A “carrying broker” relationship
The Financialist • Issue 74 • April 2002
BY DAVID CHALMERS
In July 2001, The Rogers Group became a “securities dealer.” This enables us to purchase or sell individual stocks and bonds on behalf of our clients, to take over the management of existing securities accounts our clients hold, and to access a broad array of products that were hitherto not easily accessible.
The transition of our firm to a securities dealer was not without administrative challenges. Now, many of those challenges are behind us and we are focusing keenly on providing the best advice we can to our clients and seeking the most appropriate products to help our clients achieve their long-term goals.
We can also take a bit more time to explain some of the administrative changes that have transpired with our firm. Thus, I’d like to take this opportunity to explain our “carrying broker” relationship (also referred to on occasion as a “carrying dealer” relationship).
Individual securities
The placing of individual securities on behalf of clients is a very complex administrative procedure. Let me contrast the purchase of an individual stock with the purchase of a mutual fund.
When purchasing a mutual fund (let’s use the Fidelity International Portfolio Fund as an example), you purchase units from the fund company. The fund company then uses your money to purchase individual securities. Theoretically, there is infinite capacity on the part of Fidelity to accept money and issue new units and, in turn, to purchase stocks with those monies. On rare occasions, a fund will be “closed” or “capped,” meaning that no new money will be accepted. This happened recently with the CI Signature Dividend Income Fund.
When you are selling a mutual fund, the company (Fidelity, in our example) comes up with the cash to redeem your units. Fidelity, in turn, sells stocks if there is not enough cash on hand to meet current redemptions. On (extremely rare) occasions, a fund will not have enough cash or liquidity to meet redemptions, and investors have to wait for their money. This happened several years ago with the MD Realty Fund.
As you can see, a fund company is acting as a buffer for sales and purchases.
Stocks
When you buy an individual stock (unless the stock is a new issue), however, you have to find a seller for the stock. If you want to sell, you have to find a buyer.
The matching of buyers and sellers is done through a complex mainframe computer network that literally takes bids from millions of people and monitors what buyers are willing to pay for a stock (the “bid price”) and at what price sellers are prepared to sell (the “ask price”).
The acquisition of this infrastructure requires an enormous capital investment.
Bonds
The purchase/sale of bonds is slightly different. Most securities dealers act as a “principal” in bond sales. This means that the dealer buys bonds directly from the issuer (usually a government, a corporation, or another dealer) and holds the bonds “in inventory.” Then, the bonds are made available for purchase by clients of the securities firm.
This process requires not only lots of infrastructure but also a great deal of capital to acquire and hold a bond inventory.
Complex transactions
The purchase of individual stocks and bonds becomes extremely complex as one looks at the multitude of ways in which sales can occur. A detailed explanation is beyond the scope of this article. Note that stocks can be bought for cash or “on margin.” Orders can be “at the market,” “stop loss”, “stop buy,” “all or none,” “good until,” and on a variety of additional bases. There are also very complex derivative and hedging mechanisms that occur, such as “put options,” “call options,” and “straddles.” All of this requires extremely complex administrative systems.
Back to a “carrying broker” relationship
Becoming a securities dealer requires massive administrative capabilities and lots of money. As a result, the Canadian securities industry is dominated by large banks that have the critical mass to become securities dealers. Banks have acquired most of the securities dealers in Canada.
There are, however, a small number of independent securities dealers in Canada, including The Rogers Group Investment Advisors Ltd. Most of these independent firms (including TRGIA) have entered into “carrying broker” relationships. There are several banks or large financial institutions that offer carrying broker services. We have chosen a subsidiary of National Bank Financial as our carrying broker. We are one of approximately 60 independent firms who have this arrangement. (National Bank Financial calls this “network” of dealers the National Bank Correspondent Network (NBCN).)
NBCN has all of the infrastructure needed to be a dealer, has research capabilities and carries a large inventory of bonds. We pay a fee to access their infrastructure, their research, and their bond inventory.
NBCN also prepares client statements for The Rogers Group Investment Advisors Ltd. (We prepare our own summaries “in house” for accounts held within The Rogers Group Financial Advisors Ltd.)
This article provides some insights into the nature of a “carrying broker” relationship. Hopefully, you won’t be quite so bewildered when you occasionally receive confirmation that a purchase was made in your account on behalf of “The Correspondent Network.”
Our objective is to provide a truly comprehensive package of products and services to our clients for the implementation of their financial plans and, at the same time, to retain our independence.
Please don’t hesitate to ask your Financial Advisor if you require any additional information.