Defining Direct Business

Direct business is not a well-understood model within the wealth management industry, and there is little authoritative information on the practice. To further confound an already obscure topic, direct business goes by many names, including “direct-way business,” “application-way business,” “check and application,” and “retail direct.”

Essentially, direct business is when a brokerage service purchases mutual fund shares or annuity contracts directly from the fund company or annuity provider on behalf of its clients. These assets are held in custody at the fund company or annuity provider rather than in a brokerage account. The execution, confirmation, and clearance of the transaction are handled by the provider, not the registered representative or the broker-dealer. In the past, these transactions were carried out via a “check and app” process, and although this method is still practiced, many firms utilize wire transfers today.

The Benefits of Direct Business

As a business model, direct business has several key benefits:

Reduced Costs:  Avoids brokerage platform and administrative fees, and processing expenses, thereby lowering overall costs.
Customer Service:  Direct access to the fund company or annuity provider’s customer service.
Advisor Flexibility:  Advisors are not limited to the products on their brokerage platform and thus have more flexibility and options in servicing their clients.
Account Portability: The portability of accounts and assets is easier for advisors when changing broker-dealers.

Within a wealth management firm, these benefits will likely have the greatest appeal to financial advisor teams. As broker-dealers and hybrid RIAs face advisor recruiting and retention challenges and a looming talent shortage, direct business can be a key asset in helping wealth management firms overcome these obstacles.

The Challenges of Direct Business

In the wake of the DOL Fiduciary Rule, which had caused numerous firms to view direct business as a liability, this model seemed to go out of fashion. However, in recent years, we have experienced a growing interest from broker-dealers and hybrid RIAs to help their firms more fully integrate and grow direct business in their practice. It would appear that despite some issues, wealth management firms still see the value in this practice. The principal challenge associated with direct business revolves around managing multiple business lines outside the brokerage platform. Many fund companies and annuity providers lack automated data feeds and merely supply spreadsheets to firms. Tracking these spreadsheets from various sources can be cumbersome for a firm’s back-office, and it can cause significant inefficiencies, potential errors, and increased compliance risks. Today’s regulatory environment leaves a tiny margin for error regarding suitability reviews and other FINRA and SEC regulations, including Regulation Best Interest rules. The consequences of inaccurate data or deficient supervisory processes can dwarf any advantages gained by direct business.

How Technology Can Turn Direct Business into a Vital Asset

As a firm grows, without an automated technology solution, direct business can present scalability challenges and diminishing returns. In order to overcome these barriers and maintain profit margins, broker-dealers and hybrid RIAs need to utilize a financial technology solution that does the following:

  • Interfaces with multiple fund companies, annuity providers, and other data intermediaries such as DTCC/NSCC, DST, and DAZL.
  • Aggregates account data, tracks commissions, advisor information, and dozens of other data points into a single, centralized system.
  • Automated trade surveillance tools that provide compliance departments the capability to monitor direct business sales activity.

Developing and maintaining a system in-house can be prohibitively costly in terms of dollars and employee hours, whether it’s a smaller firm that lacks the internal IT resources and expertise or a larger firm that struggles to get executive buy-in to leverage their internal IT. By contrast, outsourcing to a financial solution provider can deliver the technology platform and expertise necessary to support direct business. A 2019 study from Fidelity found 95% of firms that outsource technology experienced growth in assets under management in the previous year versus 89% of non-outsourcers. On the surface, this difference may seem insignificant. Yet, in today’s ultra-competitive environment, investing in technology can give your firm the edge needed to outpace the competition.

If your firm is evaluating how direct business supports your overall strategy, don’t discount the valuable role it plays in serving your clients and recruiting and retaining top talent. Or perhaps your firm is facing scalability challenges, consider partnering with Terrapin Technologies to transform direct business from a liability into an asset. To learn more, click here.

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