Directed Brokerage occurs when an IA suggests trades go through a specific BD; what must be disclosed?

• A. No disclosure
• B. Disclosure of the conflict of interest
• C. Disclosure only if clients are institutional
• D. Disclosure only with written consent

Answer: (B)

Directed brokerage creates a clear conflict of interest: the adviser may steer trades to a specific broker-dealer to gain benefits for themselves, not necessarily for the client’s best execution or cost. Because this can influence the advice and outcomes, the client must be informed about the arrangement. The disclosure should plainly state that a conflict exists, describe how the adviser or affiliated entities may benefit, and explain any potential impact on trade costs, pricing, or execution quality. This transparency helps the client make an informed decision about whether to proceed with the recommendation. The requirement applies regardless of client type (retail or institutional) and isn’t contingent on obtaining written consent for the disclosure itself, though written consent may be sought if the client agrees to the arrangement.