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DIRECT MUTUAL FUND BUSINESS M OV IN G T O AN EFFICIENT FR O NTIER EXECUTIVE SUMMARY In late 2006, 14 broker/dealer clients shared some observations with National Financial about the implications of allowing trading of mutual funds directly . 1 From these conversations, we were able to identify some of their best practices for direct processing of mutual fund business, after learning about the difficulties of managing in an increasingly complex environment, and hearing their perspectives about how the industry ended up in this situation. This paper summarizes the current state of the mutual fund direct business, the tradeoffs and the costs. We will make recommendations for how broker/dealers may want to address an optimal approach to managing their mutual fund direct business and how to nd their point on an efficient frontier of direct trading practices. I ndustry Estimates From a recent survey by the National Association of Securities Dealers (NASD) of member rms, it is estimated that some $3.2 trillion assets are held directly at mutual fund companies: 2 In 2005 there was $8 trillion in mutual fund assets held by U.S. individuals. 3 More than 80 percent owned shares purchased through nancial advisers. 4 Firms indicated that 52% of mutual fund purchases are still affected via check and appprocessing. 2 Mutual Fund Direct T rading Situation The industry nds itself in an increasingly complex situation when trading mutual funds directly . There are many reasons for how we arrived at the current situation. During the discussion with broker/dealers, three main topics came up each time: the increased complexity of processing direct; the path of how the rms got here; and the concern that it was getting costly to trade directly . INCREASED COMPLEXITY What began as a simple, streamlined, check and appprocess for expanding into the mutual funds business has become a very complex process. It is fraught with layers of review , regulatory scrutiny , and signicant resources required at the home office to stay current. CONTENTS EXECUTIVE SUMMARY ................ 1 SURVEY BACKGROUND ......... 3 MUTUAL FUND DIRECT TRADING SITUATION Increased Complexity How We Got Here Cost Comparison ....... 3 REGULATORY BACKDROP .............. 8 SURVEY FINDINGS .. 10 DISCOVERY: THE DIRECT TRADING MATURITY CURVE ... 13 DEVELOPING AN ACTION PLAN ........ 16 CONCLUSION ......... 18 S H AR I N G OUR K NO WLED G E F OR Y OUR SU CC ESS (continued on next page)

Transcript of 071558 01 BRO NFDirWP -...

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DIRECT MUTUAL FUND BUSINESS

MOV ING TO AN EFFICIENT FRONTIER

EXECUTIVE SUMMARY

In late 2006, 14 broker/dealer clients shared some observations with National

Financial about the implications of allowing trading of mutual funds directly.1 From

these conversations, we were able to identify some of their best practices for direct

processing of mutual fund business, after learning about the diffi culties of managing

in an increasingly complex environment, and hearing their perspectives about how

the industry ended up in this situation. This paper summarizes the current state

of the mutual fund direct business, the tradeoffs and the costs. We will make

recommendations for how broker/dealers may want to address an optimal approach

to managing their mutual fund direct business — and how to fi nd their point on

an effi cient frontier of direct trading practices.

Industry Estimates

From a recent survey by the National Association of Securities Dealers (NASD)

of member fi rms, it is estimated that some $3.2 trillion assets are held directly

at mutual fund companies:2

n In 2005 there was $8 trillion in mutual fund assets held by U.S. individuals.3

n More than 80 percent owned shares purchased through fi nancial advisers.4

n Firms indicated that 52% of mutual fund purchases are still affected via

“check and app” processing.2

Mutual Fund Direct Trading Situation

The industry fi nds itself in an increasingly complex situation when trading mutual

funds directly. There are many reasons for how we arrived at the current situation.

During the discussion with broker/dealers, three main topics came up each time:

the increased complexity of processing direct; the path of how the fi rms got here;

and the concern that it was getting costly to trade directly.

INCREASED COMPLEXITY

What began as a simple, streamlined, “check and app” process for expanding into

the mutual funds business has become a very complex process. It is fraught with

layers of review, regulatory scrutiny, and signifi cant resources required at the home

offi ce to stay current.

CONTENTS

EXECUTIVE

SUMMARY ................ 1

SURVEY

BACKGROUND ......... 3

MUTUAL FUND

DIRECT TRADING

SITUATION

n Increased Complexity

n How We Got Here

n Cost Comparison ....... 3

REGULATORY

BACKDROP .............. 8

SURVEY FINDINGS .. 10

DISCOVERY: THE

DIRECT TRADING

MATURITY CURVE ... 13

DEVELOPING AN

ACTION PLAN ........ 16

CONCLUSION ......... 18

SHAR ING OUR KNOWLEDGE FOR YOUR SUCCESS

(continued on next page)

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Survey Findings

After discussing a wide range of topics with broker/dealers,

fi ve key fi ndings were observed:

1. A fi rm’s level of control over brokers and advisors is a key

driver of mutual fund direct business

2 . Compliance with regulatory requirements and a consol-

idated view of the fi rms’ relationship with clients are the

largest perceived benefi ts of transacting via a brokerage

platform

3. Ticket charges and inactivity fees are the two most

intractable barriers to higher utilization of fi rms’

brokerage platforms relative to mutual fund direct

business

4 . A signifi cant portion of fi rms have invested in aggregation

technology

5 . The most prevalent model for processing mutual fund

direct business provides the home offi ce with adequate

compliance supervision, but is also the least effi cient

Discovery: The Direct Trading

Maturity Curve

In the course of this research project, we discovered that

there is a maturity curve for fi rms interested in aggregating

their direct business and/or consolidating it on a brokerage

platform. Information gathered during the interviews

coupled with follow-up analysis was used to develop a

maturity curve (Exhibit 5) with respect to a fi rm’s ability to:

n track and monitor direct trading and associated client

information

n consolidate positions onto their brokerage platform

The curve is a representation of an “effi cient frontier” for

fi rms with varying abilities and motives to deal effectively

with the issues raised by mutual fund direct trading. Firms

may be able to evaluate where they lie on this curve in

order to understand their immediate action-items, and

what it might take to reach an optimized state.

