Its fairly well known in the traditional retail investment world that the client and the advisor often have opposing, and sometimes contradictory, interests.

I sometimes forget just how much so in my little world of boutique asset management (We charge about ~1%). A conversation with a couple of brokers from a large firm that I can’t name (hint: Rhymes with Schmerrill) reminded my just how misaligned the incentive system is, and how screwed up it must be to work at a huge, publicly traded, mega asset management firm.

To wit: These two gents run a few $100 million dollars in managed accounts. They are mostly stock jockeys, but they have a smattering of bonds as well. Their assets are spread out amongst stocks they selected, in house managers, and other mangers on their firm’s platform. Typically, the clients are charged 1.0-1.25% on their assets. Various products (I hate that word) will pay the broker more or less depending upon the fund manager’s arrangements with the house.

As is typical of brokers with this size asset base and seniority, their payout was about ~43%.

Let’s do some quick math before we get to the heart of the conflict: On $300 million in assets, let’s call it $3.3 million dollars in gross revenue to the firm. That’s about $1.4 million to them, from which they pay a few sales assistants, T&E, etc. Thus, they each should be making about half million dollars annually before Uncle Sam takes his.

Here’s where things get interesting: Early in 2008, they moved aggressively into cash. (Obviously they are TBP readers). For most of the year, they run about 20% bonds, plus 5% percent stocks (some client would not sell). All told, about 75% of their asset base is in money market funds, which pays out essentially nothing to the broker — but preserves the clients investments. Late in the year, they put a toe back in the water.

Overall, the clients do very well. In a year where the markets are practically cut in half, their clients lose about 10%. The investors are ecstatic, and while the two brokers annual compensation was schmeissed — they went from over $3 million gross to under $1 million — they have happy, referral making clients to rebuild their business upon. Its a short term income hit that should generate gains over the long term. And, they got there by doing the right thing.

Now, that drop in income alone raises conflict issues. I tell clients who ask why they are paying 1% to sit in Cash that they are not — they are paying 1% to not be losing 45% in equities, and to have us tell them when to go back into stocks. We think that’s worth 1%, and if you disagree, well talk to your friends who have seen their investments destroyed.

Here’s where things get completely misaligned. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box. As per your contract, your payout for this year is 30%.”

Let me make sure I understand this: We did the right thing by our clients, and although we took a big short term revenue hit, we hope it pays off over the long run. And the firm response is to drop our payout even further? So the entire system is set up to discourage doing the right thing by the client?

(Hence, why they are talking with us).

We’ve previously discussed the misaligned compensation system of bankers and the short term incentives that led to the entire credit crisis. But did you have any idea that the entire industry was so utterly conflicted?

I find this utterly ridiculous. No wonder we get so many inquiries from (soon-to-be-former) clients of the big houses:They have been cut in half, but at least the firm got its 1% and the broker’s payout remains at 43%.

And that’s all that matters in the end, right?


Any big firm brokers want to add their own tales of woe, please pass them along.

Category: Investing, Legal, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

59 Responses to “Big Firm Conflict of Interest: The Penalty Box”

  1. And, I verified this was true with several other brokers and managers at large (bulge bracket) firms . . .

  2. stockman says:

    There are many of us out here (across the country) caught in these same conflicts. What are the options available today for those running discretionary fee based accounts- that eliminate the conflicts of interests mentioned (and many others)?

    It would seem that there is real opportunity here for smaller or regional type firms to displace what’s left of the wirehouses. I’ve been preoccupied with the markets but need to take more time to research options. For the good of my clients AND myself.

    Given the Madoff type scams in the news going it alone doesn’t feel prudent.

  3. BR,

    of course It Is True.

    it is, in all Truth, one of the, underlying, Rationales for the suggestion that: “Charlie Marrill needs to be hung in effigy.”

  4. ben22 says:


    Works the same way where I’m at. All the clients I moved to insured money markets last year, I haven’t gotten paid a dime on the assets. Most of that money remains in cash so we had to do a lot of expense cuts as a result going into this year. At the end of last year I started moving clients into some bonds and a handful of equities but my revenues are still way down though my clients accounts are not.

    How frustrated I am is hard to describe. I’m a major black sheep where I work, was told I was crazy when I started mass selling across the board in early early 08′. I get laughed at by someone at least 2x per week for being so bearish, they don’t care that I was right, I always get some sort of comment like, “what would have happened if it went the other way, your clients would have been upset” Everyone told me to stop trying to time the market when I did all my selling, things looked fine when I was doing it.

    Have considered selling my book and doing something different that isn’t so directly client focused but then I wonder how hard my clients will get screwed by a new advisor who tells them it’s time to get back in or back to that “ideal allocation” of stocks and bonds so they are “invested for the long term” when all they really mean is, “I need to get paid”

  5. ben22,

    go do what you want, rec BR to your clients, if they can’t tell “beans, when the bag is untied”, they’re pissing their money away, assuredly, down other ratholes, as we speak..

    IOW, corrosive Environments, corrode your Soul.

  6. randomletters says:

    I don’t work in finance, I work in software – and I do so as a software quality person. Years ago I read a rather stultifying text (“Qualitative Software Metrics”) which talked about the role and purpose of metrics. The authors created a little bon mot, which I added to – and it’s held true through the years. “You get what you measure, and only what you measure – at best”. (The last two words are mine.)

    The plight of those two brokers, is the plight of Wall Street overall. The metrics measure only the short term gain, with a fiscal horizon of about a year at most. What kind of investment strategy can that produce? Wall Street does not pay for “results”, it does not pay for “customer satisfaction”, it does not pay for “customer retention”, it does not pay for “beating the averages or the market”. It pays based upon fees generated.

    And, over the last 10-5 years, its culture has become rather openly about one thing only – money. Perhaps I reminisce too fondly, but when I was a young lad (late 60s, and mid-70s), and fathers in my town all too the train to Wall Street, the Dad’s would sometimes talk about fiduciary duties and the welfare of clients. My friends on the Street don’t do that as much – they talk about compensation.

    I wonder if it were possible, using purely fiscal incentives, to align the goals of the broker with the goals of the client – and even so, sometimes the client wants contradictory things. I submit that it is very difficult to align those goals. And, in the mean time, we’ll get what we measure, and only what we measure – at best.

  7. Byno says:

    Towards the end of my career as an FA, payout haircuts, restricted lists, minimum account sizes, etc were becoming part and parcel in the industry.

    I remember moving clients to cash during the dot com bomb and having compliance call to gently remind me that: 1) the client’s stated asset allocation for equities was too low and that they had been misprofiled, and; 2) because the client was no longer in the target allocation I would be getting paid the bond management ratio for the fixed income assets – 25bps – and zero for the money market/cash instead of the standard 100.

    Of course, part 2 of that could be avoided if you simply moved your customers to a mutual fund wrap account, where they could pay a manager his or her fee then pay you a fee on top of that, virtually guaranteeing underperformance for anything short of non-tactical asset allocation.

    You’ll hate to hear this Barry, but when people ask me – knowing what I did in my previous life – where to put there investments, without hesitation I tell them to have a fee-only CFP create a financial plan for them, then to take that plan to Vanguard. Doesn’t mean they maybe shouldn’t have some individual bonds at a discounter and some exposure to alternative assets; does mean they probably aren’t being best served going to a full-service firm where their advisor is getting nickeled and dimed to death despite being the 2nd biggest producer in the office. Jus’ sayin’

  8. Byno says:

    1) That should have been ‘their’ instead of ‘there,’ and;
    2) I forgot to mention the different payout levels for selling the firm’s products instead of non-firm related products.

    Principal-agency problems FTL

  9. stockman says:

    With my firm- running discretionary accounts has interesting conflicts- if you are ‘out of bounds’ on the house rules (guidelines)- the client gets billed normal management fee BUT the advisor/manager gets ZERO% pay out.

    Examples that I have recently been wired on: Cash>25%; Short ETF>10%; Commodity ETF (GLD,SLV)>10%

    So if you really feel it’s in your clients interest- go ahead. The firm can point out that they do not stop the advisor/manager from doing what they feel is right. It’s the advisor/manager that ‘selfishly’ complies with the guidelines in order to get paid.

  10. rktbrkr says:

    I think we’ll all be surprised how fast BAC will be able to destroy ML, the senior bank officers will resent the big money made by successful ML brokers and drive them out and replace them with salaried order takers and “save money”!

  11. MP says:

    I’m an RIA with a small firm – I manage about $40 million – and we do comprehensive planning and investment management, and act as fiduciaries and bill on a true fee-only basis. We’ve got everything in place – software, compliance, trading platform , admin support, etc. – that an advisor would need to come in, set up shop, and begin working with clients. And, given our lower overhead, we could probably do better on the payout.

    I figured that given all the problems the wirehouses have been through over the last 18 months or so that there would be brokers interested in moving to fee-only, but so far, no dice. I can’t figure it out – anyone got any ideas?

  12. ardano says:

    There is a problem and just by chance its at the center of a catch-22 issue the SEC is wrestling with in the wake of what’s called the “Merrill Lynch Rule Case,” (or the Financial Planners case.) The problem is the dual relationship that exists when any investment professional works for a wire house and has two licenses; the series 7, (registered representative,) and RIA or series 65. A conflict exists between the roles and responsibilities of the two designations. A registered representative works for the house, a RIA works for the client.

    In the example you mentioned, the RR’s used in-house managers and earned a higher pay-out. Is that not a conflict? Why would someone want an in-house manager over an independent manager? In theory, that would have had to have been disclosed to the investor. According to the rules ,a RIA must seek the best possible investment relationship for an investor because of the fiduciary relationship. However, that is often at odds with the other license…the broker/dealer, registered representative relationship.

    This conflict is triggered anytime an investment professional accepts a fee instead of charging a commission. Its not only the House that encourages investment professionals to do the wrong thing with money, and their clients, its the conflict of fees and commissions.

    For what its worth, the reps blew it anyway. Rather than going into a money market they should have used one of Merrill’s short term bond managers. Their clients would have made more money and the reps would have held their pay-out.

  13. ben22 says:


    You aren’t going to attract much talent or anyone with a book unless you offer them something to come over with you. I think what you have is probably attractive but in this environment you need something more. You are correct that a lot of places have had problems but someone I know just left ML and went to Morgan Stanley, they paid him about 2 million up front (based on his production), mostly in cash, to move his book there. Further, with clients so spooked a lot of them might question a move from a big shop to a place like yours.

    As illogical as that may seem to people here, to the average person it would be cause for concern. As wrong as it might be I could see your average person wondering how you will survive without a big name behind you in an environment like this.

  14. wally says:

    This isn’t even a long-term gain vs short-term gain question – the clients clearly have a fabulous one-year gain compared to references such as the Dow or S&P.
    It is just boneheaded of management to not have a blended standard or market standard of some sort in place to measure comparitive performance.
    But if there is one thing we have learned the last two years it is that boneheads run Wall Street and major banks; they are not rewarded for what they do, but for where they got. Sends a great message to our kids, huh?

  15. greg says:

    Barry, here is a thought. Why don’t we just pay money managers on the profits they make their clients. Many people I know in the business have never traded a stock or option in their whole career, they just stick the clients money in a mutual fund, and go golfing, because the majority of their compensation is based on the money they have on their book. If you’re running money and you can’t make at least 10% a year for your clients, then maybe you shouldn’t be running money.

  16. b_thunder says:

    Definitely those two brokers are not the type of “team players” that will get a share of $3.6 Billion bonus pool stashed away by Mr. Thain for the (i suppose) best “talent.”

  17. Barry, I’m not understanding why their rev’s took a 2/3rds hit…you’re saying that they did not get paid on the assets they held in money markets?

    because if they only lost 10% in performance, shouldn’t revenues in a 1% fee scenario go to 2.7 mil? (3 mil minus 10% or 300k)

    maybe I missed something

  18. Bob_in_MA says:

    After all that’s been made public over the last 10 years, it’s really hard for me to understand why anyone pays someone to manage their money.

    Yes, they might make some mistakes on their own. But look how many managers bought at false bottoms over the last 18 months. Hell, look at Buffett’s boners. Meanwhile, popular polls were predicting a recession in the Fall of 2007 while Wall St economists thought there was only a 20% chance…

    Open a Schwab account and put the money in some broad, low fee index funds and only move it around once a month. The average person with a high school diploma would beat 75% of money managers hands down. And there would be 0% chance of Madoff experience.

