FULL-SERVICE BROKER CROSSES A LINE, AGREEING TO CLEAR THROUGH E*TRADE: PARTNERSHIP DESIGNED TO LURE CREDIT UNIONS

In a highly unusual arrangement, a fledgling brokerage, established to serve the investment needs of credit union customers, has reached a deal to clear its trades through an online broker.

The agreement between San Diego-based Cuso Financial Services LP and E*Trade Group Inc. is unique because full-service brokerages and deep-discount online brokers, typically staunch competitors, ordinarily wouldn’t even contemplate a clearing relationship. From its Sept. 1 launch until the recent E*Trade deal, Cuso Financial Services cleared through St. Cloud, Minn.-based PriveVest Financial Services Inc., an independent broker-dealer.

‘best of both worlds’

But executives of both E*Trade and Cuso Financial Services believe together they can be more attractive to credit unions, which increasingly are attracting interest from brokerages wanting access to their customers. The hope is that the flexibility to offer their customers either a full-service relationship or bare-bones online trading will make the Cuso and E*Trade partnership more enticing for credit unions.

“We really bring the best of both worlds,” says Michael Pohlmann, vice president of strategic business development for E*Trade.

While the credit union market remains underserved, an increasing number of brokerages are active in it. They include market leader Plan America, the brokerage affiliate of Madison, Wis.-based CUNA Mutual Group, American Express Financial Advisors, LPL Financial Services Inc., Financial Service Corp. and Financial Network Investment Corp.

It’s not clear, however, how reps affiliated with Cuso Financial Services will react to the prospect of losing clients to E*Trade as they become more confident about handling their own investments. Brokers could be in the unattractive position of advising clients as they begin investing, only to lose those relationships –and the commissions that accompany them — to E*Trade down the line.

compensation a mix

“We don’t see it that way,” says Valorie Seyfert, president of Cuso Financial Services (Cuso comes from “credit union service organization,” a for-profit umbrella group akin to a bank holding company that allows member credit unions, for example, to share in fees from the sale of investment products).

“The most important thing is to be able to offer brokerage (services) to all customers, whether they want advice or not. We’re not fearful one is going to take from the other.”

She adds that the firm’s reps are employees, not independent contractors, and may be compensated through a mix of salary and commission.

Ms. Seyfert says the firm, which has reps in two credit unions, expects to cement agreements with three more by July 1.

Questions surrounding how the brokers will work with E*Trade will be resolved as credit unions — and reps — are added, Mr. Pohlmann adds. To some degree, those issues will be subject to negotiation, credit union by credit union.

“As we roll this out,” he says, “you’ll see that more clearly.”