Sell-Side Technology: As Prime Brokers Lack Sufficient Sales Oversight, Clients Step Up

By Timothy Bourgaize Murray | Sell-Side Technology

Ultra high-net-worth (UHNW) individuals and family offices are beginning to more closely monitor the fees and servicing agreements attached to products their intermediaries are selling them. The sell side could do them one better, though, and get there on its own.

Breaking Down

One problem, says David Levine, CEO at consultancy and software provider InvestorProtector, is that because of their size, more of these clients now will fall into a gray area between retail and institutional, with different sell-side contacts and relationships that—while not particularly difficult to track—end up treating them very differently on a sales level.

"Our core analytics independently reviews what every brokerage should be doing in the background already, and many do, but they don't bring it forward enough," he tells Sell-Side Technology. "It's a practical challenge. How does a broker-dealer tell you that your prime brokerage has allocated you improperly? The idea of bringing that transparency to the investor is where, in my opinion, there is a breakdown."

Levine saw the consequences of poor monitoring first hand, when he was previously an executive vice president with ill-fated brokerage firm, GunnAllen. The company shuttered in 2010 after a rogue trader steered investors towards a Ponzi scheme years earlier, which incurred a wave of lawsuits, a "net capital violation" from the Financial Industry Regulatory Authority (Finra), and ultimately bankruptcy. The experience opened his eyes to the wider problem.

Today, he points to a recent UHNW client of InvestorProtector with $35 million in six different accounts. The client ran into the mutual fund issue, causing excess fees of $24,000 a year on $8 million, which would spell a six-figure loss projected across the entire portfolio. To a major bank, that might be pennies; to an independent investor, though, it represents a significant hit.

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