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Direct Fund Purchases Cost More, Research Shows

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Fidelity’s National Financial has issued a series of conclusions on how firms can improve the efficiency of their mutual fund operations. The report is based on input collected from 14 broker dealers and focuses on comparing the cost of buying funds directly from fund companies via the “check and app” process with the cost of managing such sales on their own BD platform.

“As you look at it, it appears so much cheaper to go direct. But there are a lot of indirect costs associated with going direct, that maybe you didn’t factor in — and this cuts across all types of firms,” says Jody Meth, vice president of product management for National Financial.

“There are also compliance issues, which impact timing,” she explains. “This crates manual flows of paper and other steps that add to the time; meanwhile, the market could move and the price could change …”

In terms of advisors’ productivity, direct purchases are costly. “Imputing the value of brokers’ and advisors’ time, just a few hours per week dedicated to labor-intensive manual processing takes away from value-added activities, in particular, when scaling over a large brokerage organization,” the report explains.

The answer is for firms to consolidate positions on to a brokerage clearing platform, as much as possible, and aggregate information on fund sales and holdings taking place through the direct channel. The National Financial study estimates that automated platform-based trading can save firms 50 percent of their costs and up to 90 percent when advisors’ time is taken into consideration.

“Not all fund assets will come over to the brokerage platform, since some accounts like 401(k)s and 403(b)s aren’t set up for these types of platforms, for instance,” shares Meth.” But transparency is what counts. The firms need to know all the funds that the reps are selling regardless of whether the sales are direct or not. As reps inherit books from other reps, for instance, transparency can really help them better understand the clients.

“There’s not one solution. But as firms mature and grow, they need to get control of the full picture of what their reps are doing [with funds and fund information],” she concludes. “This is an issue that firms have to deal with. Consumers and regulators want more transparency.

“Our goal, depending on the makeup of the firm at the rep level and at the home office, is to help them optimize their business,” Meth adds. There may be issues of size and scalability at some firms, which can lead to inefficiencies, she says. “To be more efficient, you need more aggregation and automation that gives you more information on what funds are being held where.”

Janet Levaux is the managing editor of Research; reach her at [email protected]