What is a Full Service Stock Broker?
A full service stock broker is what you can find at a firm such as Merrill Lynch. Brokers at such firms offer a wide range of investment products and services that have a compensation agreement with the firm. The brokers are compensated for selling these products and services and/or gathering assets to be managed by the firm or outside managers. They may also be compensated on the interest their firm receives as a result of your decision to borrow money from them, using your investments as collateral, also known as going on margin.
These brokers have usually been through some type of training program to prepare for the securities licensing examination, as well as engaging in additional and ongoing sales training on the various products and services their firm offers. Contrary to popular belief, however, there is no prerequisite educational or vocational training to become a stock broker. Unlike doctors, lawyers, engineers and other professionals who must successfully complete years of a rigorous academic curriculum before sitting for licensing exams and being allowed to ply their trade, brokers need only pass a multiple choice exam given by the industry’s self-regulatory organization, FINRA, and pay a fee to be able to identify themselves as investment professionals.
Today’s broker could very well have been yesterday’s patio furniture salesman. A caution: while the brokerage industry spends millions of dollars in marketing and advertising to position their brokers as professionals, in reality these are just highly paid salespeople who sell financial products and services (instead of patio furniture).
What you are paying for with a full service stock broker is active management and advice about the purchase and sale of investments and services. But, be aware that you are also paying for the high overhead that comes with full service; therefore, only those investments and services that generate fees and/or commissions to the broker and his firm are likely to be presented. Put differently, when dealing with a full service broker, with the possible exception of a money market account, you will not be shown or recommended investments and/or services that do not generate a fee or commission to the broker and his firm!
Besides direct compensation in the form of fees and commissions, brokers at full-service firms may also receive compensation in the form of gifts, trips, dinner, travel, bonuses, recognition, etc., from their firm and/or the companies whose products and services they sell to you.
Sales contests are commonplace in full service firms. Like any other sales organization, on occasion brokerage firms find themselves with too much inventory in a particular stock or bond, and they need to move it. They will offer their sales force added incentive in the form of higher than normal commissions or payout to move the merchandise (similar to shoe salesmen being offered a bonus for pushing out preferred merchandise).
Most mutual fund companies and insurance companies that sell investments such as variable annuities have wholesalers working for them who have assigned territories; much like a traveling salesman has a territory. Their goal, and their compensation, is based on how much of their funds or annuities they can get a broker to sell. They wine and dine their customers (the brokers) in order to get them to sell their products to you. Again, at a full service firm you will not be recommended an investment or service that does not generate money to the firm and/or the broker.
With the exception of high commission products such as variable and equity indexed annuities, more and more full service brokers are moving away from the “commission for transaction” model to the “ongoing fee” model. There are many reasons for this, but one of the main reasons is predictability of income for the broker and the firm. With the fee-based model, the broker sells you on the idea of a managed account. You are not charged for transactions, but instead are charged an annual fee, usually paid quarterly, to have your account professionally managed, either by the broker or by an outside manager with whom the brokerage firm has a compensation arrangement.
With this model the stock broker turns into a money gatherer, knowing that the more money he gathers to manage, the more he will be compensated. And that compensation will come every month, quarter, or year, whether or not there are transactions. His only concern is to convince you that the manager he has selected is doing a good job, or that he can find you a better manager in the event that you are not happy with that manager’s results. Again, bear in mind you will not be recommended to a manager that does not have some type of compensation arrangement with the broker’s firm.
Remember, when dealing with a stock broker, whether on a transaction level or fee-based level, you are dealing with a salesperson.
To learn more about Richard Lewins, visit his site at www.lewinslaw.com.
Other posts from Richard Lewins
The answer and the reasons behind the answer to this question have changed over the years. In order...