This article was written by Ben Richter, Head of Institutional Sales at Leverate.
You are an IB.
You know what you are good at, which is marketing and maintaining good relationships with clients. Your business is striving at it, but one day, you realize you are serving yourself just a thin slice of a much bigger, much tastier pie, and so you decide to explore your options and look into opening up your own brokerage. I mean, why would you refer clients who trust YOU, to a third party, only to get paid a commission, when you can make a lot more money and maintain control over how your precious clients are treated?
Opening up your own brokerage makes sense, but let’s explore your options so you make the best decision for you and for your clients.
As an IB, you have two main choices: Ownership under the umbrella of a big broker, or going completely independent with the help of a tech provider. Let’s compare the two:
Technology: Technology is key in having a successful business. The correct trading platform, hosting, IT management, liquidity management tools, CRM, back office, etc will help you run your business smoothly and efficiently. A tech provider is dedicated to providing you the most vanguard and innovative solutions. White label solutions from a large brokerage firm will most likely come in the form of a re-packaged system from a tech provider, but your provider’s focus may not be in pushing their tech provider to develop new and better features for you. The saying “to know how expensive IT costs are, hire a cheap IT guy” hold true in a brokerage’s implementation of FinTech solutions.
Reputation: A white label solution provided by the large brokerage firms, give you the possibility to stand behind the brand of reputable broker. In this instance, “for better or for worse” is true. You’ll enjoy the benefits of a trusted brand, but you will also find yourself answering questions if the big broker faces questionable issues. Tech providers give you a turnkey solution but building a reputation is up to you. Hiring a trusted tech provider that gives your traders the best technology available in the industry can give you a powerful selling point.
Customer service: Tech providers are by nature B2B companies, so they know how to serve other businesses. They have dedicated teams to manage the relationship with the broker. Brokerage firms providing white label solutions are good at retail, but may not be so great at maintaining relationships with brokers.
Ownership of clients: White labels from brokerage firms enter you into agreements in which the flow of the clients is sent through them and in case of termination the clients belong to the provider. Tech providers allow you to operate your own business and the clients belong to you.
Conflict of interest: Because some brokerage firms who provide white label solutions are in the same business as you would be, they are not only providers but also competitors. Tech providers have no interest whatsoever in your clients and you decide whether you want to operate your business your business as an STP broker or be a market maker.
Back office: Tech providers will often offer options to help you manage your back office, compliance, risk and on-boarding that are not available through a brokerage firm’s white label solution.
Regulation: By signing up with a brokerage firm providing white label solutions, you would be operating under their license, which in the short run is much simpler. As an independent broker, you would be responsible for your own licensing and compliance, which means significant capital requirements and a heavy burden, although you would have the independence that comes with holding your own license. When it comes to regulation, you do have a third option, which is signing up with a tech provider who can extend their license and compliance services to you. This last option is considered a middle ground in the subject of regulation.
Moving your IB business to the next level can be a great challenge. Make sure you take the next step with the right foot and choose your options wisely.