Introducing brokers commonly enter white label agreements with traditional online brokers in order to facilitate investments for their customers. These setups were popular during the first part of the 21st century but we’re now seeing a shift in favour of omnibus account structures. We’ll explain what these accounts are and why this trend is here to stay.
A traditional white label setup is where an introducing broker or affiliated agent enters into a reselling agreement with a traditional online broker. The broker provides a separate customer onboarding page and brokerage application for the introducer/affiliate (“IA”) which features the IA’s own branding and logo.
When the IA signs up a new customer, it is the broker that becomes the legal owner of this end customer and the IA will usually receive some form of remuneration for having introduced the customer to the broker, such as a percentage of any trade commissions.
The primary benefit of a white label setup is that the broker takes care of everything – from trade execution to back-office operations – on behalf of the IA. This allows the IA to focus on customer service but there are also some downsides.
Challenges for introducing brokers using white labels
The main challenges experienced by IA’s using white label brokerages include:
- No legal ownership of the end customer and in many cases the broker becomes a competitor to the IA
- Being limited in their offering of financial instruments since they can only provide what the broker is offering
- Limited end customer experience that’s based on the broker’s white label applications
- Restricted pricing structure for the end customer since this is defined by the broker
Overall, the IA builds very little business value through a white label setup and only gains a limited revenue stream.
So, what alternatives exist for IA’s that would like to build long-term business value whilst maintaining a manageable level of complexity in their business? The answer is omnibus account structures.
What is an omnibus account?
An omnibus account allows the IA to execute trades on behalf of multiple investors. Because trades are made in the name of the IA, the identities of end customers remain anonymous in the account and the IA maintains full ownership of the customer.
The nice thing with this structure is that the IA would simply need an investment software platform like Bricknode Broker to keep track of all their customers, transactions and positions. Then they only need to open one omnibus account with one or several brokers.
Good investment management software can operate with multiple omnibus accounts and so the IA could, for example, set up one account with a US broker to gain the lowest pricing for trading in US-based financial instruments and another account with European brokers for those products.
The IA is free to set up relationships directly with issuers of financial products or fund companies, for example. They can structure and configure their end customer offering and experience in any way they want, thus removing all of the limitations of a white label offering.
The digital revolution in investment management
Omnibus accounts will play a big role in the finance-as-a-service revolution where banks and brokers will expand their offerings to be able to keep IA’s as customers in the future. As it becomes increasingly important for IA’s to offer personalised end customer experiences there will be a shift away from white label setups to more flexible and configurable options, enabled by omnibus accounts and cloud software solutions.
Traditional brokers and banks will in many cases have to accept that they give away the legal ownership of the end customers, and the long-term business value that these generate, to the IAs. On the other hand, omnibus accounts will still enable them to maintain a steady revenue stream. Another positive for the traditional brokers and banks is that they will see the IA as their only customer and do not have to carry the regulatory risk of each end customer that the IA onboards. This should result in greater margins for the omnibus providers going forward.
Bricknode Broker is a cloud software platform that enables investment managers to easily launch their own investment offering, with automation and licensing solutions in place. To discuss your requirements and find out more about the benefits of omnibus account structures, get in touch today.