How do registered representatives decide what to charge clients for their services? There are published prices for trades through various discount brokers who certainly have a place in the investment world for investors who don’t want advice, but should a full-service representative base pricing for service and advice on what discount brokers charge?
Intuitively, one would say no, of course not. However, the practicalities of dealing with a demanding book of clients might lead representatives to other conclusions. When giving advice on investments as full-service reps do, what is that worth as opposed to taking orders for execution as discount brokers do? It has been cumbersome to gather the intelligence to analyze whether full-service representatives are getting paid what they are worth, relative to their peers.
Doug Trott, president and CEO of Toronto-based PriceMetrix, wants to change that. His firm provides a technology platform and consultants who analyze a rep’s individual book of business relative to peers. “We help reps become better CEOs of their businesses; we focus our energies around helping them make better decisions around three things: which clients, what products, and how much? They’re most often given discretion–when they’re an employee–around those three, and if they’re independent they of course have discretion around those three and they don’t wield that discretion very well.”
A strategy consultant turned CEO, Trott started PriceMetrix in 2000 after completing a project for a broker, which included looking at “all the trades that their full-service reps did, and [comparing] what they charged in commissions to what this bank-owned dealer’s own discount brokerage would charge. We found that 17% of the trades that were done by the reps were done below what the discount broker would charge,” Trott reports. “We thought 17% of all reps was egregiously high.” It was “a symptom of a problem,” Trott explains: “the reps didn’t really have a reference point for what they’re actually worth.” Although reps could check published schedules for discount brokers’ rates on the Web, he says generally they don’t.
So far in the U.S., the firm has analyzed about 30 broker/dealers. PriceMetrix has seven U.S. clients out of a total of 13. During the courtship process, firms give PriceMetrix some of their transactional data, and what Trott’s team has discovered is that an average of 30% of full service reps’ retail trades are priced below Fidelity’s basic phone trading rate. At one firm, 55% of all retail trades were done for less than Fidelity’s basic [Bronze] phone rate. The “best we’ve seen is about 20% of a firm’s trades done below the Fidelity basic phone rate,” Trott notes.