HOW WE GOT HERE

All of the fi rms who discussed their situation refl ected back

on how they believe we got here from a time when trading

mutual funds directly was much simpler. We heard that the

primary drivers of direct mutual fund trading business had

included:

Firm Service Model — direct use of mutual fund

companies helps reduce client and account servicing

demands on the broker and advisor and on the broker/dealer

home offi ce

Paperwork — simplifi ed “check and app” workfl ow

Portability — the ease of updating accounts at the

mutual fund companies in the event the broker or

advisor switched fi rms

Product Gaps — the ability to purchase a wider range

of mutual fund investments versus what may be supported

on a brokerage platform

COST COMPARISON

Traditionally, it was thought that trading mutual funds

directly was free or very inexpensive. In response to the

concern that it is costly to trade directly, we developed a

cost comparison model. The results estimated that typical

operational cost savings from automating trading processes

may be nearly 50%. And, once the broker and advisor

“hidden” time costs are included in the equation, we found

that it is over 90% more costly to run a “check and app”

business than to utilize a single brokerage trading platform.

Regulatory Backdrop

The most frequently mentioned topic was that of the

changing regulatory environment. Firms shared that direct

mutual fund trading is a signifi cant factor in their ability to

manage risk in today’s environment of increased regulatory

scrutiny. This impacts four critical areas of compliance

concern including:

1. Books and Records (SEC Rule 17a-3)

2 . Investment Suitability

3. Breakpoint Calculations

4 . Anti-money Laundering

EXECUTIVE SUMMARY continued

(continued on next page)

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Developing an Action Plan

Regardless of business model, most fi rms may want to

consider performing the following steps to determine their

own situation, fi nd where they sit on the direct maturity

trading curve and map a course of action if applicable:

1. Perform a Direct Trading Cost Analysis

2 . Develop a Comprehensive Consolidation Strategy

3. Optimize the Firm’s Approach to Aggregation

4 . Utilize an Order Capture System for Direct Business

Each fi rm’s results will vary, but overall broker/dealers

might expect that consolidation of accounts onto a single

brokerage platform could potentially provide a high

number of business management benefi ts. For fi rms

with large books of legacy direct accounts, however,

consolidation alone is not always the optimal solution.

In particular, those fi rms with business models focused

away from traditional brokerage products will likely

leverage a combination of funds consolidation and data

aggregation strategies to achieve the same goals.

SURVEY BACKGROUND

In late 2006, National Financial engaged IBM Global

Business Services to interview a cross-section of broker/

dealer clients. The goal was to quantify best practices

for direct processing of mutual funds. The research

encompassed non-attributable interviews with individuals

from operations, compliance, and management from 14

different broker/dealers.1 The interviewers probed for client

perceptions of the costs and regulatory compliance impact

of direct trading as well as the various considerations behind

the continuation of this practice.

The fi rms participating in the survey each had on average

approximately $2 billion in directly held mutual fund assets,

300,000 customer accounts and an average account size

of $6,600.5

MUTUAL FUND DIRECT

TRADING SITUATION

Increased Complexity

More than half of all mutual fund purchases are still made

directly via the “check and app” method.2 Historically, this

simply meant brokers and advisors fi lled out a printed

account form, had their clients review and sign the

application and write a paper check. These items were sent

directly to a mutual fund company for processing. Today, the

process is more involved: brokers and advisors are required

to forward the application to the home offi ce or an Offi ce

of Supervisory Jurisdiction (OSJ), where it is reviewed and

approved and then repackaged and delivered to the fund

company. This may add additional time to the process.

This represents an enormous industry-wide effi ciency loss,

requiring large staffs to handle physical paperwork (with

potential for increased risk of error), considerable mailing

costs, and long cycle times compared to electronic trading.

The complexity of this approach is illustrated in Exhibit 1

(on page 4). As shown, the direct process entails myriad

steps and touches to invest a single check with a mutual

fund company. There are generally four parties involved

just to deposit a check: the client, the broker or advisor,

the Home Offi ce and/or OSJ, and the mutual fund company.

It may take additional time for the trade to be placed and

the investment made.

Exhibit 2 (on page 4) shows the more streamlined and

automated processing for transactions conducted through

a brokerage platform. As it indicates, eliminating the need

to move a paper application can reduce the number of touch

points and shortens the time before order and execution.

There are compelling compliance and business management

rationales for aggregating and/or consolidating mutual fund

business onto a single brokerage clearing platform. When

asked why they have not fully migrated the mutual fund

business, certain broker/dealers explained their perspectives

on how the processing of direct mutual fund business

evolved, and what they are facing as they try to manage

a legacy business in a new regulatory environment.

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EXHIBIT 2

BROKERAGE CLEARING PLATFORM MODEL

Source: IBM Global Business Services, 2007 Assumes investor account has previously been established.

*CIP is “Client Identification Program”; KYC is “Know Your Customer”; AML is “Anti-Money Laundering”

Pre-Trade Trade Date Post-Trade

Generate and distribute

paper applications

Calculate breakpoints

Principal Review

In good order?

KYC/AML*processes

Receive check and

application

Principal Signoff

Make investment

Send Commission

checks

Receive commission

Generate appropriate

17a-3 notices

Receivestatements from fund company

Confirm Identity and

CIP*

Receive commission

checks

Process, reconcile

and calculate payouts

Update client database

Return application and check

to rep

Receive applications

Complete application

Sign application

and provide check

Client provides missing

information

Returns check and

application to Rep

Forward materials to

broker/dealeror OSJ

Check for completeness

Obtain application

with signature and check

FU

ND

CO

MP

AN

YB

RO

KE

R/D

EA

LE

RIN

VE

STM

EN

T R

EP

CLIE

NT

Follows up with client

Generatestatements,

tax reports, etc

Forward materials to

fund company

NO

YES

EXHIBIT 1

( IN )DIRECT TO FUND VIA HOME OFFICE MODEL

Source: National Financial, approximation of processing, 2007

*CIP is “Client Identification Program”; KYC is “Know Your Customer”

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How We Got Here

1. REGULATORY ENVIRONMENT

Firms surveyed report that direct mutual fund trading is a

signifi cant factor in their ability to manage risk in today’s

environment of increased regulatory scrutiny. Indeed, a fi rm’s

ability to meet key compliance duties has never been of higher

importance. Even though the positions are held directly

with the mutual fund companies, fi rms retain the following

regulatory responsibilities (described briefl y on pages 8–9)

which may require signifi cant time and expense:

1. Books and Records

2 . Investment Suitability

3. Breakpoint Calculations

4 . Anti-money Laundering

2 . FIRM SERVICE MODELS

Looking at Exhibit 3, we see a fi rm’s traditional line of

business is one of the strongest predictors as to the depth

of its existing book of direct business.

