client directed brokerage

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floyd

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sceweser says ” do not use brokerage from another client to pay for products or services purchased under any client directed brokerage agreement”
I have no idea what this means!!!!, can someone tell me what this is supposed to mean in everyday language
thank you
 
My understanding on this is:
When I am managing a portfolio for a client, I will be doing many buy and sell transactions in that portfolio. I need to choose a broker who will be doing these transactions for me. Here, though client is paying the brokerage fee, but it is me, who is selecting a broker and giving him business. Now, to oblige me, broker may offer me some soft benefits (referred to as soft dollars). Standards say that these soft dollars are to be used strictly for purposes that benefit underlying clients.
Now, there could be some clients who choose their own broker and ask me to do transactions for their portfolio thru their broker. This is client directed brokerage agreement.
So, what that statement is saying is, any soft dollars earned from the former case, should not be used to buy services for clients under ‘client directed brokerage agreement’. Because, this would not be fair to clients in the former case, where these soft dollar benefits should actually be going.
 
your first two paragraphs are absolutely correct but the last paragraph does not make sense. ermm i think you may not have understood the idea. “brokerage” is the money paid to brokers for trade execution. Soft dollars are not monetary in nature. they are research etc to help in the investment management process for the client who paid money or brokerage for it.
scheweser is saying “do not use brokerage from another client to pay for products or services purchased under any client directed brokerage agreement”
saying ny soft dollars earned from the former case, should not be used to buy services for clients under ‘client directed brokerage agreement’. Because, this would not be fair to clients in the former case, where these soft dollar benefits should actually be going.
firstly soft dollars cannot possibly buy services it is research and other non monetary stuff.
secondly even if it could this is not what scewsser is saying it is saying do not use Brokerage from another client to pay for products or services purchased under any client directed brokerage agreement”
which absolutely makes no sense
 
you work for client a1 - thro your broker b1 - who provides you with some brokerage services.
– research reports, etc. These research reports should be used only for the benefit of client a1.
you have a client c1 - who directs that his broker d1 will do the relevant trades etc. for him. In this case - you cannot use research reports from b1 - to advice client c1 thro broker d1 – to buy / sell stocks on his portfolio - since you are using “soft dollars” from the FIRST CASE (as pointed out by rus1bus) to provide “Client directed brokerage” services….
not sure if I am making sense here….
 
cp it is saying do not use brokerage from other client. brokerage is the “money” you pay to a broker for trade execution. So your explanation wouldn’t be plausible ???????????/
 
floyd
small recommendation. read the book.
read the definition of BROKERAGE first.
and then please comment. What rus1bus said above, and what I am saying below that are the right definition.
DO NOT RELY ON SCHWEEZE for Ethics.
Brokerage refers to the amount on any trade retained by a Broker to be used
directly or indirectly as payment for execution services and, when applicable,
Research supplied to the Investment Manager or its Client in connection with
Soft Dollar Arrangements or for benefits provided to the Client in Client-
Directed Brokerage Arrangements. For these purposes, trades may be conducted
on an agency or principal basis.
[from the definition it looks like
a. broker could provide you the services, charge you a fee. which you (client manager) pay later.
or
b. since you are doing the trade thro’ the broker - he provides you the service, deducts (nets out the charge for the service provided) at source.
in either case - research provided belongs to the client for whom you were doing the trade for thro’ the broker. It cannot be used for ANY OTHER CLIENT.
 
cpk has always been helpful to me and I follow the post.
However, Schweser/Floyd is saying you cant use BROKERAGE from a client to benefit a self directed client. No talk of soft dollars.
Does brokerage flow from a client to a manager to a broker? If so, I think schweser is saying that the manager cant use dollars from client A to pay for client B’s self directed trades. I would try to forget about soft dollars in this example.
Thoughts?
 
