organization, its strategic direction and the caliber of its leadership also play a role. So too do the breadth of its platform and the quality of its technology offering.

So let’s review some of the costs for which independent advisors are responsible.

1. Ticket Charges

Every time an advisor does transactional business, they must pay a ticket charge. These can differ from one firm to another. One BD may charge $20 for a stock trade and another may add in cents per share. There’s one firm that charges $28 per trade.

Fixed income charges can vary as well. Some broker-dealers signal their preference for fee-based business by reducing payouts for transactional business to only 75% or 80%.

2. Program Fees

These are charges that broker-dealers hit brokers with for participation in fee-based programs. For example, fees for participation in a broker as portfolio manager program at one firm is 9.5 basis points for a million dollar account. The same account at another BD is priced at 3 to 5 basis points.

Placing assets with the corporate RIA can cost 10 to 12 basis points at some firms, instead of the lower 5 basis point charge for a direct relationship with an outside custodian. There’s one broker-dealer that doesn’t charge anything for assets custodied elsewhere. (RIAs must hire their own compliance consultant and generate their own client reports.)

Our annual analysis of starting payouts for wirehouse, regional and national brokerage firms.
April 25

3. Monthly Fees

Independent broker-dealers also charge a host of fees for all the services that they provide. Errors and omissions liability insurance, technology and compliance services are included in an IBD’s monthly fee. Some firms even levy a nebulous “association fee.” What’s that about anyway?

Monthly charges are the area in which there’s the most variation among broker-dealers. But the low cost solution isn’t necessarily the preferred one. For example, the capabilities of one firm’s technology package versus another’s can differ widely.

So, how should advisors shopping for a new firm handle all this complexity?

First, do a cost benefit analysis to determine the value to your practice of additional bells and whistles. A first rate technology offering may be worth the added expense. That depends on a realistic assessment of which tools the advisor is likely to actually use. Compliance can be another differentiator. Many advisors choose to have their compliance handled by the home office, others prefer the OSJ model. Each firm has its own business model and cost structure.

Next, get it in writing. Advisors should request an itemized list of all monthly charges from the prospective firm and check it with a current firm advisor to ensure that it’s complete. Every firm has schedules of ticket charges and program fees that are readily available.

Finally, do the math. Simply focusing on a prospective firm’s nominal payout can be misguided and confusing. The net payout is what matters. Advisors who want clarity on their actual net percentage must carefully scrutinize all costs and deduct them from the firm’s stated payout.

The famous Nuveen advertising slogan puts it very well: “It’s not what you earn, it’s what you keep that counts.”

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