  19. AndrewShaw says:

    TradePMR and Interactive Brokers(TD does this too?) are advertising all day to you RIA people. They process the trades and hold the money, you get your fees on autopilot. Looks to me like you just have to give up your name-brand business card and go it alone.

    Its debatable I’m sure, but that freedom has got to be calling some of you. Hopefully your customers and files belong to you and not headquarters in NYC. I know from my past in insurance for a major that I did not own my customers, and could not take them with me.

  20. CaptiousNut says:

    I disagree with one inference.

    The idea that *on net*, employees at these large firms get screwed by the clumsy, dimwitted, bureaucratic management flies in the face of my personal experience.

    I think that overall, employees work the system, they work management to reap the most for themselves.

    Would these asset managers even have $300 million to start with if they tried to go on their own, FIRST?

    No, they needed the Merrill name, connections, and marketing to begin.

    But that won’t stop them from leaving, big clients in tow, to start their own fund now.

  21. @MP

    The trouble you may be having recruiting brokers is that not all of their clients/accounts are fee only, many of them also need a B/D to move their book of business…

    Dual registration is probably the independent model to shoot for going forward…

    And hopefully, the regulators come up with a way to watch over investment advisors AND registered reps concurrently without one hand tied behind their backs (a la Madoff)

  22. MP says:

    @Ben22 – thanks for the feedback. I can see how someone might follow a $2m payout. As to perception of those moving from a large wirehouse, in spite of the difficulties of the companies themselves, there are always those that want to stick with the Devil they know.

    @AndrewShaw – TD, Schwab and Fidelity all try to bring on assets via RIAs. I think they’ve all got programs to help support those that want to become RIAs to set up shop as well.

  23. jjblacksheep says:

    Exactly what happened to me during the 2000-2002 period. Finally disgusted enough to sell my book and have been going it alone ever since. Outperformance for my clients was far and away overshadowed by the resulting decrease in fees for the firm. Not once was my relative % vs. peer group brought into play. Awesome.

  24. Double D says:

    1 to 1 and a quarter percent is highway robbery. You (generic “you”) are NOT saving your clients from losing 45%. That is history; it’s done, gone. As to the timing of a re-entry point, all your clientele has to do is watch the averages on the financial news. Why don’t you give some of those fees back to the accounts you did so well off of over the past 9 or 10 years?

  25. dead hobo says:

    I understand your disappointment with the compensation system, but I don’t understand your surprise.

    The world is run by average people. This includes people of average intellect and average ability. The concept of ‘average ability’ extends to the quality of management. The plan you describe is pretty average sounding. And so is management, apparently. Employees always expect better of management, especially when their pay is involved.

    Management is probably not thinking of money so much as the development of a compensation plan that is defensible and doesn’t cost too much. Downstream consequences are usually not a part of the equation unless top management requires the middle management planners to consider them. And then it becomes a battle of wills.

    A high quality top management (assume for a moment one exists) might ask middle management to design a plan that is beyond the capabilities of average people. By this, I mean one that is fair to employees and takes customer relations and positive outcomes into consideration. Since top management just asked for the impossible (in a literal sense), top management has to decide to fight the middle managers or just go with the best they can come up with. ‘Best’ is usually defined as defensible and competitive with little chance of ending up in court.

    Since top management is probably as average as the middle managers doing the compensation plan, the main criteria is getting it done. It’s is somebody else’s job to administer it in such a way that undue risk is avoided in the future when the economy picks up.

    You’re just dealing with the concept of aggressive mediocrity. People who are aggressively mediocre see the top of the bell shaped curve as a pinnacle to aspire to and not as the definition of average. They will fight to stay average, but perversely, see themselves as exceptional.

  26. jpm says:

    But did you have any idea that the entire industry was so utterly conflicted?

    Yes. As a retail investor, I realized that I could make up the 1% trivially by managing it myself. Now having bet on the meltdown, there is no way that any reasonably priced financial adviser will beat my record.

    Except Barry, of course. (Whoever said I wasn’t polite?)

