Brokers Pressured to Keep Promoting High-Margin Products


Want to contribute to Merrill’s bottom line? 

From the Wall Street Journal February 25, 2013.

NEW YORK–The largest retail brokerages in the nation may have ended last year on a high note with increased revenues, but brokers aren’t finding themselves relaxing just yet.

Instead, some say they are feeling the pressure to keep revenues up by promoting investment products with higher commissions and fees.

This is one of the big, big differences between the brokers who work for the major investment firms like Merrill Lynch, Morgan Stanley, UBS and a host of smaller firms.  Brokers at these firms are there first and foremost  to produce profits for the firms and its shareholders.  We have no problems with profits, but we see a very basic conflict of interest when profits come before the client’s best interest. 

The increased activity showed in the brokerage firms’ quarterly earnings. Morgan Stanley reported a big jump in its pretax profit margin, hitting 17%. Bank of America Corp.’s global wealth management group, which is composed mostly of Merrill Lynch, and UBS AG’s Americas wealth management unit both saw their average revenue per adviser climb significantly.

The improvements were likely partially a result of more trading activity, but also partially due to cost cutting.

The quest now is to keep those revenues up.

To do so, firms have an eye on promoting products that generate greater profit margins.

According to a broker at UBS Wealth Management Americas in New York, there has been a big push to put client money in alternative investments as well as lending business.

As a Registered Investment Advisor we have a fiduciary duty to put our clients’ interest ahead of our own.  The “wirehouse” broker (the largest retail brokerages are commonly referred to as the wirehouses) does not.  In fact, he is encouraged to increase the firm’s bottom line by moving his clients into products that are most profitable for the company, not necessarily the best for his client.   The way we at Korving & Company make money is by charging a fee for our services.  Our fee is spelled out very plainly in our advisory agreement, and is the only thing that impacts our bottom line.  We do not get added income from the  investments we buy for our clients, a very common practice at the wirehouses.

Want to know more about the advantages of RIAs?  Contact us.

%d bloggers like this: