A directed brokerage agreement is a contract between a broker-dealer and an investment manager, where the investment manager directs the brokerage to execute trades on behalf of the investment manager’s clients. This type of agreement is primarily used in the financial services industry, where investment managers are responsible for managing their clients’ investments.
The directed brokerage agreement enables the investment manager to direct trades to one or more specific broker-dealers, who will execute the trades on behalf of the investment manager’s clients. In return, the broker-dealer receives compensation for executing the trades as specified in the agreement.
One of the primary advantages of a directed brokerage agreement is that it allows investment managers to achieve best execution for their clients. By directing trades to specific broker-dealers, investment managers can ensure that their clients receive the best possible price for their investments.
Another benefit of a directed brokerage agreement is that it allows investment managers to consolidate their trading activities with a smaller number of broker-dealers. This can lead to cost savings for the investment manager, as they are able to negotiate better pricing and terms with the broker-dealers they work with.
However, there are also some potential disadvantages to a directed brokerage agreement. For example, if an investment manager directs all trades to a single broker-dealer, they may be limiting their clients’ access to a diverse range of investment opportunities. Additionally, if the investment manager fails to monitor the broker-dealer’s performance, they may not be aware of poor execution quality or other issues that could impact their clients’ investments.
Overall, a directed brokerage agreement can be a useful tool for investment managers who want to achieve best execution for their clients while also consolidating their trading activities with a smaller number of broker-dealers. However, it’s important for investment managers to carefully consider the potential benefits and drawbacks of a directed brokerage agreement before entering into one. Additionally, investment managers should regularly monitor their broker-dealers’ performance to ensure that their clients’ investments are being executed in their best interests.