I am not expert in this, but I liked your discussion and decided to investigate the topic. I think that CFA soft dollar standards (PDF) may be helpful to understand it.
the difference is, Who receives the products and services that are in addition to execution, (see the Definitions below)
using CP adjusted example:
————————–
you work for client a1 - thro your broker b1 - who provides you with some brokerage services.
– research reports, etc. These research reports should be used only for the benefit of client a1.
you have a client c1 - who directs that his broker b1 will do the relevant trades etc. for him. In this case the brokerage that you (IM) pay to the broker pays services under “Client directed brokerage arrangement” that are provided by the broker to the client c1 directly, and scheweser says ” do not use brokerage from client a1 to pay for products or services purchased under client c1 directed brokerage agreement”
here is the link: http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2004.n1.4005
definition from the standard:
Soft Dollar Arrangement refers to an arrangement
whereby the Investment Manager directs transactions
to a Broker, in exchange for which the Broker provides
Brokerage and Research Services to the Investment
Manager. Soft Dollar Arrangements include Proprietary
and Third-Party Research Arrangements but do
not include Client-Directed Brokerage Arrangements.
Soft Dollar Arrangements are sometimes referred to
herein as Investment Manager-Directed Brokerage
Arrangements, where applicable.
Brokerage and Research Services refers to services
and/or products provided by a Broker to an Investment
Manager through a Brokerage Arrangement.
Brokerage Arrangement refers to an arrangement
whereby a Broker provides services or products that
are in addition to execution. Brokerage Arrangements
include Investment Manager-Directed and
Client-Directed Brokerage Arrangements.
Client-Directed Brokerage Arrangement refers to
an arrangement whereby a Client directs that trades
for its account be executed through a specific Broker
in exchange for which the Client receives a benefit
in addition to execution services. Client-Directed
Brokerage Arrangements include rebates, commission
banking, and commission recapture programs
through which the Broker provides the Client with
cash or services or pays certain obligations of the
Client. A Client may also direct the use of limited
lists of brokers—not for the purpose of reducing
Brokerage costs but to effect various other goals (e.g.,
increased diversity by using minority-owned brokers)
or geographical concentration
 
Let me see whether I can simplify this or confuse you guys even more, by explaining this in plain English (as requested by Floyd) and where it is relevant.
You need to read the entire Soft Dollar Standard including the examples, as mentioned in earlier posting.
To me, it says.
- Brokerage means all the fees associated with the transactions and additional ‘free’ benefits you get when you deal business with this broker (free research, free Bloomberg terminals, TVs,..)
- Client directed brokerage belongs to the specific client, i.e., if the client requests to direct transactions a specific broker then the specific fees and freebies belong to that specific client only. (The flip side is that the benefit from investment-directed brokerage is not available for that client anymore, thus “do not use brokerage from another client to pay..”)
- The investment manager needs to ensure when the client asks for a specific broker thus direct the benefits to himself that the client is entitled to request:
1. Who is defined as the specific client? Only the client can get the benefit, not its representatives, trustees. See transaction 5 and 6 in CFAI example.
2. Does it profit all of this specific client? It is not allowed to give benefit only to a subgroup of the specific client, if the client is constituted of a group. See transaction 7 where it only benefits one subgroup of the client (the client in this case is all the investors in a hedge fund).
3. Does it profit this client ONLY? It is not allowed to give the benefit to other clients IN ADDITION the specific client. See transaction 8 where the brokerage benefits the specific client AND two other clients.
You need to understand this rule in the context of the Soft Dollar standard where the standard explains how you should allocate the brokerage benefits to ALL clients and the investment manager. Under client direct brokerage, the client who is entitled get the exclusive benefits so you need to make sure that the client has the right (is entitled) to direct the brokerage to get the benefits.
So in summary, the key point in client direct brokerage is to identify the client accurately because if you don’t differentiate clearly, you risk allocate the benefits from one client (the pension fund) to another client (pension fund’s trustee) inappropriately, when asked by the ‘wrong’ client to direct brokerage.
Just my two cents.
 
guys thank you for all responses erm as far as i get it if i request client directed brokerage, manger should not use 1) research or any other benefits purchased from other clients money(paid to their broker) to benefit me and make sure my benefits are received my me. i hope i understood correctly
 
client directed brokerage agreements are those set forth by an individual client who states where/who they want the brokerage to go to. under these agreements any brokerage received from the dealer must go to that client and NOT a pool of clients per usual. hope that helps!
 
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