Proactive Back-Office Tips for Broker Dealers to Prepare for Future Financial Crises

Even in times of economic stability, businesses should consistently take steps

to reinforce their operations in the event of future downturns. Recent FINRA research hints that some broker dealers are lagging on this front.

In an analysis of 43 broker dealers, FINRA found that six didn’t have the processes or tools in place to shield their operations against liquidity risks. Managing liquidity is critical for brokerages, but it’s not the only pressing issue they contend with – especially during a financial crisis.

When the economy takes a turn, organizations with inefficient spend (and a lack of visibility into that spend) suffer the consequences most. A brokerage firm that doesn’t have a clear strategy for better, faster and cheaper execution than their competitors isn’t likely to survive long in the current market, let alone a distressed one.

Here are three steps broker dealers can take now to differentiate their execution strategy and weather the next recession:

  • Establish professionalism by accurately measuring execution fees: Subpar execution fee management is a primary inhibitor of broker dealer profitability. For broker dealers to survive, regardless of the state of the economy, they need a precise read on their clients’ fees and the various attributes that comprise them. Having this information is valuable from a client-facing perspective as well. Providing detailed execution cost breakdowns, and being able to answer specific questions about them, gives clients confidence that your firm can navigate future financial road bumps.
  • Monitor risky broker activity: Beyond surveilling broker activity for true red flags or other noncompliant behavior, firms should keep an eye on any financially precarious positions their staff might be taking. Brokers that regularly pursue risky tactics (e.g. short sales), work with particular securities, or test the bounds of intraday activity limits will face a greater struggle to stay afloat if the market tanks.
  • Focus on developing client loyalty: Being proactive about client service in the middle of a robust economy gives customers more reason to stick with your firm during more tumultuous times. For instance, regularly verifying exchange invoices to ensure clients aren’t being overcharged helps firms protect their revenue and prevent customer attrition. Similarly, investing in tools and processes that provide clarity into your fee structures and trade activity allows your staff to route more strategic orders on behalf of clients.

Broker dealer leaders hoping to guarantee their firms’ longevity need to begin increasing internal efficiency now, not when the economy starts to falter. Back-office processes – which tend to be a top source of risk and revenue leakage – are a great place to start.

For more recommendations on how to unlock profitability and bolster client relationships from the back-office, check out our white paper How Mismanaged Execution Fees are Eating Broker Dealer Profits.