  27. tippet523 says:

    It amazes me that folks still work at places like that. We have an 85% payout but I am responsible for all costs. It allows me to hire a CFA,CFP, MBA for one of my staff folks and a regular sales assistant for the other. I net somewhere around 60%. Fees this quarter were down 1% of 1st Quarter 2008.

    Fees are a percantage of assets 1.25% of a smaller account 80BP for a bigger account and we are 100 tied to the value of the clients accounts.

    I believe folks stay becuase they are unsure that the clients will move with them and also just moving everyone is one giant pain in the neck for the client and the Rep.

  28. philipat says:

    Barry, I’m surprised you’re surprised. You know that incentives/compensation are one of the major things that have to be fixed (Together with The SEC/The Ratings Agencies/Derivatives trading on an Exchange/No more SIV’s and other Off Balance sheet crap)

    Incentives must be aligned to the long-term interests of the firm. And the long-term interests of the firm mean taking care of and retaining clients. Wall Street bonuses have been, in line with the principle of greed only, been aligned to short-term gains with no consequence for the future. That’s why we are in this mess? IMHO, clawbacks don’t work. There are too many issues, including legal issues. Incentives, therefore, should be linked to stock options which vest after 5 years. The firm still performs, you get your pay day, having truly contributed to the GENUINE performance of the firm. This also tends to align the best interests of clients with those of the firm. Ultimately, most HNW clients are, almost by definition, not stupid and, especially after the mess of the last several years, won’t take this cr*p anymore.

    So, they really need to understand that the gravy days are over, earnings will be MUCH lower in future and tied much more closely to real interests of individual/clients/firm on a much more closely aligned basis. Anyone who thinks they can get away with the old screw everyone except myself model is, I believe, dreaming. It’s a whole new ball game out there.

  29. Marcus Aurelius says:

    That’s what happens when you deal with vampires.

  30. greg says:

    Here is a simple rule/law that might be interesting. Every year end, everyone who manages money, would have their individual returns published along with their compensation.

  31. dead hobo says:

    Off topic slightly, I’ve been thinking about your piece on Dennis Gartman’s belief that you should never buy into a losing position. In one sense, this is the same thinking as you should never feed a Gremlin after midnight. Since it’s always after midnight somewhere, this investment rule is just smart sounding hot air.

    If Gartman’s axiom is taken as ‘Don’t try to catch a falling knife’, then there is merit it. In an abnormal market, such as today’s, it’s not bad advice since nobody knows exactly where the bottom is or where the initial bounce will rise to and congest at for a time. However, if you have a log term view, it takes a little pressure off of trying to be omniscient and wounds are likely to be superficial.

    However, your trash is someone else’s treasure. If you own XYZ, having purchased at a higher point, then by carrying this logic to a conclusion, nobody on Earth should ever buy XYZ again until it recovers. Since all stocks are a in a losing position when declining, then buying any of them is adding to a losing position, regardless of if you own it or not. I don’t understand why owning one is a prerequisite to having a ‘losing position’. If someone doesn’t own XYZ, but buys it on the dip, then how is that different from someone who is dollar cost averaging? If it is bad for the dollar cost averager, it must be bad for the new purchaser.

    Thus, the axiom doesn’t hold up under scrutiny.

  32. dead hobo says:

    I said, referring to Dennis Gartman’s belief …

    Thus, the axiom doesn’t hold up under scrutiny.


    In fact, if this axiom is carried to it’s ultimate conclusion, it would cause the buyer to buy into a rising market and predispose them to buying at the top. Thus, it is the ultimate loser strategy if taken literally.

  33. philipat says:

    “A high quality top management (assume for a moment one exists) might ask middle management to design a plan that is beyond the capabilities of average people. By this, I mean one that is fair to employees and takes customer relations and positive outcomes into consideration. Since top management just asked for the impossible (in a literal sense), top management has to decide to fight the middle managers or just go with the best they can come up with. ‘Best’ is usually defined as defensible and competitive with little chance of ending up in court. ”

    This is normally addressed by paying Millions of Dollars to Consultants to recommend ways that Senior Management may pay itself more and Middle Management less. Based on “Best Practise” of course. This means that if you can justify increasing Senior Management compensation more, your fees are higher. Sounds just like the Ratings Agencies doesn’t it?

