I am not getting it. The “required” practice is that “The Investment Manager must not use Brokerage from another Client account to pay for a product or service purchased under the Client-Directed Brokerage Arrangement”. Here is a situation: the manager, Mr Alpha, has two clients: the Stinky Pension Fund (SPF) and the Infinite Growth Fund (IGF). Let us assume that SPF tells Alpha to use client directed brokerage with Penny Transaction Brokerage (PTB) and he uses Great American Brokerage (GAB) for IGF’s transactions. So how is the brokerage from PTB and GAB going to interact in this standard? Thanks for your comments.
Oddly enough I do not follow but here is what I know: Under a CDBA (client directed brokerage agreement) the fiduciary must use the brokers outlined under the CDBA, otherwise that is a violation. If a CDBA does NOT exist and the fiduciary has multiple clients, they must disclose how they use the brokerage and to the extent that it benefits clients in the long run. Hope this helps
actuary0123 Wrote: ------------------------------------------------------- > I am not getting it. > > The “required” practice is that “The Investment > Manager must not use Brokerage from another Client > account to pay for a product or service purchased > under the Client-Directed > Brokerage Arrangement”. > > Here is a situation: the manager, Mr Alpha, has > two clients: the Stinky Pension Fund (SPF) and the > Infinite Growth Fund (IGF). Let us assume that > SPF tells Alpha to use client directed brokerage > with Penny Transaction Brokerage (PTB) and he uses > Great American Brokerage (GAB) for IGF’s > transactions. So how is the brokerage from PTB > and GAB going to interact in this standard? > > Thanks for your comments. If you are using two different brokers, then you are probably not going to mix up the brokerage (unless you have a complete bonehead handling your brokerage payments). Now problem arises when we use the same broker for both Stinky & IGF except that GAB has given us a cheap deal for Stinky (typically that’s why clients direct you to a broker - because of existing arrangements) and a different package deal for IGF the brokerage for which is higher but the soft dollars buy valuable research reports back from GAB (say). Now if you go by the standard you cannot possibly use the research reports from GAB to make investment decisions for Stinky because they went for the cheap deal though they are with GAB. Its IGF’s money thats broght back the reports. But here’s the problem: If for example, GAB’s deal is such that they will provide research reports only if the volume of trades crosses a certain limit. If the volume of trades to cross that limit happens only when both Stinky’s & IGF’s trades are attributed together, then you are in a real mess with how to use the reports for Stinky & IGF (this is assuming both Stinky & GAB’s portfolios are similar and the research reports are valuable). So basically you need to seggregate client-directed brokerage accounts from other client accounts, not combine their trades, no block trading with CDBA etc. The standard does not provide absolute clarity in handling real life situations (nor can they possibly attempt to that). The basic concept we need to understand is products & services paid for by CDBA should benefit only the CDBA account, products & services paid for by other client accounts should benefit only the other client accounts. Hope that helps.