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Home > Blog > Discount Brokerage Firms May Be Hazardous to Investors’ Financial Health

Discount Brokerage Firms May Be Hazardous to Investors’ Financial Health

A front page article in The Wall Street Journal on January 11, 2018 (“Advisers at Leading Discount Brokers Win Bonuses to Push Higher-Priced Products”) exposed the fact that Fidelity, Charles Schwab and TD Ameritrade employees win extra pay and other incentives to put clients in products that are more lucrative for them and the firm.

As noted in the article, while “investors who seek advice from discount brokerage firms might assume the counsel they get is impartial, given how these firms have rejected the old Wall Street model of working on commissions, in fact, advisers at some of the biggest discount brokerage firms make more money if they steer clients toward more-expensive products, according to disclosures from the firms and people who used to work at them. That means customers could end up with investment products and services that are costlier than they need.”

Among the findings that are highlighted in this article are the following:
“Fidelity representatives are paid 0.04% of the assets clients invest in most types of mutual funds and exchange-traded funds. They earn more than twice as much, 0.10%, on choices that typically generate higher annual fees for Fidelity, such as managed accounts, annuities and referrals to independent financial advisers. At Fidelity, sales incentives not only enhance pay directly but also help representatives win ‘Achiever’ bonuses that can be tens of thousands of dollars a year.

Charles Schwab employees with exceptional service and client satisfaction can qualify for the Chairman’s Club, winning a trip to a Hawaii or Florida resort. For advisers, sales volume also can be part of the calculation. The firm’s compensation practices could create ‘a financial incentive to recommend [managed accounts] over other products and services,’ said a 2016 Schwab disclosure of compensation practices.

TD Ameritrade discloses in a document on its website that sales bonuses could give financial consultants an incentive to make recommendations for asset retention with a view to their compensation rather than the best interest of clients.”
“The products and services for which employees of Fidelity, Schwab and TD Ameritrade are best paid charge an annual fee – a percentage of assets – to offer advice.”

According to The Wall Street Journal, “all three firms pay incentives to representatives for referring clients to independent investment advisers. These advisers charge clients an annual percentage of their assets, and the discount brokerage firms receive up to 0.25% annually on assets committed to the advisers.”

If you are an individual or institutional investor who has any concerns about your investments with any discount brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

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