The “check and app” business, with its extremely low

barriers to entry, has had many benefi ts in the past for

“adjacent-industry” fi rms, such as traditional insurance

fi rms that expanded to sell mutual fund IRAs or hold mutual

funds in non-retirement accounts. Benefi ts included:

n offering a path of least resistance to expand their mutual

fund product offerings

n shifting responsibility to the mutual fund company

for providing both regulatory and general information

concerning the account to the shareholder

n reducing fi rms’ back offi ce and service personnel costs

From the broker and advisor perspective, trading direct

has also provided benefi ts by:

n shifting responsibility of answering shareholder questions

to the mutual fund company

n shifting routine account servicing to the mutual fund

company — processing checks, redemption requests,

reallocations, etc.

Generally, outsourcing securities back offi ce activities

helps enable mutual fund sales with minimal investment

in the infrastructure to facilitate such sales. However,

this practice also presents a fi rm with regulatory challenges

with respect to meeting obligations to maintain client records.

3. PAPERWORK

As discussed above, the ease of using pen and paper carried

benefi ts in the past, often allowing fi rms to grow with

minimal investment. As the fi nancial services business and

the regulations have become increasingly complex, it has

been challenging to keep up with the changing supervisory

requirements. This has created a need to shift to a more

automated model. Firms cannot sacrifi ce their regulatory

supervision, and manual supervision is no longer a viable

solution. As a result, it takes a greater number of hands to

touch each new piece of information concerning a client.

Firms that have moved to a fully automated order-entry

environment such as a brokerage platform, have experienced

signifi cant benefi ts:

n a single account opening process

n same-day trading

n automated tools for use in the enforcement of regulatory

requirements and surveillance, and

n ability to more quickly move money between different

mutual fund families.

A failure to pursue this streamlined approach may result in

decreasing client satisfaction levels over time — a matter that

should be of no small interest to the broker and advisor.

Insurance B/D Bank Independents with

Limited Product RangeIndependents with

Full Service Offerings

CORE PRODUCT LINE n Annuitiesn Life

n Cashn Lending

n Planning

n Selected product set

n MFsn Securitiesn Annuities

PROPORTIONAL

DIRECT TRADING

High Medium High Medium–Low

EXHIBIT 3

OVERVIEW OF DIRECT TRADING PROFILES BY FIRM TYPE*

*Not indicative or representative of all financial firms in these channels

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4 . PORTABILITY

Traditionally, brokers and advisors may have preferred to

hold client assets directly with a mutual fund company

because of portability issues. This enabled them to retain

their own clients and revenue stream when switching fi rms,

simply by changing the broker of record at the mutual fund

company level. Today, changing the broker of record requires

that an account be repapered with the client’s positive

consent. However, brokers and advisors have historically

perceived a degree of control when choosing direct trading,

and this has contributed to the continuation of this practice.

Direct trading is especially common today under the

independent advisor model.

5 . PRODUCT GAPS

Not every product can be carried on every brokerage

clearing platform. As a result, some fi rms may never be

completely out of the business of transacting mutual

funds directly. However, many leading brokerage clearing

platforms provide access to the vast majority of products

as measured by industry sales volumes. Most platforms

cannot accommodate the entire universe of mutual funds in

every product type. This is one of the primary reasons that

consolidation alone may not be a “total solution.” A hybrid

consolidation/aggregation technology solution may better

meet fi rms’ needs.

Cost Comparison

Explicit ticket charges and fees (low balance, inactivity fee)

applied by brokerage and/or clearing fi rms are readily visible

to clients and can impact clients differently:

n A ticket charge can be deemed insignifi cant relative to the

size of a client’s invested assets; or,

n In the case of a small account, ticket charges and annual

fees may seem to represent too large a portion of the

invested assets.

In truth, a ticket charge may or may not affect an investor

depending on the investor’s specifi c situation. Many mutual

fund companies charge their own low-balance fees. This

means that any client who is invested in more than one fund

family is often better off paying this fee once on the brokerage

platform, rather than paying a higher aggregate fee to two or

more fund companies.

Brokers and advisors frequently place smaller investments direct

with fund companies because servicing is perceived as being

“free.” Meanwhile, unseen by the broker or advisor, the fi rm

assumes additional costs and obligations related to tracking and

maintaining up-to-date books and records for these positions

– costs that are passed on in some fashion. In short, the

distinction as to which model is ultimately less expensive (and

for whom) is somewhat more subtle than it may fi rst appear.

Exhibit 4, “Hypothetical Firm Run Rates for Mutual Fund

Processing,” illustrates an example of two cost model

scenarios: 1) trading mutual funds direct (“check and app”

model) versus 2) trading mutual funds on a brokerage

platform (brokerage model). This example does not represent

any one fi rm, but rather is a composite of the types of

costs a fi rm might consider when assessing its own mutual

fund direct situation. In actual terms, a fi rm will likely fi nd

itself somewhere between the two models and will have to

adjust the components and values for its own situation. A

hypothetical case comparison of these two approaches was

run assuming the following:

n Two hypothetical broker/dealers with identical character-

istics: 150 brokers and advisors working 50 weeks per

year; 175,000 accounts with an average account balance

of $8,000; $1.4B assets; 40,000 new transactions/year.

n Compensation was the same in both models: broker’s

and advisor’s compensation was $100,000 per year ($50/hour)

while the home offi ce staff compensation was $50,000/year.

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estimated $1.477MM vs. $1.1MM in the “check and app”

model. However, combining both sections, we estimate the

total cost in this example is 97% more costly to trade direct

versus trading on a single brokerage platform.

While it is not possible to be precise in choosing costs to

apply in any illustration, it does not appear possible that

direct “check and app” processing is less costly than its

alternatives, let alone “free.” Every minute the broker or

advisor is engaged in manually-intensive back or middle-

offi ce activities, it is both an actual cost and an opportunity

cost. This labor could be provided at a much lower fi xed

cost in the back offi ce or by the broker/dealer’s clearing fi rm.

Broker and advisor cost assumptions: The time a broker

or advisor spends on the varying tasks to support the direct

process can be high. Here we’ve assumed a relatively modest

4.5 hours per week to perform such tasks as processing

the application and check and later reconciling multiple

statements and calculating breakpoints. For a fi rm with

150 brokers and advisors, this cost of manual processing

is substantial: over $2.7MM in our estimate.

