Would you ask your butcher if eating thick, juicy steak is the best thing for your heart? Of course not. You’d expect that his answer might involve a conflict of interest and misinformation. I ask this question because recently I came across a video produced by Hightower Securities that compares brokers to butchers and fiduciaries to dieticians. Think about it. The butcher sells you a choice cut of his most expensive meat that may not be good for your overall health, while a dietician offers honest, unbiased advice on a healthy diet. I think Hightower Securities’ metaphor does a terrific job of illustrating the conflicts built into the brokerage compensation model and why consumers are better suited seeking the advice of a fiduciary. Click here to see the video.
If you’re interested in some facts to support Hightower’s video, I suggest you read Go,Teams! Our Annual Compensation Ranking Examines Team Remuneration Along With the Best Payout Plans. The most interesting material is at the end of the article where you’ll find firms’ actual payout grids.
For example, if a Merrill Lynch broker has made $280,000 in commissionable transactions or brought in asset management dollars that generate this level of total compensation (gross dealer concessions) as of mid-December, he stands to make 35% of the total, or $98,000. However, if that broker generates another $20,000 more in gross production/sales, bringing him up to $300,000, he’ll earn 38% on the total amount for the year, plus a potential long-term productivity bonus of 2.5%. Do the math. That $20,000 sale could mean an extra $23,500. So, do you think that broker might call his customers in the latter half of December with a great end-of-the-year investment idea?
You will see a similar pattern at all of the major Wall Street firms as you scan each firm’s payout grids. We think the investor is better served by working with an advisor who does not have production/sales goals. An advisor should only be paid by his clients, not the company whose products he pushes. He can only serve one master and it is normally the one who pays him.
To return to the Hightower metaphor, do you think this broker has incentive to offer a juicy steak to someone with high blood pressure and a family history of heart disease?