Four Questions for the Retail Brokerage Compliance Officer

“Are there still commission-only brokers left?” an incredulous reporter asked me the other day at lunch.

It seems impossible that are still customers for these guys given how much information is available at our fingertips in 2012.  But I had to tell her that yes, they still exist.  And in some form or another, they probably will forever, even as their ranks continue to shrink.

The boiler rooms have survived the late-90’s Mafia-related crackdowns, the penny stock scandals, the market-making inside commission rip scandals, the dot com blow-up, the credit crash, the private placement witch hunts and now Dodd-Frank.  You simply cannot shut these things down in their entirety.  The owners of these firms just switch tactics, when one thing stops working, they do another. They went from penny stock manipulation to churning legitimate stocks, from IPOs to Reg D private placements.  The products and tactics change but the one constant is that all accounts are eventually blown up, hence the relentless apparatus to procure new ones. The broker is not really “building” his business through prospecting, he is replacing it.  Even still, there is a cloak of respectability thrown over the whole enterprise – nice suits, nice business cards, nice street address, etc.

But I know four surefire questions one can ask the compliance officers of these last holdouts that would surely put an end to it all immediately.  Because while tactics may change, the underlying filth and grime is so ingrained in the fabric of this business that it can never truly be bleached out or scrubbed away.

Here are the only questions that need be asked:

1.  Why does there appear to be a strange uptick in gross commissions during the last two days of each month?  The trades appear to be taking place randomly, as though they could have happened at anytime during the month – but it seems like they needed to get done before the monthly pay period closed out (the Tuesday before the last Friday of each month) based on this pattern.  Is it possible that these transactions were done strictly so that the broker could get his gross above a certain number for the month, perhaps to qualify for an increased payout percentage?  Forget possible, isn’t it likely?

2.  What qualifies your brokers to promise “consistent returns of 20% a year” when they’re speaking with prospective clients?  Have they ever actually delivered that? Can you provide evidence? If they have provided even half of that rate of return, why do they ever need new clients. Why are they buying telemarketing lists of business owners in Southwestern Minnesota? is this some kind of a charitable outreach program the firm has set up to democratize the consistent winning of Wall Street around the nation?

3.  What qualifies your brokers to select individual stocks to sell to prospective clients they’ve only spoken with once?  Is this in the best interest of any customer in either the short or the long-term?  Why are the single stock selections of a broker a product that is worthy of a premium commission to begin with?  Given that order execution is essentially free in the modern era, what value-add is happening with this particular trade that merits a 2.5% commission of the total purchase amount and then another 2.5% commission on the proceeds once it’s sold?

4.  Why does your firm, domiciled as it is in lower Manhattan, have a disproportionate amount of clients in rural states or the deep south.  Does this have anything to do with the fact that people from those regions are:

a) More likely to be impressed that someone from NYC’s financial district is calling them?
b) More polite and congenial and hence less likely to hang up the phone mid-conversation?
c) Less likely to know other financial professionals personally or have one in the family?
d) Less likely to be web-savvy enough to background check your firm and research the recommendation?
e) More likely to have a landline phone with a number that is publicly listed and that they will take calls on?

The truth is, a compliance officer from a retail broker-dealer cannot answer any of these questions without admitting the truth about the what the firm is actually adding to (or subtracting from) society.

And when the answers to these questions come forth, the reality is an ugly one.

Read Also:

Backstage Wall Street (Amazon)


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