Monday, March 13, 2006

Brokerage Firms Pay Revealed

On Wall Street - A SourceMedia and Investcorp publication

Every year the industry magazine "On Wall Street" does a survey of its participants and writes a story on how they get paid. They get paid via a "grid". The "grid" basically represents what % of the commissions or fees that are generated that the broker actually gets paid. For example, if the broker sells a mutual fund and generates a $5,000 commission and the grid pays out 50% on mutual funds, the broker will take home $2,500.

What is interesting about the payout grids, which can all be found at the end of the article (scroll all the way down to the end of the articles page and you will find several pdf files) is that very few of them ever get above a 50% payout. In order to reach the level that the broker gets to keep 50% of the fees and commissions generate the broker must usually generate at least $1 million in revenues. Even then some of that compensation is paid in "Deferred Compensation."

The average broker is probably not taking home much more than 35 - 40% of the fees and commissions being generated. You have to ask yourself how intelligent can these "brokers" really be if every year they are essentially letting 60% of the fees and commissions generated by their clients go back to the firm they work for (notice how I said "work", they don't "work" for you). Giving up 60% of your revenue does several things that are bad for the clients. The first is that the clients are paying more in fees than is necessary as the broker must sell much more product at higher costs in order to pump up his bottomline. Second, as you will see with many of the "grids" the brokers are given certain incentives to sell one type of product over the other. Finally, the use of deferred compensation acts as a "golden handcuff" to keep the brokers at the firm they are with. If they leave they will forfeit much, if not all of the deferred compensation they've accumulated, thus they are not free to find the best place for YOUR money.

All of these wirehouse brokers could leave and go independent or become an RIA (Registered Investment Advisor) and take home next to 100% of the revenues they generate, but to do that they'd have to actually run their own business, most of them are just too lazy to do that - even though it would be in their client's best interest.

This story by On Wall Street and the grids attached are just one more nail in the coffin on why brokers and brokerages firms are hazardous to your wealth.

For more reasons you can goto my website, and read Secrets of the Wirehouse.

Scott Dauenhauer, CFP, MSFP