SEC Chairman Mary L. Schapiro said at SIFMA’s annual meeting on Nov. 9 that the SEC will look closely at advisor compensation practices that may harm investors.
In particular, bank-wirehouse brokerage firms have used large up-front retention or recruiting incentives or loans that can amount to 300% of retail brokers’ trailing 12-month production. Advisors typically promise to stay for a number of years and work these payments off in the course of their production
It’s good for investors that the SEC is looking closely at this kind of compensation.
For investors, and for the financial services industry over the long term, these very high signing payments are injurious since, as investing is a zero sum game, the money to pay these bonuses comes from—wait for it—customers or clients.
These customers are part of the army of retail investors that pays the fees and commissions that enable the banks and insurance firms to pay 300% to brokers to pledge to stay on for some number of years.
These fees are also part of the money rolling around at the banks and insurers who bankrolled the financial services lobby last year and this one to fight financial reforms—to the tune of about $500 million. That’s half a billion dollars to fight reforms for problems caused by some of these same firms. Have a look at the analysis by John Bogle, founder of Vanguard, who has spoken so eloquently of the $600 billion in fees that annually go to the “financial-industrial complex.”
Individual investors, for the most part, don’t understand this at all, just as they don’t understand how much of their true cost of investing is hidden in fees layered into products created at some these same bank-wirehouses or insurers. These are fees that are outside of the commissions revealed on confirmations.
The SEC Chairman spoke on Nov. 9 about “Having a culture that puts the investor first, the integrity of the marketplace first, the integrity of the firm before profits.”
This editor is a member of the Committee for the Fiduciary Standard, which advocates that those who provide advice to individual investors should put investors first, as fiduciaries, as investment advisors do now under the Investment Advisors Act of 1940. The SEC is studying that issue now as part of Dodd-Frank financial reforms.