The decision by the Securities and Exchange Commission (SEC) to ban directed brokerage commissions – taken by unanimous vote on 18 August – will see the $475 million spent each year on directed brokerage in the US – or approximately 75 million shares daily in directed trades – cut by as much as 50%. Or so says Tower Group.
“Directed brokerage is a method that mutual fund families have used to gain access to and distribute products through the brokerage channel,” says Tower Group. “Brokerage distribution has accounted for more than 60% of fund families’ annual sales. In return for the access to these new channels, fund families would direct commissions to broker/dealers as compensation for distributing their fund shares. For the larger brokerage firms, which have robust research and capital markets capabilities, this ruling may result in a positive outcome, but for many smaller firms, which rely on directed brokerage to supplement order flow and budgets, the immediate impact will be more serious.”
The TowerGroup research is entitled “The Abolition of Directed Brokerage. But, Not Everyone Wants to Drive a Yugo!” It is written by Matthew Bienfang, senior analyst in the Retail Brokerage & Investing research service at TowerGroup and author of the report.