Lars,
You make several interesting points--several that I agree with and a few that I take issue with.
Re: all of the books, i.e. "Where are the clients yachts..." that's called marketing. If the book was titled "How Brokers Help Their Clients..." how many books do you think he would sell? Not many. And I'm not knocking the theme of the book either. In the short time (8 years) that I have been in this business, I have seen a lot of brokers who could easily be confused with used car or aluminum siding salespeople. And a lot of that is a function of how this business is set up. If you are a retail broker working for a wirehouse firm, you are measured by how much production you bring in. There are no bonuses or merits for how well your clients do. You do however get bonuses (i.e. the trips to Hawaii you mentioned) for reaching goals of how much proprietary products, such as that firm's proprietary mutual funds, limited partnerships and unit trusts, that you sell. There is a lot of pressure from mgt to push this stuff. I worked for a wirehouse, where after 6 months, I was consistently ranked 6th or 7th in commission production out of 20 brokers in the office. My business was 100% selling individual stocks to wealthy individuals. I reviewed the proprietary funds and l.p.'s that they offered, and came to the conclusion that they weren't good values--one oil & gas l.p. that they were really hot on was so stacked with fees and commissions that my research showed that the only way the client could break even was if oil rose $5 a barrel--so I didn't sell any of the proprietary stuff. None of the stocks I sold to clients were followed by my firm's research department. One would think that a broker who was, after only 6 months in the business, ranked 6th or 7th out of 20 guys in the office in production and whose clients were making good money and were happy, would be highly regarded. Not so. I was constantly chastised for not pushing enough proprietary products, and pushing stocks that weren't followed by the firm. It was always a big turnoff to me that you were always discouraged from thinking for yourself. I remember one conversation where the mgr told me, "We pay analysts in NY a lot of money to do research. What makes you think you're smarter than they are?" My response was, "Because it seems as though my stock picks always outperform anything they show me." Needless to say, he didn't appreciate the answer.
There is also the problem of churning. The pressure to produce, especially at the big firms, is overwhelming. Have a bad month or two, and you're out the door. I think a lot of brokers who churn don't do it for the sole sake of lining their pockets, but instead do it to survive getting the axe. Lets say its the last day of the month. You're a broker, your quota is $15,000, and you're sitting at $14,500. What do you do? Fortunately, I have never been in such a situation, but I know plenty who have been. I had one guy tell me "It's in my client's best interest to do this trade, because if I don't do it, I won't be around next month, and it's in my clients' best interest that I'm around to service his account..." While I don't endorse this, you can see how the temptation would be there.
In my opinion, the compensation for brokers should be restructured to give the client the option of, instead of commissions, the broker is compensated based on the client's portfolio performance. You could base it on performance versus a benchmark index. The better the portfolio performs, the more money the broker would make. While this would be a little complicated to set up, I'm sure it could be done. What it would accomplish is to put the client and the broker on the same playing field, so your goals would be consistent. If your client made a lot of money, so would the broker. This would eliminate the need for churning or house products. The only losers in the equation would be the lousy brokers and churners. The problem is, compensation based on performance is disallowed by the NASD. Who controls the NASD? The big brokerage firms, who have no desire to change a good thing.
A new development that is starting to change the above-mentioned scenario is the emergence of brokerage firms that clear for independent brokers. Basically, the brokerage (or "clearing firm") clears the trades, holds the accounts, sends out statements and confirms and does all of the backoffice work for the independent broker. For this the clearing firm receives a percentage of the commission (usually 15-25%) plus the ticket charge. The advantage to the broker is that there are no quotas to make and no proprietary products to push. Its not for everyone, but I have found that it allows me to perform as my own brokerage firm, almost as a money manager would. You don't have the big name exposure that a major name that a wirehouse provides, but you also don't have the inherent pressures of making quotas and dealing with branch managers.
This post is getting a bit too long so I will close it here. I guess I just want to reiterate that the "sharks" that Brinker refers to are definately out there, but the fact that there are sharks doesn't mean we are all sharks. Believe it or not, there are a lot of us who really do measure our presence in the securities business by how well our clients fare.
Gary |
