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At Beacon, we currently manage $2.8 billion in assets, and there’s a common misconception among investors that a capital management firm like ours actually maintains custody of clients’ assets. In reality, we have no access to those dollars; they’re actually stored with a credible custodian. This is why it is important for financial services professionals to do their due diligence when selecting a custodian or broker-dealer.
Custodians are not all the same
When conducting research on a custodian, the first question to ask is an obvious one—is this a financially sound firm? You don’t want to choose a firm that could go out of business tomorrow and financial stability is just one reason our largest custodian is TD Ameritrade.
Another factor in picking a custodian is how they execute trades. In our relationship with TD Ameritrade, for example, we implemented a quarterly trade post report that shows the value-add they’re providing clients in the way they execute trades.
National Best Bid and Offer
One regulation the SEC enforces is the National Best Bid and Offer (NBBO), which requires brokers to execute customer trades at the best available ask price when buying securities, and the best available bid price when selling securities. It may not sound like a lot, but if you can make a $0.05 improvement on a large million-dollar trade, that equates to significant potential savings.
Maintaining a trading report provides you with a metric of how your custodians are making trades. It also provides you with actual documented proof of why you’re using a particular custodian. This level of analytics is not technically required by the SEC, but by integrating it into your annual reviews, it’s further evidence that you’ve done your due diligence and are fulfilling your best execution review policies.
Performance Advertising – Understand the rules
In addition to best execution, another SEC guideline to follow is its stance on performance advertising. While there are no steadfast rules regarding performance advertising, the SEC has deemed the following five prohibitive actions as those to avoid.
1. Do not make any fraudulent or misleading statements. This one is pretty straightforward—don’t lie to investors.
2. No testimonials. Basically, the SEC says no testimonials are allowed in any type of marketing. However, this guideline has some sticking points that could be revised, particularly when it comes to social media. As it stands, the “like” button on Facebook is considered a testimonial.
3. No past, specific recommendations. While you can show performance in your marketing, the SEC frowns upon you parceling a random date and time that worked out well for your firm.
4. No use of marketing eyewear. If you use any charts or graphs, you can’t say, for instance, that you began with $100,000 in an investment and ended up with $500,000 without any attribution. The SEC requires that you include all of the disclosures that go into that calculation.
5. Avoid free or “without charge” advertising. If you advertise that something is free it has to remain free forever. There cannot be a fee involved one month or even one year down the road.
To learn more about how you can develop best practices in researching custodians or to install programs to avoid performance advertising problems, contact your wholesaler today!
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