Home offi ce cost assumptions: Under the brokerage model,

ticket charges will be specifi c and visible. We assumed that

more customer service staff would be needed in the brokerage

model. The costs at the Home Offi ce are therefore 35% higher:

EXHIBIT 4

HYPOTHETICAL FIRM “RUN RATES” FOR MUTUAL FUND PROCESSING MODELS

Broker/Advisor Cost Estimates “Check & App” Model Brokerage Model

Time to process physical applications and checks 2 hr/wk $5,000 0 hr/wk $0

Time to copy applications 0.5 hr/wk $1,250 0 hr/wk $0

Overnight delivery fees $75/wk $3,750 $0/wk $0

Time spent reviewing, consolidating,

reconciling mutual fund family statements1 hr/wk $2,500 0 hr/wk $0

Cost of consolidated reporting

(imposed by broker/dealer)$250/month $3,000 $250/month $3,000

Time spent calculating breakpoints, verifying

prospectus compliance, etc.

1 hr/wk $2,500 0 hr/wk $0

TOTAL BROKER/ADVISOR HOURS/WEEK 4 .5 0

ANNUAL EST. COST PER BROKER/ADVISOR $18 ,000 $3 ,000

TOTAL EST. COST (BROKER/ADVISOR) $2 ,700 ,000 $450 ,000

Home Offi ce Cost Estimates “Check & App” Model Brokerage Model

Paperwork review 3 FTE* $150,000 0 FTE $0

Mailroom/fi le room/document imaging .5 FTE $25,000 0 FTE $0

Overnight delivery fees $150/day $39,000 $0/day $0

Customer service (shareholder or rep) .25 FTE $12,500 4 FTE $200,000

Compliance (suitability, breakpoints) 2 FTE $100,000 1 FTE $50,000

Checks and wire processing 0.25 FTE $12,500 1 FTE $50,000

Commissions processing 0.25 FTE $12,500 0.25 FTE $12,500

Position aggregation (Staff) 0.5 FTE $25,000 0 FTE $0

Position aggregation (Technology) $500,000/yr $500,000 $500,000/yr $500,000

Regulatory reporting and follow-up 0.5 FTE $25,000 0.5 FTE $25,000

Books and Records (Staff) 2 FTE $100,000 0 FTE $0

Books and Records (Technology) $100,000/yr $100,000 $0/yr $0

Ticket charges (absorbed) $0 $0 $16/ticket $640,000

TOTAL HOME OFFICE FTE ’S 9 .25 6.75

ANNUAL HOME OFFICE COST ESTIMATES $1 ,101 ,500 $1 ,477,500

TOTAL COST EST. (BROKER/ADVISOR + HOME OFFICE) $3 ,801 ,500 $1 ,927,500

EST. COST PER TRANSACTION $95 .04 $48.19

*FTE = “full-time equivalent” staff member

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1. BOOKS AND RECORDS

The primary regulation affecting a broker/dealer’s direct

mutual fund business is SEC Rule 17a-3, commonly referred

to as “Books and Records.”6

n Practically, fi rms must maintain detailed name and address

records of the client plus asset and income information,

investment objectives, and the client’s and supervisory

principal’s signatures. Firms must verify this information

with clients within 30 days of account opening or upon

change of information, and at least once every 36 months

thereafter.7

n Firms are required to produce this information for all

positions where they are listed as the broker of record.

However, they may have concerns about whether they

are capturing the most current client information and are

able to maintain the same quality of controls in the direct

business as they can in-house.

n Once direct positions are substantially identifi ed, the

next step is to confi rm the account information with

the clients. With the realities of doing business today,

with brokers and advisors changing jobs frequently, with

clients changing brokers and advisors more frequently,

how might a broker/dealer remain confi dent that all of the

client information is the most current and accurate? Due

to client confusion over frequent and complex paperwork,

they might not have properly informed all of the parties

who need to know of a change that impacts Books

and Records.

n Further, in today’s fast-moving markets where companies

buy or merge with other companies, a client may well

be unaware or unfamiliar with new names of the new

companies or with new paperwork required. In short,

fi rms that rely on direct sales may fi nd themselves trapped

in a vicious cycle of chasing and then confi rming client

account data necessary for compliance.

2 . SUITABILITY

Underlying SEC Rule 17a-3 is the requirement of investment

suitability.

n As noted above, fi rms must be able to demonstrate to

regulators that a well-founded suitability determination

was made at the time of an investment recommendation.

Small-to-medium sized fi rms, when compared to their

larger counterparts, may experience a more magnifi ed

challenge in monitoring suitability because they may not

have signifi cant sources of capital required to implement

automated surveillance. They may continue to rely on

manual compliance reviews, which is increasingly diffi cult

and time-consuming.

n In some cases, a broker or advisor may have made a

mutual fund recommendation and placed the transaction

directly. Some fi rms surveyed expressed concern over

their fi rm’s accountability for the recommendation and

the challenges inherent in properly documenting

subsequent changes in such a client’s fi nancial situation

or fi nancial goals.

REGULATORY BACKDROP

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3. SALES CHARGE DISCOUNT BREAKPOINTS

Firms must have procedures reasonably designed to

ascertain information necessary to determine the availability

and appropriate level of breakpoints.8

n The SEC’s Offi ce of Compliance Inspections and

Examinations, the NASD and the New York Stock

Exchange (NYSE) have increased their reviews of fi nancial

services fi rms over the past several years. They look

for violations of Books and Records rules, disclosures,

suitability requirements, and failure to provide breakpoint

pricing, among other areas of concern. During these

sweeps, they have uncovered issues including, but

not limited to, failure to provide breakpoint pricing,

weak-to-nonexistent internal controls, and unsatisfactory

compliance programs/oversight procedures. The results

are that fi rms must take corrective action and often pay a

fi ne. From 2001–2006, fi nancial services fi rms have been

fi ned for “securities-related disgorgements and penalties”

in aggregate from $522M (2001) to a high of $2B (2003).

Most recently, 2006 fi nes were $1.5B for identifi ed

violations.9

n In the SEC sweep, “the most frequent causes for not

providing a breakpoint discount were not linking a client’s

ownership of different funds in the same mutual fund

family, not linking shares owned in a fund or fund family in

all of a client’s accounts at the fi rm, and not linking shares

owned in the same fund or fund family by persons related

to the client (spouse, children) in accounts at the fi rm.”10

n Firms that trade direct may still rely on determinations

made by their registered brokers and advisors about

whether a client is entitled to a breakpoint discount.

Such fi rms may not have access to automated back-

offi ce processes and systems designed to identify and

consolidate these positions associated with direct mutual

fund business.

