The NASD lists its total number of registered representatives as approximately 660,000. The annual turnover rate of representatives in the securities industry, according to the Securities Industry Association, is about 19%.
With such volatility, it is little wonder that fund companies struggle to keep tabs on who is selling their funds, or how to reconcile unmatched trades to their sales reporting databases. When trades come through clearing firms, funds face a double layer of complexity in identifying the introducing dealer and its affiliated representative.
Over the years, each fund company has had to face this problem alone. Each employs a back-office staff to track down missing or incomplete information. Each culls from the same universe of registered representatives, updating and correcting the same information. Each duplicates the others' efforts, without ever benefiting from the reconciliation work done by the other companies.
The issue of managing and tracking representative-level information has far-reaching effects on how fund companies and broker/dealers do business. Consider the problems faced on a daily basis by mutual funds and broker/dealers.
On the fund distribution side, regional sales managers struggle to maintain up-to-date contact information in order to best manage their representative relationships. After all, they want to make it easy for representatives to do business with them. These regional managers work closely with the top-producing representatives to ensure their needs are met and that they are excited about selling the company's product.
In addition, regional managers are frequently compensated at least in part based on the sales generated by representatives they support. Unmatched or mismatched trades are of significant concern to these professionals.
Operations professionals are equally concerned. In order to apply commissions and 12b-1 trailers and to ensure prompt delivery of shareholder statements to the appropriate intermediary, they need accurate representative information. When that information is outdated or incorrect, or, to make matters more complex, obscured by omnibus "shell" accounts, the best they can do is to get those materials to the correct dealer firm or office and rely on the firm to distribute the materials properly.
Especially in this time of increased regulatory scrutiny, fund operations executives must be able to keep track of the representatives selling their funds. The more a fund company knows about the representatives servicing its accounts, the more leverage it has to work with the broker/dealer firms to resolve potential problems, such as market timing.
On the other side of the equation, broker/dealers face many of the same issues. They receive high volumes of phone calls from each fund family that they work with and expend considerable resources helping them track elusive representative information. They chase down dropped trades. They reconcile their own records in order to direct payments and statements to the right representatives. And they rely on representative information to provide their own oversight against market-timing issues.
The mutual fund industry is known for its sophisticated application of technology and its ongoing quest for increased efficiencies. It also has traditionally been an industry of collaboration and the sharing of best operations practices.
DST Systems is a proponent of a universal approach to tracking this information and has developed a solution for its clients designed to increase efficiencies and improve data quality. DST's Universal Dealer Service is a central repository of firm, office and representative information that systematically matches trades to the correct representative. Participating clients in DST's solution have seen their reject trade rates decrease from 15% to 20% to less than 2%.
The real value of this solution lies in the synergy created by the participation of multiple fund companies and the scale that a large service provider like DST can accommodate. As soon as a representative does business with any of the participating fund companies, that representative's information is reconciled and updated in the universal database.
This solution enables broker/dealers to more easily apply 12b-1 fees and commissions payments to their brokerage compensation systems. It frees up resources as they receive significantly fewer inquiries. In fact, when broker/dealers provide regular updates of their own firm, office and representative information, the universal database is able to automatically reconcile trades. DST's solution also will soon support individual shareholder transactions that are typically veiled within omnibus accounts.
By approaching the issue collectively, funds and broker/dealers will achieve representative-trade match rates much higher than any individual company, with its limited resources, can achieve on its own.