How Retail Investment Program Structures Differ

Credit unions have options for the structure of their investment services program. Which option they choose will affect how involved they must be.

 
 

When a credit union decides to launch a retail investment services program, it has many decisions to make. One of the biggest decisions is choosing a structure that fits the credit union’s needs and capabilities. There are three primary program structures, and which structure a credit union chooses will affect the delivery of products and services as well as determine the amount of involvement required of the credit union. The three primary structure types — managed programs, dual employee programs, and broker-deal programs — are differentiated by the levels of roles, responsibilities, regulatory liabilities, and functions the credit union assumes.

Managed Programs

In a managed program structure, the credit union contracts with a third party broker-dealer. Financial consultants (FC) are not employees of the credit union. Instead they are either an employee or independent contractor of the credit union’s contracted broker-dealer. The credit union takes on minimal roles and responsibilities in a managed program. It is the program structure that requires the least level of involvement for the credit union.

In a managed program, the credit union’s contracted broker-dealer assumes functions and responsibilities related to:

  • Compliance with all regulatory authorities such as FINRA, Securities and Exchange Commission, state regulators, etc.
  • Oversight of all licensed representatives.
  • Office of Supervisory Jurisdiction (OSJ).
  • Employee or independent contractor relationship with licensed representatives and unlicensed service and support staff.
  • Compensation to all licensed representatives and associated operational expenses such as continuing education, licensing fees, conference travel, etc.
  • Most broker-dealer operations and expenses.

The credit union assumes responsibility for the following items:

  • Ensuring the program adheres to all aspects of NCUA Letter 10-FCU-03 (dated December 2010).
  • Supporting and marketing the program to credit union members.
  • Providing an appropriate level of program presence in branches.
  • Actively participating in the recruitment and hiring of financial consultants.
  • Collaborating with the program’s contracted broker-dealer on other items as necessary.

Dual Employee Programs

As in a managed program, in a dual employee program a credit union contracts with a third party broker-dealer. However, in a dual employee program, financial consultants are employees of the credit union. They are dually managed by both the credit union and the contracted broker-dealer.

In a dual employee program, the contracted broker-dealer assumes functions and responsibilities related to:

  • Compliance with all regulatory authorities such as FINRA, Securities and Exchange Commission, state regulators, etc.
  • Oversight of all licensed representatives.
  • Office of Supervisory Jurisdiction (unless the program itself has internalized the OSJ function).
  • All broker-dealer operations and expenses.

The credit union takes on the same roles, responsibilities, and functions as outlined in the managed program structure. In addition the credit union assumes responsibility for:

  • Employee or independent contractor relationships with licensed representatives and unlicensed service and support staff.
  • Compensation to all licensed representatives and associated operational expenses — such as continuing education, licensing fees, conference travel, etc. — that are passed through from the broker-dealer or taken on as direct operational expenses.
  • In some cases the OSJ function, unless specifically outsourced to the broker-dealer.
  • Certain brokerage platform and transaction expenses.

Broker-Dealer Programs

A broker-dealer program requires the most credit union involvement of the three structure types. This structure requires the credit union to form a CUSO that is a FINRA-registered and licensed broker-dealer. The CUSO must also be registered with the SEC. The credit union and the CUSO take on all the responsibilities noted above.

Although there are a relatively small number of credit union programs that are structured as a wholly owned CUSO and FINRA-licensed and registered broker-dealer, the programs that do exist are able to serve other credit unions, normally credit unions within the same state. Credit unions that have a broker-dealer program typically outsource many of the broker-dealer operations to a larger broker-dealer that serves the credit union marketplace.

Drivers Of Program Structure Choice

Generally credit unions choose a structure based on the desired level of responsibility to the program. Credit unions with a managed program chose that structure, in part, because of their size and concerns about sustaining at least one full-time representative.

Credit unions that have grown their retail investment portfolio and require more than one financial consultant might choose to maintain the simple structure of the managed program because of the additional requirements and nec­essary expertise involved in changing program structure. For example, one of the key considerations for dual employee programs is how to structure an appropriate compensation model for both financial consultants and the support staff.

Credit unions that decide to internalize more of the investment program’s roles and responsibilities must also recognize they need expanded expertise and external resources. The decision to run a more involved retail services program must be accompanied by adequate analysis of the ability of the potential program to provide an appropriate level of net income after the credit union accounts for additional expenses.

Credit unions must thoroughly assess the benefits, features, and attributes of each retail investment program structure to ensure they understand the functions they must assume. To learn more about how to determine the appropriate financial modeling metrics for a retail investment program, click here.

 

 

 

July 9, 2012


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