4 . ANTI -MONEY LAUNDERING

A provision of the USA PATRIOT Act* requires fi nancial

institutions, including broker/dealers, to develop and

implement comprehensive anti-money laundering

(AML) programs.

n Generally, under the USA PATRIOT Act’s Client Identifi -

cation Program (CIP), fi nancial institutions are required

to implement reasonable procedures for (a) verifying the

identity of any person seeking to open an account; (b)

maintaining records of the information used to verify the

person’s identity, including name, full residential address,

date of birth, and taxpayer identifi cation number or

other identifi er; and (c) determining whether the person

appears on any lists of known or suspected terrorists or

terrorist organizations.11

n The SEC has specifi cally confi rmed the applicability of

a fi rm’s AML responsibilities to the sale of mutual fund

shares or variable life annuities on a direct basis.11

n A provision of CIP allows a fi rm to place reliance on

another fi nancial institution to perform the fi rm’s

CIP. However, both parties must enter into a contract

requiring annual certifi cation that meets all of the

broker/dealer’s CIP. Otherwise, the fi rm remains solely

responsible for CIP.12

* Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, known as USA PATRIOT Act.

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SURVEY FINDINGS

Our research suggests that fi rms lie along a natural maturity

curve with respect to how they realistically optimize their

direct mutual fund trading practices. Let’s take a closer look

at some of the key fi ndings that emerged from this analysis:

1. FINDING: A fi rm’s level of control over brokers and

advisors is a key driver of direct business

At fi rst blush, fi rm affi liation appears to be a key driver as to

whether fi rms will maintain large subscription-away books

of business and whether they will continue to transact direct.

The average broker/dealer paying W-2 wages in our survey

was booking 19% or fewer of its new transactions direct,

while the mix of direct business was 67% for the average

insurance-affi liated independent advisor broker/dealer.

However, these numbers more directly refl ect the amount

of control these fi rms tend to exercise over their brokers

and advisors. The two principal business models are the

banking/employee W-2 wage model and the independent

advisor model. Firms that employ their brokers and advisors

as W-2 employees or otherwise exercise tighter control than

the traditional independent advisor model allows will tend

to do more business on the brokerage platform. Exhibit 5

below summarizes the two principal business models and

how direct trading is typically treated under each.

There may also be a big fi rm/small fi rm effect, with smaller

fi rms doing much more direct business relative to their

size, and larger fi rms being oriented towards their clearing

platforms and a truly electronic order-entry environment.

Note that 85% of fi rms under the independent advisor

model mark-up the brokerage clearing fee to help

compensate for some of their own unrecovered costs for

inactive accounts. However, mark-ups tend to be relatively

minor and are not really a source of revenue for fi rms.

While brokers and advisors are much less likely to trade

on a brokerage platform in this model because of the ticket

charges and other fees, they will tend to place the business of

their largest clients on the brokerage platform; both because

of the larger positions held by these clients and their more

complex fi nancial needs.

2 . FINDING: Compliance with regulatory require-

ments and a consolidated view of the fi rms’

relationship with clients are the largest perceived

benefi ts of transacting via a brokerage platform

Clearly, one of the primary drivers leading fi rms to

consolidate onto a brokerage platform is regulatory

compliance. Specifi cally, fi rms need the ability to conduct

surveillance and run reports to help ensure proper

breakpoint and books and records compliance from a

single source.

In addition, most fi rms surveyed cited the ability to access a

consolidated view of the fi rm’s relationship with the client,

consolidated statements and tax reporting as key benefi ts.

These fi ndings are found in Exhibit 6 on page 11.

Employee Model Independent Advisor Model

Brokers and advisors are employed directly as

W-2 employeesBrokers and advisors are more independent or 1099

employees

Brokers and advisors tend to trade on a brokerage platform; most new business required to be on brokerage platform

Brokers and advisors tend to trade directly with mutual fund

companies using “check & app” process

Parent fi rm absorbs brokerage clearing fi rm charges and

systems expenses

Parent fi rm passes clearing fi rm charges through to broker and advisor

Firm absorbs costs for using aggregation technology Firm charges brokers and advisors for technology use, such

as aggregation

Ticket charges and other fees for trading are passed through

to the clientFees for inactive accounts or low balances are passed

through to the client

Compliance is centralized Compliance is decentralized

EXHIBIT 5

Source: IBM Global Business Services, survey findings, 2007

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11

3. FINDING: Ticket charges and inactivity fees are the

two most intractable barriers to higher utilization of

fi rms’ brokerage platforms relative to direct business

Firms surveyed provided insight into why it is challenging to

1) recapture mutual funds held away and 2) achieve higher

success rates using a central brokerage platform (Exhibit

7). 75% of surveyed fi rms reported that ticket charges were

a signifi cant barrier. One-third reported that unsupported

product types or accounts on a brokerage platform were

clear deterrents to changing behavior. Some brokers and

advisors may be consolidating when possible, but they must

seek alternative solutions for business that cannot be transi-

tioned onto a brokerage platform. If costs and resources

required are too high, fi rms will simply not consolidate.

These include time and resources to undertake research

intended to understand the broker/dealer’s true cost of doing

business and on home offi ce capabilities to deliver this kind

of effort.

EXHIBIT 6

PERCEIVED BENEFITS OF CONSOLIDATING ON A BROKERAGE PLATFORM

Source: IBM Global Business Services, survey findings, 2007

Source: IBM Global Business Services, survey findings, 2007

EXHIBIT 7

SIGNIFICANT BARRIERS TO RECAPTURING POSITIONS

HELD AWAY

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4 . FINDING: A signifi cant portion of fi rms have

invested in aggregation technology

More than 90% of fi rms surveyed are already employing

some form of aggregation technology in order to account

for positions held away. 56% of fi rms providing this service

charge a user fee of some kind back to the broker and

advisor, should they elect to utilize the service, with the

remaining fi rms absorbing the user fee as a cost of business

(Exhibit 8).

Several fi rms in our survey indicated they had purchased

an aggregation solution. Others in our survey reported

they have gone quite a bit deeper. Some implemented

full portfolio accounting systems to shadow books and

records. Others integrated services with their internal

customer relationship management (CRM) system or broker

workstations to improve processing effi ciency and quality.

5 . FINDING: The most prevalent model for processing

mutual fund direct business provides the home offi ce

with adequate compliance supervision, but is also the

least effi cient

One approach to managing control and supervision over

the “check and app” business that is effective, but potentially

costly, has been the redesign of procedures to route completed

applications to the home offi ce or offi ce of supervisory

jurisdiction before they are sent to the mutual fund com-

panies. This affords the home offi ce ample time to conduct

various functions such as completeness reviews, principal

review, verify prospectus compliance, capture the details

of the transaction and suitability information for Books and

Records purposes.

