how is directed brokerage ethical/unethical?

i could argue that directed brokerage is ethical because it is the client’s money that you are trading with.

i could argue that directed brokerage is unethical because I am also supposed to be doing research with the brokerage, and if they want to have it sent to their alma mater, that is putting undue stress on the brokerage of other clients.

am i missing something?

what if every client wanted their commission recaptured and directed to their alma mater? would everyone just pay half price for research?

IF the client directs it then it should be ethical. BUT, if the trustee directs it in a way that is not in the clients interest then it is unethical. For example, if I am the trustee for a companies pension fund, I can’t direct the brokerage to be used to fund my alma matter(or anything that does not directly help the benificiearies).

right, i am with you. i remember those two questions back to back (btw they were word for word the same as last year in schweser.) . what i am saying, is i guess you could argue that we are overpaying for research, right?

if i have 2 clients i trade them and use their brokerage for research.

but say i have 2 clients and one directs me to do commission recaputure and send to his alma mater, wouldn’t i then be buying less research ? therefore, wouldn’t I be doing a worse job for both clients since i had less research to analyze?

i guess you wouldn’t think that you are doing a “worse job” if you are like me and you think that you can get by without a lot of biased sell-side research.

am i missing something?

remember brokerage is property of the client. so technically if the client wants to direct that brokerage elsewhere they can. a trustee cannot, because the brokerage belongs to the beneficiaries. If the client does not direct brokerage then you can use the brokerage from that client to purchase research to benefit other non directed brokerage accounts.

you can use brokerage from non directed clients to purchase research for other non directed clients as long as at some point that client is benefitted from some research purchased. but non directed client brokerage cannot be used to benefit direct client brokerage clients.