    And we in the West complain so much about corruption in the Third world?

  34. dead hobo:

    whenever someone gives financial advice that starts with “Never do this” or “Always do that”, I turn on the BS meter and leave it running

    its good to have general principles and rules by which you invest, but this always/never stuff is way to doctrinaire

    if investing was that cut and dry, there wouldnt be a market of buyers and sellers and everyone would be rich

    there’s green on my screen this AM, i’ll go savor it while it lasts…LOL


  35. dead hobo says:

    philipat Said:
    March 3rd, 2009 at 9:46 am

    This is normally addressed by paying Millions of Dollars to Consultants to recommend ways that Senior Management may pay itself more



    I forgot. They do that, too. I was thinking more about the proles than the bosses. Excellent point.

  36. I do my own trading online. I got out of the market exactly two years ago and am in mostly bond funds and have small positions in a few stocks against which I write covered calls. I don’t believe in mutual funds nor financial advisers/brokers. Professional money managers don’t care about my money the way I do.

    The culture has to change. People have to make managing their money as much a part of their lives as their day jobs. Anyone who says they don’t have the time or experience had better make the time and get the experience.

    They won’t. So they’ll continue to be Madoffed.

  37. philipat says:

    “I forgot. They do that, too. I was thinking more about the proles than the bosses. Excellent point.”

    Any other questions, essentially refer to Dilbert.

  38. bri says:

    true dat. was at schmerrill ’til 07.

    was very much a rookie, and was not a big hitter by any stretch, but knew early on i could not get paid for putting my clients in cash, which i did anyway. i had been a recent reader of Taleb, so believed there was much more systemic risk than management with their awful monte carlo models, although at the time, i had no clue we’d crash like this.

    basically, i was 80% cash in most of my client’s accounts, and i was never gonna make it there that way, where the ethos was slam them into mutual funds, awful long only managed accounts, and move on.

    so i left in 07.

    no one, including my family supported my decision. it was seen as a “loser” move.

    now i’m getting back in the securities (int’l) business at boutique, and can easily call up any of my client’s from 2 years ago, while my former colleagues are among the most hated people on earth. groupthink writ large.

    nothing new here, but important to remind us, Barry. thanks.

  39. leftback says:

    It’s all about the fees, baby!! The customers still don’t have any yachts.

  40. X on the MTA says:

    I work at an IBD dealing primarily with retail brokers with similar AUM. While this is accurate, it really is representative only of wire houses. Independent firms usually feature payouts in the 75%-90% range, which allows the broker to Do The Right Thing without having to worry too much about a hit to his income. Sure, you have to deal with a lot more overhead when you are independent (office, clerical, 1099 taxes, health insurance) but it is a significant net gain to brokers. Additionally because we don’t have a bunch of in-house managers and proprietary products there is less of that cross-selling going on. I won’t name my firm to avoid sounding like an ad, but there is places in the retail world where it doesn’t have to be like this.

    Also, you bet your ass we get kickbacks on the money markets. Most firms get trails on the money markets, and we rarely ever share them with the brokers, so that Penalty Box shit is weak! (Exception, tax-free muni MMFs don’t leave us trails, but I don’t know about other firms)

  41. Matt S says:

    Bravo Barry.

    May I add that, never a day in 24 years of private wealth management have I let my personal interests conflict with my clients best interest. It is essential that a person in our business has the integrity to always do what they feel is best for the client, even at the risk of being in the “penalty box” and less popular with their employers.

  42. cttfinder says:

    This is a very interesting article and I learned something I didn’t know.

    But, Mr. Ritholtz, aren’t you misrepresenting your supposed genius here to be in cash last year?

    This compilation of annual Business Week forecasts in recent years placed you near dead last (59th out of 60 entrants)

    If you’re going to crow about supposedly being in cash last year, don’t you owe your blog readers a more complete picture?

  43. tom brakke says:

    I am in the midst of a series on incentives throughout the marketplace. This is a great example of another one that’s out of whack.

    For those that have an interest, I have covered the general issues of failed incentives, the mismatch of interests between the managers of money and the owners of the money (directly to your point), hedge funds, investment banks, and most recently, in the mysterious waffle, a questionable practice in the brokerage industry.

