Updated Apr 28, 2021

When a bank or credit union chooses to provide retail investment services via a third-party broker-dealer (e.g., LPL Financial, Raymond James, CUNA, etc.), they must decide the type of networking arrangement. This arrangement consists of two main models: managed program and dual employee program. This article provides an overview of these two structures, the advantages and disadvantages of each, and concludes with a comparison between the two models.

Characteristics of a Managed Program

When a financial institution adds an investment program via a third-party broker-dealer, it is relatively common to start with a managed program arrangement. As the name suggests, in a managed program, the contracted broker-dealer manages all aspects of the program, meaning they employ, license, and manage the financial advisors. The third-party broker-dealer pays the advisors, and with the exception of some marketing expenses, all the advisor-related costs are paid by the third-party broker-dealer. Additionally, the third-party broker-dealer controls the Office of Supervisory Jurisdiction (OSJ) function.

Advantages:

  • Low cost of services.
  • Minimal time commitment.

Disadvantages:

  • Little influence over services and marketing.
  • Small GDC share, small upside potential.
  • Minimal buy-in from financial institution staff.

Characteristics of a Dual Employee Program

In the dual employee program arrangement, both managers and financial advisors are employed by the financial institution but are licensed, registered, and supervised for compliance through the third-party broker-dealer. The financial institution manages the program. The advisors, advisor-related costs, and marketing expenses are all paid by the financial institution. There several options with regards to the shouldering of the OSJ function. It can be assumed by an employee of the third-party broker-dealer, a dual employee of the financial institution, or outsourced to a third party.

Advantages:

  • Control (strong influence over services and marketing).
  • Large GDC share, more significant networking upside potential.

Disadvantages:

  • Business risk of expenses if the program does not perform.
  • Perceived liability risk of association of investment advisors with the financial institution.

Managed vs. Dual Employee Programs

Commonly, financial institutions choose an arrangement based on the optimal level of responsibility to the program. For example, a financial institution with a managed program may have selected that structure because of its size and concerns about sustaining a minimum of one full-time financial advisor.

A dual employee arrangement can help the financial institution improve and expand the investment services program by giving leadership more control over various aspects of the investment business and can facilitate tighter integration with other departments across the organization. However, financial institutions that decide to migrate to a dual program employee structure must take into account the need for expanded expertise and additional resources. It’s vital to partner with a third-party broker-dealer that can help the financial institution transition from one model to another with minimal disruptions and take its investment services program to the next level.

 **Portions of this article include excerpts originally presented by Brian Lauer, Partner at Messick Lauer & Smith P.C., in our webinar Best Practices in Working With Your Third-Party Broker-Dealer.

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