Broker-Dealers: Is Your Cart Filled with Expensive Clients?

It surprises me that many broker-dealers we talk to still consider the act of “billing” or “invoicing” their clients for monthly trade activity an operational task, rather than a strategic leverage point. In an era of decreasing commission dollars and greater competition for order flow, shouldn’t everyone be looking to gain every advantage to maintain existing customer business, if not increase business?

At Firm58, we see two main reasons why broker-dealers are stuck in this operational mindset. First, some BDs simply state that “we’re charging ‘X’ mils and making a profit, why do I need to change?” The truth is, each customer has a unique set of demands, and receives differentiated levels of service.

Two retail customers don’t walk into a grocery store, fill up a shopping cart each and get charged the same amount of money for a shopping cart full of groceries. It all depends on what was purchased. Might the store make a profit with this strategy? Sure. In the short run, the average price might compensate but, over time, those that require less (or fill up the cart with less expensive goods) will shop down the street where they’re charged only for the goods they purchased.

On the other hand, those that fill up the cart with expensive items (are provided more than what they are paid for) will continue to fill up the cart with expensive goods and become smarter about asking for more, at the same price. Soon you’ll be left with customers that are eating away at profits, and your business will suffer.

Differentiated pricing that represents the costs of the services provided isn’t new in capital markets; it’s just sometimes ignored in favor of an “overall profitable trading business.” Shortsighted decisions like this come back to haunt firms.

Second, many firms don’t have the systems to properly charge for the services provided with a mark up for their costs, thus have to rely on a flat rate. Why is this so hard? Well, measuring the daily costs of trades made across many exchanges with complex fee structures, maker/taker fees, etc., is difficult. It takes investments in infrastructure and resources to manage this properly. These investments are typically viewed as “operational” and do not get the same level of commitment as those viewed as strategic (i.e., revenue generating).

But imagine being able to use this execution cost data to support smart order routing, or simply provide greater transparency to customers for compliance. If you consider all of the possibilities for tracking costs at this detailed level you’ll see it’s not a tactical cost, but in fact a strategic investment in your business and your customers.

For those that get it, pricing and billing both present a unique opportunity to differentiate services, maximize revenues of existing business, and generate new business (e.g., by offering competitive cost-plus billing). Those businesses that address these functions strategically will thrive in all economic cycles, not just the upswings.