Investment Industry to Individual Investors: It’s All About the Brokers


    If individual investors have not gotten the message so far, here is another message that comes from the mutual fund industry:  The commissions your broker generates are more important than any investment return you receive.

    Or in investment industry jargon, it’s all about the “yield to broker” and not about anything the client earns.

    Based on this story in a brokerage trade publication one broker was quoted as saying “Everything was about the YTB on the product — the yield to the broker — not the yield to the client,” he said.”

    Remember: brokers get paid first

    One For You, Two For Me

    In the article, another broker said he received 25 e-mails from his branch manager about “why every one of my clients needed to have [some] new proprietary mutual fund.”  Note that the proprietary fund earns more for the selling broker than a fund offered by another firm, even though the fund may have lower expenses, better management or be better suited for the client.  Of course, none of that is important to the branch manager who is just incented to sell.

    All this is now in the spotlight now because of the New York Times op-ed submitted by a former Goldman Sachs trader, who criticized his firm for victimizing its clients in its OTC derivatives trades.  This caused a flap because large investment firms know they are victimizing their clients to various degrees all the time.  They do this via revenue sharing, 12b-1 fees, opposing any fiduciary standard, and by spending millions on anti-investor legislation and regulations.  All this is happening while these same large investment and mutual fund firms insist they respect and value their customers.  Obviously, this is not the case, but the big firms have their honor to uphold and the budgets to propagate any message, even if it is false.

    James Gorman Takes Control

    But a hint about the real attitude behind the attitude of large investment firms towards any criticism came from the CEO of Morgan Stanley CEO James Gorman, who questioned why the New York Times would even stoop to publish the opinion of a lowly employee, even if he is probably a member of the Top 1%.

    Gorman must have forgotten about the First Amendment.  He seems to think that someone cannot write an op-ed for a newspaper with getting his prior approval.  Just as sadly, some members of the financial media also Tweeted that Smith should not have criticized his former employer.  That is a basic violation of journalistic objectivity since it is not the job of any reporter to defend the industry or the individual firms they cover.  That is the job of higher-paid PR people employed by the firms and investment industry trade associations, who can unleash a barrage of attacks on the most unsuspecting and defenseless. Just ask Sandra Fluke, who dared to testify before Congress, and was victimized by Rush Limbaugh.

    So maybe the senior VP of communications at Morgan Stanley should inform Gorman about the First Amendment.  Better yet, Morgan Stanley brokers should take note that their CEO really does not appreciate any form of internal criticism.  This may is a reason why independent and fee-based reps at financial adviser firms now comprise 41% of the adviser market compared to 27% or reps working at wirehouses and regional firms, according to Tiburon Strategic Advisors.

    Hearing Gorman’s haughty proclamation, it’s no wonder more brokers want to go independent.  If they did, they would at least be able to express their opinions publicly as adults, without any fear of being harassed for their opinions.  Come to think of it, this simple act, guaranteed by the First Amendment, would be enough to change the entire investment industry.

    Tough Times for Brokers?

    But the recent furor over criticizing a wall Street firm has another angle: salaries.  Public criticism shines a light on compensation and that is a subject which is best kept in the dark.

    Alan Greenspan: Out of a Job? Blame yourself.

    Here is a short story from September 1974 when Alan Greenspan, the chairman of the President’s Council of Economic Advisers, said:

    “If you really wanted to examine percentage-wise who was hurt the most on their income, it was Wall Street brokers.”

    According to the Business Insider Web site, “this may have been the moment when the pity-the-rich discourse went mainstream, observes economist Bruce Bartlett at NY Economix. And this was just the start:

    “Subsequently, The New York Times reported on the travails of a stockbroker whose income had fallen to just $20,000 in 1974 from $100,000 in 1970, forcing his wife to take a job and him to make extra money selling desserts to local restaurants.

    “To put these numbers into perspective, a calculator maintained by the Economic History Association says that $100,000 in 1970 has an “economic status” value of $925,000 today, and $20,000 in 1974 is worth $134,000 today.”

    The income gap since 1974 has grown steadily larger, as has the sense of entitlement.  That is essentially what is driving the current public spectacle about curtailing an individual’s right to express his opinion.


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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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