It’s one thing to have a competition for the car salesperson who sells
the most cars for the month or the clothing salesperson who sells
the most clothes. There is little danger there, because buying a car
or buying clothes involves personal style and taste that are quite
subjective. And unlike stockbrokers, those salespeople don’t hold
licenses. The aura of a licensed professional naturally dispels any
notion of a performance-ranking system. What if you walked into
your doctor’s office and saw a sign that said “Congratulations to Dr.
Sperry—Most Operations for the Month of February”? Make you
feel a bit queasy about your upcoming operation with Dr. Sperry?
Well, that’s how stockbrokers are ranked.
The vast majority of stockbrokers are ranked primarily on a
single computation: the amount of commissions brokers produce for
their firm. Because every transaction in a customer’s account results
in a commission, part of which goes to the broker and part to the
firm, you can see that a performance-ranking system based on commissions
is the same criterion as the number of operations a doctor
performs in a month. Such a compensation system is the biggest
“rub” in the securities industry, as discussed in more detail in Chapters
2 and 5.
At least every month, brokerage firms generate branch office
printouts showing exactly what each broker produced that month
and for the year in total or gross commissions. The printouts are
broken down by broker, by product, and by customer and reflect
how much commission goes to each broker and how much to the
firm. It may also give averages for commissions by product type. It
might report the number of trades and the average commission per
trade. It might reflect such things as how many new accounts a broker
has opened, the total amount of money a broker’s customers
have deposited into their accounts, the number of sales contests a
broker has won, or the number of proprietary firm products a broker
has sold. The industry goes to great lengths to analyze a broker’s
commission business and how it is growing or changing. One thing
is certain: each factor that goes into a broker’s ranking revolves
around the ability to sell.
We suggest the following hypothetical ranking system for brokers
that would revolutionize the industry:
• The annualized return of customers’ portfolios
• The annualized return of customers’ portfolios outperforming
certain indices or benchmarks
• Reduction of taxes, fees, and the hassles of financial planning
for customers
• Customer satisfaction
• Customer education
• Low account and customer turnover for a broker
A broker’s ranking might also be based on the attainment of
certain levels of advanced education or specialized training and licensing,
but these are lofty goals not embraced by the brokerage industry.
Commissions are the industry’s lifeblood.
At Merrill, in addition to a report that ranked how Douglas was
doing in competition with his fellow brokers in the office, Douglas
was also ranked nationally. This is done at many of the major brokerage
firms. Douglas competed against Merrill brokers who were in
his original training class in New York and then scattered to work
at Merrill offices all over the country. These statistics were published
in Merrill’s ranking reports at the time. After his first year in production,
Merrill ranked Douglas sixth in the nation out of one of the
larger graduating classes ever, a class of 180. Like many brokers in
the throes of competition and personal recognition, Douglas’s pride
may have been misplaced. In the brokerage industry, the ability to
reap financial rewards personally and for one’s firm should take a
backseat to doing what’s in the best interest of the firm’s customers.
All the trips, gifts, awards, staff support, computers, titles, and
accommodations a broker receives are based on the commissions
the broker generates. Now you might be thinking, I don’t care how
my broker is ranked or rated because that’s an internal function and
doesn’t affect me. You might be wrong. The following are some of
the perks that brokers receive as a result of a high ranking in gross
commissions and how they might affect a customer:
• Broker says, “Call my assistant and she will help you with
those forms.”
Customer thinks, Hmmm . . . my broker must be doing well
to have an assistant.
• Broker sends something to the customer that says at the
top, “Chairman’s Council—Only for the Elite.”
Customer thinks, Hmmm . . . my broker is good! He’s going
to do good for me!
There are many other rewards flowing to your broker as a result
of rankings that you may never know about, such as bigger pri-
vate offices, special computers, expense allowances, bonuses, or trips
to exotic places. But just as important is the impact of perks like
these on the brokers who are constantly striving to obtain them but
never do. A ranking or reward system based on sales provides an incentive
for every single broker in the firm to try and make a sale
that may not be in the best interest of the customer. And that could
be you. If you have previously been impressed by any of these perks
your broker may have bragged about, recognize them for what they
really are.
Source: Brokerage Fraud: What Wall Street Doesn't Want You to Know