Unfortunately, this model may potentially add days to the

time it takes to process a purchase of mutual fund shares.

Additionally, fi rms incur additional costs by having staff

manually review and process applications, an expense that is

avoided in an order-entry environment. Moreover, overnight

fees between brokers and advisors, branches, the home

offi ce, and fund companies can be fairly substantial for

a large operation.

The survey also identifi ed three other models of direct

mutual fund processing. In these models brokers and

advisors send applications to the:

n mutual fund company directly

n home offi ce for processing on their brokerage system

n home offi ce for processing on another proprietary system

Note that relatively few fi rms participating in our survey

still permit brokers or advisors to send applications directly

to a mutual fund company. Most fl ow back to the home

offi ce fi rst.

EXHIBIT 8

FIRMS OFFERING AGGREGATION TECHNOLOGY TODAY

AND PRICING MODELS

Source: IBM Global Business Services, survey findings, 2007

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13

DISCOVERY: THE DIRECT TRADING MATURITY CURVE

Source: IBM Global Business Services, 2007

EXHIBIT 9

DIRECT TRADING MATURITY CURVE CONCEPTUAL FRAMEWORK

For example, in the

divergent scenario, “fi t to

objective” may be relatively

high, quite close to the

more effi cient optimized

model; however, the initial

development and on-going

support costs are excessive.

Although not plotted here,

one can imagine that initial

and annual costs are also

large for divergent fi rms,

who have more than likely

worked their way progres-

sively up the maturity curve

by continuing to invest

in process and system

improvements over time.

In the course of this research project, the interviews, coupled

with follow-on analysis, helped develop a maturity curve

for fi rms in aggregating their direct business and/or consoli-

dating it on a brokerage platform (Exhibit 9).

Firms may fi nd it helpful to evaluate where they lie on

the maturity curve in order to understand their immediate

action items as well as to develop a plan to reach an

optimized situation. The direct trading maturity conceptual

framework provides one means of analyzing a fi rm’s

positioning relative to its peers. Firms may simply choose

the maturity stage which best applies (based on defi nitions

on pages 14 and 15), or develop new models with

customized objectives and priorities.

This curve follows an arch-shaped path when plotting

two parameters: 1) the level of investment to achieve a

compliance solution and 2) the realized benefi ts of that

investment. We defi ned “realized benefi ts” as an adjustment

between benefi ts and risks as follows:

(potential benefi ts to be achieved)

(any potential compliance risk of taking no action)

=

“REALIZED BENEFITS”

Specifi cally, development of the curve involved plotting

a set of 14 criteria that labeled “fi t to objectives” against a

simple marginal investment term of high/med/low/none.

The “fi t to objectives” results were determined by calculating

a combination of factors (shown in Exhibit 10 on the

following page) with a simple weighting. Then they were

standardized against the raw scores received from the

participating fi rms in the survey. The result is refl ected

at each stage on the maturity curve.

Each fi rm is encouraged to consider the factors that best fi t

their fi rm’s own requirements. In undertaking an analysis,

a fi rm may choose to use different objectives and/or

weights. However, the regulatory objectives should

remain a requirement of your analysis.

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EMERGENT

COMMON FIRM ATTRIBUTES

n Taking feeds from its largest funds families or positions are likely being taken

into a local database.

n Maintaining regulatory compliance by updating client information for books

and records purposes

SUGGESTED ACTION PLAN

1. Confi rm account information by mailing necessary client letters and processing responses for accuracy and completeness.

2 . Begin the gap analysis required to support a more permanent solution, considering benefi ts consolidation to a

single platform vs. aggregation

3. May choose to consider a third-party solution that would bypass the time and costs of further internal technology

investment and a more immediate transition to the Optimized stage.

Marginal Investment Low

Residual Risk Medium

Fit to Objectives Low

BASELINE

COMMON FIRM ATTRIBUTES

n Investing in some form of aggregation technology to account for

mutual fund direct positionsn Beginning to consolidate on brokerage platform to support and facilitate

n Compliant with regulatory obligationsn Effi ciencies not fully realized

SUGGESTED ACTION PLAN

1. Assess full impact of prior fi nancial decisions: signifi cant initial costs may have been spent and fi rm may

be reluctant to abandon their existing investments.

2 . Consider further assessments necessary to reach optimized stage:n Assess ongoing and annual costs, including costs of additional human resources requiredn Re-evaluate complexity of operating multiple systemsn Monitor success that brokers and advisors are or are not having and solicit feedback for improvements

3. Consider outsourcing to a third party at this time, before signifi cant dollars are spent on a non-ideal system.

Benefi t from improved, current technology that may also help brokers and advisors grow their books.

Marginal Investment Medium

Residual Risk Medium

Fit to Objectives Medium

Factor Weight

1. Automatically check orders for breakpoint calculations 5

2. Generate compliance and surveillance reports for all accounts 5

3. Provide a consolidated view of the relationship 5

4. Produce consolidated reports 5

5. Provide for centralized servicing of the relationship 5

6. Provide exposure information through a single platform 5

7. Increase productivity of the client relationship processes 5

8. Correctly attribute costs by trade, optimize business mix 5

9. Reduce administrative burden on brokers and advisors 5

10. Materially identify mutual fund positions held away 9

11. Demonstrate Books and Records compliance 9

12. Demonstrate compliance with suitability rules 9

13. Demonstrate breakpoints and/or prospectus terms compliance 9

14. Demonstrate AML compliance against subscription-away accounts 9

EXHIBIT 10

DEFINING “FIT TO OBJECTIVES” CRITERIA

Source: IBM Global Business Services, 2007

STAGES OF THE MATURITY CURVE: AN OVERVIEW

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15

DIVERGENT

COMMON FIRM ATTRIBUTES

n Substantial continued investment in internal systems and processesn Multiple systems likely used to accommodate different products

n Providing sales force a view of the client and his/her assetsn Cross-selling of product to meet client’s fi nancial needs

SUGGESTED ACTION PLAN

1. Answer two key questions:

n “What are my total costs with these multiple systems?”

n “Is data management a core competency for every solution I previously selected?”

2 . Use answers to determine next course of action:

n Continue to spend incremental dollars on mandatory, but less-than-effi cient systems and processes; or

n Redistribute limited dollars between a new, modern, single, all-in-one solution and recruiting and retaining

brokers to generate higher returns in more areas of the business.

