Wall Street’s pay practices place financial advisors’ personal interests in direct conflict with the interest of their clients. This is one of many reasons that Wall Street firms oppose the adoption of a fiduciary standard that would require financial advisors to put their clients interest first.
This conflict was highlighted in Andrew Osterland’s recent InvestmentNews article entitled “Reps face belt-tightening at MSSB.” Apparently, the merger of Morgan Stanley and Smith Barney is not going well, profit margins have shrunk, and broker-advisor representatives are being pressured to step up revenue production. That pressure is being brought to bear on advisors that generate less than $767,000, which is the average revenue production by MSSB advisors, according to the article. The hammer is coming down on sub-$767K producers amidst an announcement by Chief Financial Officer Ruth Porat that “We may reduce our broker head count below previously announced targets” of 17,500, which was reached by the recent termination of 300 trainees and low producers.
Despite MSSB claims that there is no required-minimum production level, the message to advisors is unmistakable: produce more than $767,000 annually or run a high risk of being terminated.
This pressure on broker-advisors to sell enough to generate $700,000-plus in commissions and fees every year puts the firm’s and the advisors’ interests in direct conflict with customers.
Under applicable laws, broker-advisors are required to take steps to learn the investment objectives, risk tolerance, and other essential facts about their customers, and only recommend those investments that the broker-advisor has a reasonable basis to believe are suitable for the investor in light of that information. They are also required to disclose all material facts about a recommended investment, including any conflicting interest the broker-advisor may have. In addition, the broker-advisor must present a fair and balanced picture of the pros and cons of any recommended investment.
When a broker-advisor is made to understand that his continued employment depends on generating more than $700,000 in revenues for the firm, that places him or her in an untenable position relative to customers. Unfortunately, those pressures and conflicts are inherent in the culture and business model of Wall Street, and Wall Street has made it very clear that it will spare no expense to lobby to preserve them.
“This will ultimately harm customers,” says investor attorney J. Boyd Page, senior partner of Page Perry in Atlanta. “Wall Street doesn’t just give away money. It expects something in return and that something is big fees and commissions. Wall Street puts incredible pressure on broker-advisors to generate fees and commissions at any cost. They create a significant conflict of interest between the individual broker and his customers.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.