    More on the way.

  44. TDL says:

    Isn’t about time that we replace “bulge bracket” with the more appropriate term, “bucket shop” (especially in the case of Merrill)?

    Most of Barry’s blog readers (especially those that comment here) have been following him for several years (in my case I followed him here from TSCM.) Many of us (if not most) are well aware of when he has been wrong and when he has been right. Barry doesn’t owe us a more complete picture, because we see what he says everyday (i.e. we see the complete picture.)


  45. donna says:

    Much like paying corporate management bonuses based on the increase in the stock price for the quarter.

    Yes, American business incentives have been fucked up for a long time, which is why very very few of them bother to do the right thing anymore.

  46. leftback says:

    @ cttfinder: Methinks some of those other “star” forecasters are going to be regressing to the mean…..
    while Barry’s ranking will be heading closer to the moon. The game is not over, ’til it’s over.

  47. Ritchie says:

    Barry: “(We charge about ~1%)”

    Isn’t “about ~1%” repetitiously redundant?

  48. randy says:


    This looks like a huge opportunity to build the next great firm. Seriously. All you need is to put the right billing and pay plan in place, and then start hiring these brilliant and ethical folks. I’ve never seen such a clear-cut test to identify the right people to hire.

    The comp and pay plan is the thing.

    I’d suggest something like this:
    * Define and document a metric for when markets are up versus when they are down. (You’re the expert, so you are going to know this much better than I. Change in the DJIA month-over-month? You need to keep it to something that people can see on the news and understand.)
    * There is one set of billing and compensation formulas for up markets and a different pair of formulas for down markets.
    * For the up markets do what you have been doing.
    * For the down markets charge clients based upon the amount of money that you saved them versus your up-down market indicator. So (given my metric above) if the DJIA was down 10% and they only lost 9% then they should get charged like it was a 9% profit. And pay your people on that profit.

    After this debacle, smart clients will understand and sign up for that. And you will be able to hire the right managers to make that happen. If you can define the right metric. If they bring their clients then your biggest problems will be the logistics and infrastructure of your massive growth.

    Once you put this in place people will copy it. But you will have the branding and the history of being one of the guys who called this bear and put your client’s interest first. Hoover up other folks who can show that they did that also, and you can corner this market.

  49. dead hobo says:

    How to fix the economy using Compensation Plans

    By DH

    1) Place an ad on the internet at Careerbuilder or Monster, asking for Finance Professionals. There will be two groups, Sales professionals and financial analysts who are sales oriented

    2) Tell them their compensation will be based on a large percentage of fees collected up front and as they are collected via renewals or periodic required payments. Also, they get a large percentage of realized income from said investments. However, the clients also get enough to think they are doing ok.

    3) Have the sales oriented financial analysts dream up some new financial products that generate high fees and high momentum oriented capital gains income. The new finance products just have to be legal, or at least not illegal, at this time.

    4) Have the sales professionals sell said financial instruments.

    5) Make money from these new, creative investments. Income will attract more customers, more fees, and more capital. A feedback loop is generated.

    6) People feel wealthy again and start spending money.

    7) The recession is over, all due to a few heroic and creative Finance Professionals.

    The End

  50. Mark Wolfinger says:

    This is outrageous, but obviously true.
    I posted a link here for all my readers.
    Barry – can something be done (I know, it’s a stupid question).

  51. dead hobo says:

    RE my plan to end the Recession above:

    Banks might even start to provide leverage for these products, as they appear to have a preference for the esoteric over those investments the benefit the common person.

  52. stonehouse says:

    I remember very clearly the day I asked if they thought it right to tout a POS telecom to my clients at Shmorgan Banally while shorting the life out of it on the trading desk. “We wear a lot of hats” was the response. I decided my clients needed better and I’ve been happily running an fee RIA since.

  53. ben22 says:

    @X on the MTA,

    I’m not sure you make any sense in what you say or maybe I just misunderstood you.