3. Build a business case analyzing outsourcing options and resources redeployment

Marginal Investment High

Residual Risk Low

Fit to Objectives High

OPTIMIZED

COMMON FIRM ATTRIBUTES

n Providing system functionality for consistent processing and workfl ows

for all mutual fund assets held away

n Utilizing effi cient data warehouse capabilities (including broker and advisor

and investor views of assets)

n Maintaining a lean manufacturing environment

SUGGESTED ACTION PLAN

Even at the Optimized stage, where a fi rm operates in a best-practices environment, there is room for improvement.

At this stage, fi rms will consistently drive improvements at the margin through continuous improvement in

operations. Optimized fi rms continually look for ways to improve their compliance processes and overall operating

model. They may ask any of the following questions:n Is there anything in my processing that gives me a true competitive market advantage?

n Where should I invest today to be in the best position for regulatory and competitive challenges of tomorrow?

n Which parts of my value chain are best outsourced to more effi cient, commodity processors (economies of scale,

manage regulatory change)?

n Are my operations unique and value-creating, or are they investments in infrastructure resulting from the cost of

doing business?

n What am I spending to maintain this process in-house? Is it the most effi cient allocation of my marginal dollar?n In which scenarios can I process least expensively? Are there ways to infl uence how transactions will be processed,

or scenarios in which it’s best to route certain types of transactions elsewhere for processing?

n What tools and/or analysis can I provide to the front offi ce to help drive client penetration and profi tability?

Marginal Investment Medium

Residual Risk Low

Fit to Objectives High

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Consolidating mutual fund positions onto a single brokerage

platform potentially provides the highest number of business

management benefi ts. For fi rms with large books of legacy

direct accounts, however, consolidation alone is not always

the optimal solution. Firms may face signifi cant costs

including costs to meet regulatory compliance requirements

and other business costs when working to streamline

their processes.

In addition, those fi rms with business models focused away

from traditional brokerage products will also likely leverage

a combination of funds consolidation and data aggregation

strategies to achieve their goals. For fi rms whose product

mix cannot be supported by consolidation (life insurance-

driven), aggregation technologies provide a somewhat more

complex, but reasonable alternative.13

As shown on page 13, fi rms can be placed along the full

spectrum of the Direct Trading Maturity Curve in these

general categories:

n Firms in the early stages of maturity — tend to suffer

from poor risk/reward profi les as technology investments

may be lacking.

n Mature fi rms — regulatory risk is low and additional

benefi ts of aggregation or consolidation beyond

compliance (process automation, enhanced prospecting

capabilities) begin to accrue.

n Firms in the middle — between these states lie a range

of scenarios as fi rms balance the cost of technology

against the goals of lowering regulatory risk and

expanding client views.

Every fi rm is encouraged to explore where they fall on the

Direct Trading Maturity Curve and undertake analyses

of how they can most quickly move to optimal states. As

part of this process, fi rms may want to consider taking the

following steps:

1

2

1. PERFORM A DIRECT TRADING COST

ANALYSIS.

Determine whether the revenues tied to the direct business

justify the costs and risks that accrue to your fi rm. This

analysis should include an attempt to calculate a “virtual

charge” that represents the total direct account service cost

to the fi rm. Examples of attributable costs include:

n staff time spent processing and reviewing applications

n overnight delivery charges for physical applications

n technology for: position aggregation, account feeds

from mutual fund companies, imaging and document

management

Some fi rms allow mutual fund trades to be placed direct if

they are below a specifi c threshold (often, $5,000 or less).

The client does not incur a brokerage ticket charge. The

fi rm may then be able to focus its efforts on the benefi ts of

consolidating larger client relationships onto its brokerage

platform. However, the fi rm continues to assume the cost of

providing two separate infrastructures for both regulatory

compliance and position aggregation.

2 . DEVELOP A COMPREHENSIVE

CONSOLIDATION STRATEGY.

To the extent consolidation can be achieved it will support

the most robust package of operational effi ciencies,

relationship management capabilities and client service

delivery benefi ts such as consolidated statements and

tax reporting. Determine to what degree and how best

to drive consolidation of mutual fund positions onto the

brokerage platform. Consider viability of specifi c steps,

such as incentivizing brokers and advisors to trade through

the brokerage platform via differential ticket charges and

recapturing positions by withholding commissions on direct

business.

Firms following the consolidation path can expect some

resistance to change, especially among established brokers

and advisors accustomed to doing business a certain way.

Thus, a critical piece of any consolidation strategy will be

DEVELOPING AN ACTION PLAN

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17

3

4to ensure that branch managers and brokers and advisors

understand the case for change. Brokers and advisors will of

course need to be trained on the procedures of consolidating

assets on the brokerage platform, but will also need to be

able to articulate the potential benefi ts to clients.

Where a fi rm has not maintained a deep relationship with

an investor, it should consider re-evaluating the relationship

prior to migrating assets onto the brokerage platform.14 Firms

with clients that cannot be located, or who do not respond

to requests to recertify the account, might consider resigning

as broker of record.15

3. OPTIMIZE THE FIRM ’S APPROACH

TO AGGREGATION.

Aggregation is correctly viewed as a critical mission in

today’s regulatory environment. Firms surveyed, with few

exceptions, utilized some form of aggregation technology in

order to help identify direct positions. Although clients still

receive multiple statements and tax forms in the aggregation

model, brokers and advisors do have the ability to build

an aggregated client statement and/or online view that

approximates what a client might see from brokerage.

At a minimum, aggregation technology used by fi rms

included taking feeds from the various mutual fund

companies into a third party or proprietary aggregation

system. Firms that have historically done business with a

limited number of preferred mutual fund companies should

have easy access to the records of their transfer agent. For

others, trailing commissions, whether received via electronic

feed or paper checks are probably the most obvious place

to start.

As indicated in the fi rm profi ling under the Direct Trading

Maturity Curve discussion, the aggregation path likely leads

in one of three directions:

n acquiring a comprehensive and mature vendor system

n outsourcing to a third party service provider

n leveraging a proprietary solution where it provides a

competitive advantage

4 . UTILIZE AN ORDER CAPTURE SYSTEM

FOR DIRECT BUSINESS.

Firms that continue to execute transactions direct should

consider implementing order-capture technology that

both collects the information at the time the order is taken

and retains it for Books and Records and other regulatory

compliance. Such a system will need to capture all of the

client information necessary for principal and suitability

review as well as breakpoint analysis. Books and Records

compliance can then be maintained directly from this

system.

