May 20, 2009 Comments (0) Blog, Securities Fraud

Wall Street Firms Still Preoccupied with Big Sales not Good Advice

(Last Updated On: July 17, 2015)

Lest you believe that Wall Street has changed its stripes, and is now in the business of financial advising and consulting rather than selling, look at the hiring and firing going on these days at the big firms. Firms are terminating lower-producing brokers and replacing them with big producers. Production means gathering customer assets and selling securities. In the eyes of the firms, the most successful brokers are not necessarily those who provide sound financial advice to their clients, but rather those who gather the most customer assets and sell the most securities. It’s still all about the fees and commissions.

So far this year, 11,600 brokers have left their firms, reports Aaron Lucchetti of the Wall Street Journal in a May 6, 2009 article entitled “Brokers Abandon Wall Street.” At this pace, Luchetti observes, nearly 35,000 brokers will exit by year-end. The previous high-water mark occurred in 2002, when a total of 11,500 brokers left Wall Street, according to Lucetti. To be sure, not all of the departures are involuntary.

Merrill Lynch (now part of Bank of America), reportedly offering one of the highest-paying recruiting deals for top producers, recently hired 29 big producers that had reportedly generated $42 million in production at their former firms. On the other hand, UBS announced plans to terminate about 600 lower-producing brokers (those who generated annual fees of less than $260,000); but last month, UBS hired about 20 brokers who each brought more than $1 million in fees, according to the article.

Many brokers, who typically keep 30% to 40% of the fees they generate, are facing lower paychecks and higher unemployment. Without anything else, those facts alone simply must create tremendous pressure to gather and sell assets.

Not that there is anything wrong with it – that is, with commerce and salesmen in an arms-length transaction. Everyone needs to be aware, however, that the relationship between broker and customer is not arms-length, and that American securities laws long ago changed the law from “buyer beware” to the requirement of full and fair disclosure of all material facts and risks that pertain to a proposed investment. Those constraints seem to be incompatible with the sales practices needed to be a big producer that the firms are hiring, and they may explain, at least in part, the lower production of the brokers the firms are firing.