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RIA custodians charge steep new ETF-related fees that can range into the tens of thousands of dollars for big trades and advisors are working to deal with them

Schwab, Fido, TD and Pershing are all in on these 'trade-away' fees and claim they simply are defraying costs of manual labor -- but RIAs aren't so sure

Author Lisa Shidler November 18, 2013 at 10:35 PM
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Chris Romano: We don't even consider trading away at Fidelity because of the high ticket trade away fee.

Frederick Van Den Abbeel / TradePMR

Frederick Van Den Abbeel / TradePMR

November 19, 2013 — 12:28 AM

It is somewhat not surprising considering all of the marketing surrounding “free ETF” trades. There really is no such thing as a free trade so the brokerage firms are making their revenues elsewhere either trading against the RIAs with poor bid/ask execution fills or by other means.

I recall reading a report written by Mr. Lawrence E. Harris who is a Professor of Finance and Business Economics at the University of Southern California who wrote a very informative piece titled: The Economics of Best Execution (1996) who stated:

“Since retail customers generally do not know whether they receive good execution on average, brokerage firms have little incentive to demand that dealers provide good execution. If they did, they would obtain fewer order flow inducements from dealers. Instead, brokers accept relatively poor execution and use the resulting order flow inducements to lower their brokerage commissions…”

“The brokerage industry is not likely concerned about this equilibrium. From a marketing viewpoint, when deciding to trade, most customers probably give more weight to their visible commission costs than to their less obvious built-in transaction costs.”

Stephen Winks

Stephen Winks

November 20, 2013 — 6:00 PM

If you are getting something for free, then you are not the client. To no ones surprise, maximizing trading desk margins take precedent over the consumer’s best interest required by statute.

What does an electronic trade really cost? It should approach zero in a large electronic crossing network. So why aren’t these efficiencies achieved at the retail level like the institutional level? This is further confirmation that a retail brokerage format is ill suited for advisory services and statutory responsibilities essential to acting in the consumer’s best interest.


Ben Stein

Ben Stein

November 21, 2013 — 12:57 AM

nice to see at least one media outlet trying to crack a well-protected egg and issue of usurious trade-away fees imposed on those RIAs who know what best execution really is and recognize their fiduciary (and performance obligation) to for their respective clients to secure best ex.

Had reporter Lisa Shilder only known to have asked the conflicted custodians she sourced for this story how much total revenue they receive from selling their customer orders to 'preferred liquidity providers’—professional traders whose business model is to profit at the expense of 'buyside customers who don’t know how to get best execution.” And further, Lisa might have asked one of those custodians how they rationalize profiting by selling customers’ orders (who by the way, do not get any part of those payments) while also telling those customers they are receiving the best execution in the market.



November 21, 2013 — 12:28 PM

Note to reporter: The trade-away aka step-out fees are nothing new. These “penalties imposed on customers who want something more (i.e. real best execution) have existed for the past number of years. The fact that RIAbiz is bringing this issue to light as being “something new” is because its been a well-known issue that custodians want to keep quashed; all other publications have backed away from reporting this topic because..duh..TD, Fido, and Chuck are the biggest advertisers for those publications.Let’s see how this would read.”...We get paid for selling our customer orders to predatory trading firms who exploit those orders, which is a revenue scheme we really don’t need to publicize loudly—and then we tell our customers they are getting best execution. If those silly customers think they can get a better price for their order elsewhere, we charge them $20-$25 per ticket..What? Why would we share payments for customer orders with those customers than own those orders?? We have a business to run here!” Happy Turkey Day to the RIAs who like getting flipped the bird by the folks who claim to have their back.

Stephen Winks

Stephen Winks

November 21, 2013 — 9:20 PM

For those that are interested, there are zero trading cost environments like those at CALPERs which take their fiduciary duties seriously. CALPERs uses the source code of the old Computer Aided Decisions to achieve negative trading cost (they actually make money for their investors when they trade as they are compensated for their trading volume.) There more shares they bundle into a trade the lower the cost per share. Thus, volume compensation to ECNs actually makes trade execution a profit center, rather than a cost center. Fidelity, Schwab, TD Ameritrade, Pershing are all electronic crossing networks like CALPERs. The cost ascribed to trade execution is largely arbitrary, ultimately the differentiator between brokers and advisors is whether trade execution is treated as a cost center to be minimized or as a profit center to be maximized. Advisors are paid for their advice, brokers do not render advice, just provide commodity trade execution services which can be obtained for free. Obviously, advisors win based on advice rendered and cost.


Ben Stein

Ben Stein

November 22, 2013 — 12:58 PM

the various exchange rebate programs certainly provides a great cushion for smart managers who have DMA sponsors that share the rebates. this is different from the reference that custodians are selling their customer orders to liquidity providers who pay to play against the customers..(who don’t share in those payments..and if those customers want to get better prices away from those 'liquidity providers’..they have to pay their custodian a 'tax’ which is egregiously high in most cases.



January 6, 2014 — 7:48 PM

As Fred said, nothing is for free.

However, if you want to get the best pricing and execution then buy securities from the market and not from a principle transaction. All of those custodians are big (Prin) dealers and sell you from their inventory. Instead, use Interactive Brokers and buy directly from the market. You can’t beat their pricing (pay per share), and routing execution is outstanding. Plus, you get to use numerous dark pools so you aren’t stuck buying and selling from all “lit” markets.

They have a self aggregator for you so you don’t have to worry about correcting items at the end of the day. More so, I can’t stress this enough – the pricing is outstanding. They don’t have a pay-per-transaction basis of ($9.99 per trade, etc). It is exactly like a Prime Services Group for Hedge Funds does. I’ve saved tens of thousands on transaction costs all year long, and you can use the rebate programs that most market exchanges provide. For example, I bought a few thousand shares of a Natural Gas ETF and it cost ($1.25), then the shares were allocated to my clients ($1.25 / # of clients). Simply pennies is what it came to. Again, you can’t beat it. Moreover, IB doesn’t have any minimums so you can use your RIA to open an account and just do one account to try them out. You are crazy not to do so.

Just my thoughts and opinions but I haven’t had an issue with them at all and I’ve moved all of my clients over there.

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