    Let me break it down for you:

    I work at an IBD. My biz partner and I have a 91% payout, most of our revenue comes from asset management fees. Our payout grid is a function of book value (combination of all “products” value) and your overall production, if one or the other is to drop a lot in one year your payout could go down along with a drop in overall rev. On our platform lowest payout is 70%. This is gross of course and based on production, not results for clients. My overhead stays fixed or increases every single year regardless of my performance, and yes, my overhead is very high.

    Last year when we went to almost all cash in the early part of the year a big part of the 91% payout we get just vanished as we get paid 0 on money markets here, also no trail. So yeah, we still got 91%, as it was locked in for the year, but on a much smaller overall number so we did in fact have to worry about our income at an IBD. I don’t understand how your brokers don’t deal with the same thing???? If you get most of your revs from wrap and you pull it out and don’t get paid on it does it matter what % payout you get? Any trail would not make up for that loss of rev.

    I have a similar platform to what you describe, my clients are almost all stocks/options/etf’s so I’m not in any sort of conflict by selling prop. or trying to get trails just for showing up. I have over 7,000 mf’s to rec on our platform but they are all shit, like most all mf’s are so I don’t use any of them. At the end of the day I still feel like last year I made some very good moves for my clients and I didn’t get rewarded for it in the form of income.

    As for the comment above from someone else about how we should have to post our names and returns every year, I’d have no problem with that but what does that solve at all? If my name was Bill Miller and in 2007 I reported 15 years running that I beat the S&P and you moved all your life savings to me in Jan. 2008 what good did that list do?

  54. WaveCatcher says:

    I am not a RIA (yet) and have been researching the fee structures used by top performing RIAs. The fee structure that I prefer is the classic 2/20 hedge fund model (management / performance fee). I believe this fee structure places the strongest emphasis on generating strong returns for the client. e.g. Pay-for-Performance

    What I’ve learned is that RIAs are prevented from charging performance fees except for high net worth clients. IMO this rule results in misalignment since the advisor will be primarily focused on gathering and retaining AUM rather than growing the clients’ accounts.

    It can be argued that a management fee (2%) provides incentive to grow the account, but IMO it places more emphasis on growing the book through client acquisition and less emphasis on growth via strong returns.

    I would be grateful if anyone here has the answer to:
    1) Can an RIA have one fee structure for HNW clients and another fee structure for non-HNW clients?
    2) Can an RIA offer fee rebates if the RIA fails to meet performance benchmarks?

  55. dunnage says:

    These guys are salesmen. Bring in less, get less. Reasonable. Now these dudes have some class and getting ain’t better than that. Actually, I think this is the way that life is supposed to work. Class isn’t supply side voo doo.

  56. philipat says:

    “I am not a RIA (yet) and have been researching the fee structures used by top performing RIAs. The fee structure that I prefer is the classic 2/20 hedge fund model (management / performance fee). I believe this fee structure places the strongest emphasis on generating strong returns for the client. e.g. Pay-for-Performance”

    Not really. If you are the client this is “Heads we both win, tails I lose”. As they say, the best way to make money out of Hedge Funds is to run one!

  57. dgov says:

    @ WaveCatcher

    1) yes and 2) yes.

    1) an RIA can have a different fee structure for each of his clients, with the caveat that he can’t charge a performance fee on any clients who are not “qualified clients” (net worth > $1.5 million.)

    2) the rebate wouldn’t be structured as a rebate. It would be structured as a hurdle. For example, you could arrange it so that you only take a performance fee to the extent that you beat your benchmark.

  58. Blahr1 says:

    It’s apparent that there is a lot of frustration in the financial industry regarding Financial Advisor compensation and how it’s tied to selling products that produce production credits as opposed to what is best for the client. Many Advisors are very unhappy at traditional broker/dealers. There are other options. If you are interested in talking to firm that believes in putting the client first, true financial planning, and an open architecture to implement these planning solutions then you should explore Family Office Group. A national firm that consists of CERTIFIED FINANCIAL PLANNER™ practitioners who support the Advisor in all disciplines of the client experience. The conflicts of interests are removed by paying advisors on revenue, not production. Clients’ interests are put first because no product is every recommended unless it is modeled in the client’s financial plan. As an Advisor, you will also receive a bonus based on the profitability of the firm as a whole. Check out their website at: and contact the firm if you are interested in talking to one of the founders of the firm – 215-514-2827.

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