Firms implementing such technology should be able to

offset the one-time cost of implementation by eliminating

or reducing recurring costs of manpower necessary to

review, process, and mail physical applications by brokers

and advisors as well as home offi ce staff. Overnight mailing

fees of mutual fund applications would be greatly reduced

and the client’s investment into their selected mutual fund

may be processed more timely.

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There are products that simply cannot be carried on a fi rm’s

own platform due to the legal structures of those products.

529 College Savings Plans, 401(k), 403(b), and certain

types of insurance products are some examples of products

that must be held with the product provider. Therefore, no

fi rm can be entirely out of the mutual fund direct business.

A comprehensive solution that accounts for a fi rm’s entire

product mix including assets held away is required. While

some fi rms have, with individual successes, built such

systems, there is a broad market need for a more complete

solution. This solution should allow fi rms to effi ciently jump

from a complex state of basic recordkeeping regulations to

a region on the maturity curve where the benefi ts of new

technologies can be realized.

Firms are encouraged to undertake their own analysis to

determine if revenues tied to their mutual funds direct

business justify the accompanying costs and risks of

continuing to do direct business. Firms may choose to

pursue either an approach that emphasizes consolidation

or one that combines consolidation and aggregation,

accordingly. Generally, fi rms whose primary business is

brokerage are likely to consolidate direct positions onto

a brokerage clearing platform. Alternatively, those fi rms

primarily engaged in the sale of life insurance or other

products, particularly under an independent advisor

model, are likely to fi nd aggregation to be a more realistic

alternative.

Regardless of which route brokers and advisors believe

to be less costly, fi rms engaged any kind of traditional

“check and app” business are likely facing higher costs of

processing than those in a brokerage platform order entry

environment. Imputing the value of brokers’ and advisors’

time, just a few hours per week dedicated to labor-intensive

manual processing takes away from value-added activities, in

particular, when scaling over a large brokerage organization.

The “check and app” business is one of the last great

frontiers of ineffi ciency to be conquered by trailblazing

fi rms in the brokerage industry, and one that will continue

to pose great challenges from a process effi ciency, regulatory

compliance, and client servicing perspective. Realizing

this, forward-looking fi rms are moving to understand the

problem and the opportunities, and identify appropriate

solutions to carry them into a more optimized state.

CONCLUSION

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19

IMPORTANT INFORMATION AND

METHODOLOGY ABOUT EXHIBIT 9

This conceptual framework was developed as a result of the

interviews with broker/dealers who responded to specifi c

questions about the amount of investment they have spent

to date dealing with their mutual fund direct business in the

more complex regulatory environment. They also responded

to each of the 14 factors as listed in Exhibit 10. A relatively

straightforward approach has been taken: a weighting of 5

if the factor impacts effi ciency; and a 9 for each factor that

is regulatory or “mandatory.”

Using a math model, the responses were tabulated then

stratifi ed as followed:

1. Factors 1-9 were weighted relative to the quantitative

results from each fi rm surveyed

2. Factors 10-14 were weighted relative to the results from

each fi rm surveyed

3. The weighted results were combined and indexed, and

the results were mapped on a scatter graph

The fi nal results were reported on the direct trading maturity

curve relative to the amount of spending reporting by each

fi rm. The spending categories were: None, Low, Medium,

High, and were self-reported by each fi rm.

1 The firms were bank-affiliated, insurance affiliated, and independents. 2 U.S. Securities and Exchange Commission, Staff Report: Joint SEC/NASD/NYSE Report of Examinations of Broker-Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds, March 2003, http://www.sec.gov/news/studies/breakpointrep.htm

3 2006 Investment Company Fact Book, 46th Edition, A Review of Trends and Activity in the Investment Company Industry, http://www.icifactbook.org/ 4 Fundamentals: Investment Company Institute Research in Brief, Vol.14, Number 3, April 2005, http://www.ici.org/pdf/fm-v14n3.pdf 5 The accounts cited in these statistics are generally individual retail accounts. Plans such as 529 college savings plans and small 401(k) and 403(b) plans,

which are generally required to be held direct, have been excluded from parts of this report that specifically address solutions to the “direct” problem. 6 Code of Regulations, Part 240.17a-3 under the Securities Exchange Act of 1934 7 Ibid 8 NASD - Special Notice to Members, December 2002, http://www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_003029.pdf 9 Compiled from SEC Annual Reports: 2001–2006, www.sec.gov 10 NASD - Special Notice to Members, December 2002, http://www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_003029.pdf 11 U.S. Securities and Exchange Commission, Joint Final Rule: Customer Identification Programs from Broker-Dealers, Release No. 34-47752, File No. S7-25-02, http://www.sec.gov/rules/final/34-47752.htm

12 Ibid 13 Defined as firms with low penetration in the traditional brokerage products and primary reliance on an alternative stream of business. 14 A typical situation might be a case where the original broker or advisor has left the firm and the firm has no other relationship with the client. 15 An important exception to this would be accounts that are unsupported on the brokerage platform (529 College Savings Plans, 401(k) and 403(b) retirement plans). Alternative procedures and controls for these accounts will need to be maintained.

IBM Global Business Services

National Financial selected IBM to conduct the

survey of 14 National Financial broker/dealer

clients. IBM provides business consulting through

its Global Business Services unit, which provides

consulting services on strategy, technology

and process for many leading fi nancial services

institutions worldwide.

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© 2007 FMR Corp. All rights reserved.

FOR BROKER/DEALER USE ONLY.

National Financial Services LLC, Member NYSE, SIPC460051 1.845991.100 0707

2 0 0 S E A P O R T B O U L E VA R D

B O S T O N , M A 0 2 2 1 0

ABOUT NATIONAL FINANCIAL

National Financial, a Fidelity Investments company, offers Integrated Brokerage Solutions® to 344 clients

ranging from retail broker/dealers to institutional investment fi rms. Collectively, National Financial’s clients

have more than 86,000 brokers. As of March 31, 2007, National Financial custodied more than $670 billion in

assets representing more than 5.4 million customer accounts. Integrated Brokerage Solutions incorporates

innovative technology, products, and programs, supported by dedicated client service professionals and trusted

industry alliances. This holistic, solutions-oriented approach is designed to help client fi rms attain a competitive

advantage by helping them drive growth, create effi ciency, and manage risk. For more information about

National Financial and Integrated Brokerage Solutions, please visit www.nationalfi nancial.com.