Many wealth management firms engage in some form of direct business. Direct business encompasses everything from managing pre-existing held-away assets to actively conducting business directly with providers outside the primary brokerage platform. Yet there is a dearth of current and practical information on the subject. We have aimed to address that on our blog in prior posts and, most recently, in our webinar, Turning Direct Business into a Strategic Asset. Guest speaker Arthur Osman, Founder & Managing Director of Arthur Osman & Company, discussed a wide range of topics revolving around direct business, including compliance requirements and recent trends. In this post, we’ve consolidated key takeaways to help your firm manage direct business.


You Say Potato, We Say…

No two firms describe direct business the same way. Even within a firm, advisors may call it one thing and the back-office another. While direct business seems to be the most widely accepted term, it still goes by many names, including held-away assets, held-away accounts, application-way business, direct-way business, check and app, fund direct, retail direct, and off-platform.

As for a close to “textbook” definition, direct business is when securities like mutual funds, alternative investments, and annuities are directly placed with the provider of those products under their custody. The assets are held in their custody rather than on the firm’s primary brokerage custody platform.

The execution, confirmation, and clearing of that transaction are handled by the provider of that product, not the registered broker-dealer. In the past, many of these accounts were facilitated manually using actual checks and hard copy applications (hence the older term “check and app”). Today, we see a lot of modernization around how firms submit this business in electronic methods.

A simpler way to think about direct business is any business an advisor provides that is not on their primary custodial platform. Mutual funds, annuities, and alternative investments are common product categories where firms and advisors use direct business. With independent firms who have multiple custody arrangements and use third-party asset managers, third-party asset managers would also be considered a form of direct business in that broadest definition.


Compliance Obligations with Direct Business

Most advisors like the client-centric benefits of practicing direct business. From the advisor’s perspective, collecting data on held-away accounts can provide a more holistic approach. Additionally, advisors like the flexibility of offering a variety of options to their clients, including potentially less costly alternatives.

Despite these benefits, from a firm’s perspective, it prefers its advisors to conduct less direct business. This is typically borne out of the administrative and regulatory compliance requirements associated with direct business. It’s important to understand who is responsible for administering and complying with the requirements of direct business. This responsibility varies depending on the type of firm, broker-dealer model, and potential affiliations.

In either an independent or institution-owned broker-dealer, the broker-dealer firm is responsible for ensuring compliance with the appropriate rules and responsibilities.

Independent RIAs with multiple custodial platforms that leverage third-party asset managers would also bear the responsibility. This is the case regardless if that business is custodied by a third-party. The firm must meet books and records and anti-money laundering compliance obligations.

Independent advisors and depository institutions (banks and credit unions) using a third-party marketing firm (TPM) in a partially outsourced arrangement is a scenario where both the broker-dealer and the TPM have that responsibility. Still, the independent and the institution must comply with the administrative and books and records requirements for the direct business they place outside the TPM.

Finally, in instances where an independent advisor and an institution are using a third-party marketing firm for the entirety of their business in a fully outsourced arrangement, that is where the third-party marketing firm bears the full responsibility for compliance with direct business.

No matter which scenario or model a firm operates under, the product provider does not bear those responsibilities.


Evolving Trends of Direct Business

It’s also important to examine how firms have evolved in supporting and accessing direct business. We’ll use three categories: fully open, limited, and closed.

Fully Open.  Fully open essentially means that advisors can either go direct or place specific business on the brokerage platform. There are no restrictions around the types of products or accounts that an advisor can use in a fully open environment.

Limited.  The second category is limited, where firms essentially try to reduce the volume of direct business by limiting account size, account type, or products that can be used when selling directly.

Closed.  The third category is closed. This category would be firms simply deciding to discontinue supporting any form of direct business.

Many of these trends have evolved over the last five years, where the industry underwent a series of material regulatory reforms either being planned or coming into implementation. The first one was the proposed DOL rule, which was ultimately repealed and then replaced with Reg BI, which was eventually implemented.

The industry witnessed a lot of very large independent broker-dealers making drastic decisions to go from a fully open environment to a closed one. Later, they recognized the disruption and the limitation that was created. Then, these firms reconsidered that position and moved to a more limited offering of direct business.

What’s clear is that firms have and continue to develop policies and practices to moderate and manage the volume and the method direct business is conducted. This is primarily to ensure compliance with books and records, supervisory, and anti-money laundering requirements.


Want to learn more about direct business? Be sure to watch the full webinar recording on-demand and get valuable insights from industry experts on how to manage held-away accounts and turn your direct business into a strategic asset.