Potential Risks for Banks Using Third-Party Broker-Dealers

Potential Risks for Banks Using Third-Party Broker-Dealers

In January of 2019, Roy Kim, the Director of Banking Asset Management from ACA Global, wrote an article titled the same as above.  It’s one of the better pieces on this topic we have read, and it’s something we have incorporated into our due diligence structure for our banking and credit union clients. 

We received permission from the author to re-publish a section of his article for our readers.  A link to the full article can be found at the bottom of this post. 

Our reasoning for shedding light on this topic is that there are many banks and credit unions with Advice Platforms that are at risk for various reasons. If you are partnering with a lesser-known broker-dealer, if you have a split agreement in place with a local BD or RIA, or even if you are working with a local advisor or RIA without a split agreement, your institution is exposed to risk. 

Here’s a list of FINRA’s findings and why banks and CU’s should care. 


A bank never wants to hear about pervasive best execution issues at a broker-dealer, but it does happen. According to FINRA, “firms failed to assure that order flow was directed to markets providing the most beneficial terms for their customers’ orders.” Bank asset management groups are accountable for best execution, so it’s worth their time to investigate how their broker-dealers control the quality of their customers’ orders. 


FINRA continues to see evidence of unsuitable recommendations to customers, including but not limited to uninformed investment decisions, over-concentration in complex structured notes or similar securities, and excessive trading. FINRA’s report in this area uncovered many control weaknesses specific to the sale of variable annuities. Banks operating retail non-deposit investment sales programs should care about this finding and ensure they have mechanisms in place to oversee the activities of registered representatives.


FINRA identified numerous instances where brokers executed transactions without the proper authority, and in some cases, attempted to cover up their wrongdoing. The risk this poses to banks whose brokers engage in this fraudulent activity is obvious. Banks should ensure controls are in place at the broker-dealer to prevent or detect unauthorized transactions.


FINRA requires a certain level of net capital to protect customers in the event a broker-dealer fails. FINRA identified incorrect net capital computations resulting in misreporting to vendors and other interested parties. A vendor’s financials are important to a bank’s hiring decision.


FINRA found it difficult for some firms to segregate client assets from the broker-dealer’s proprietary activities. This becomes an issue for banks if a broker-dealer fails and creditors go after client and firm assets since they are commingled. This also increases the risk that client assets are misappropriated. 


FINRA identified firms with inaccurate confirmations due to insufficient supervisory programs. Banks rely on these confirms to comply with regulations. It’s important that banks are aware of these issues with their broker-dealers. 


Having a robust advice platform can be an amazing benefit to your clients, members, and institution as a whole, but the third-party BD must be carefully and often evaluated.

To learn more about Compass Consulting’s services, or to evaluate your current third-party broker-dealer, visit our website; compassconsulting.com, or call 760-477-1299

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