The technology demands of complying with stricter investment regulations are squeezing small third-party brokerage firms, according to the chief executive of one of the bigger outsourcing firms.
Randall Ciccati, the CEO of PrimeVest, a St. Cloud, Minn., subsidiary of ING U.S. Financial Services, assessed the state of play in an interview after announcing last month that his company had acquired 12 former bank clients of Fiserv Investor Services. Fiserv, a large outsourcing company, had sold BHC Investments Inc., a part of its relatively small investment services division, to Fidelity Investments last March for about $365 million.
An executive of one of the 12, Resource Bank in DeKalb, Ill., said in a statement that compliance was a factor in its decision to sign up with PrimeVest.
“We were impressed by the PrimeVest compliance department’s knowledge and plans to deal with impending regulatory challenges,” said Paul Neumann, director of investments. “We were also excited about the technology available through PrimeVest, as well as their self-clearing capabilities.”
Large third-party marketers have a competitive advantage because they are better able to address banks’ compliance concerns in the heightened regulatory environment, Mr. Ciccati said. Variable annuity transactions and breakpoint sales — mutual fund purchases at a dollar amount that entitles the customer to move into a lower fee bracket — are of particular concern to banks, he said.
“Smaller broker-dealers don’t have the technological capabilities,” he said.
BHC was part of Fiserv’s investment services division, which was among the company’s smallest segments, according to regulatory filings. The division posted $171 million of revenue for the first three quarters of 2004, compared with $1.66 billion for financial systems outsourcing and $649 million for health plan management services.
Bank broker-dealer operations face more liability risks under the increasingly stringent securities regulations, according to a report by Kenneth Kehrer Associates, a Princeton, N.J., consulting firm. Based on recent experience, a bank operating a broker-dealer might face about a 10% chance of incurring a $125,000 regulatory penalty, the study said.
BHC became a regulatory target in 2003 when the Securities and Exchange Commission began investigating potentially improper mutual fund trades that BHC had cleared for several broker-dealers. Fiserv agreed in April to pay $15 million of fines as a result of the investigation.
In a recent investigation of broker-dealers that sell variable annuities, the SEC and National Association of Securities Dealers expressed concern that some were taking advantage of senior citizens who do not fully understand annuity contracts’ nuances. In mutual fund breakpoint sales, brokers are required by NASD rules to help customers reduce their transaction’s cost with a slightly larger purchase; sales just below breakpoint amounts are a violation.
The brokerage firm’s self-clearing ability lets bank managers view and approve transactions as soon as they are completed, Mr. Ciccati said. PrimeVest’s data also let banks track brokers’ sales activity, he said.
“If there’s a [compliance] issue, we understand at the point of sale, not months later,” he said.
PrimeVest last year had $2.6 billion of annuity and mutual fund sales through banks, according to the Kehrer firm. Its sales of those products in the bank channel were second only to the $6.6 billion volume at Independent Financial Management Group Inc. in Purchase, N.Y.
PrimeVest’s $112 million of gross commission revenue from general securities brokerage was also second to IFMG; the unit of Toronto’s Sun Life Financial reported $369 million of revenue, the Kehrer firm said.
In addition to Resource Bank, PrimeVest recently added the following banks to its client roster: Security National, First National of Akron, First State of Mapleton, Northwestern State of Orange City, and Security State of Sheldon, all in Iowa; State National, First National Liberty, and Security Service Federal Credit Union, all in Texas; Peoples National of McLeansboro, Ill.; Security National of South Dakota; and First Market in Richmond, Va.
