What is prime broker?

Quick Take on Fixed Income
April 2015

Q: What is prime broker?

A: A prime broker essentially allows clients to trade through an omnibus account at the various custodians. Trading through such an account allows clients to remain anonymous, not only protecting their privacy but also making the trading process more efficient and less prone to settlement errors.

Q: What are the advantages of an account having prime broker?

If trades are placed for an account that does not have prime broker, the client’ s information (including name, address and Social Security number) will need to be sent to the executing broker/dealer to open an account at the institution so the trade can be executed. Sharing this type of sensitive information with our broker/dealer partners is not ideal, so we try and avoid this by having prime broker paperwork in place. Without prime broker, we are required to share client information with the executing broker/dealers because they are required to send the client a trade confirmation. This can be confusing to clients when a trade confirmation from XYZ broker/dealer shows up in their mail and they are not aware of any relationship with that firm. With prime broker, all trade confirmations come directly from the custodian, avoiding this confusion.

Another advantage is custodians will “shadow post” fixed income trades before settlement, so an advisor will see that a trade was placed. Without prime broker paperwork, custodians will not post trades until the bonds actually settle, which can take days or weeks. This can become problematic if an advisor is not careful and can lead to duplicate trades if a previous trade is not reflected in the account. Prime broker also greatly cuts down settlement issues because less manual entry is involved, cutting down on human errors.

Lastly, without prime broker paperwork, Fidelity does not allow clients to trade with any other broker/dealer. This limits its clients strictly to Fidelity’s own inventory, therefore not allowing them to take advantage of better offerings outside of Fidelity.

Q: What are some requirements to get prime broker?

The minimum account value to get prime broker added is $100,000. If an account meets this requirement, prime broker can serve as a resource to help find the best securities for clients and allow for trades to settle in an efficient manner.


Copyright © 2015, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.

 
 

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Heartland Wealth Advisors, L.L.C.
7015 College Boulevard, Suite 750
Overland Park, KS 66211
phone: 913.469.8228
fax: 913.469.8219
 
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