Charlie Munger on Commission-Based Brokers and Bankers

Jason Zweig and Nicole Friedman were lucky enough to have spent six hours talking with Charlie Munger over the dinner the other night and wrote it up for the Wall Street Journal this weekend.

This exchange, wherein Charlie perfectly echoes my own experience and opinions about transactional brokerage and banking really caught my attention. In a former life, I had lived this. Even wrote a whole book about it…

Q: How should brokers and bankers be paid?

A: I’m afraid that salesmen do have a wonderful incentive. On the other hand, what a salesman will do is just awful, if you give a man a family to support, in the commission system. And the reason that the brokerage houses need such big compliance departments is that, without them, the salesman who needs the commission to live, maintain status, to pay the bills and so forth, if it gets to the end of the month, he would sell a blind man any goddamn thing to get the gross.

It’s disgusting. My dead wife had a relative, her mother’s cousin, who was a blind doctor. And he had two adopted children. And after he was blind, and he was living on the savings that he’d made from very hard working, he came late to medicine from pharmacy, and he worked hard and he’d saved some money, and that’s what he lived on—and this goddamn broker who was married to the adopted daughter, he just churned the old guy until he was broke. He was blind! He was his own father-in-law!

They just think if you need it enough, it’s OK to do. And it happens everywhere. And what happened at Wells Fargo was just another instance of that. You get the incentives too tough and too many people will yield.

The mistake [at Wells Fargo] was, when it blew up, they just started firing the people that did it and they fired thousands without changing the incentive system. It was insane but again a dumb bureaucracy, a pompous CEO.

Josh here, go read the whole Q&A, there’s a lot there from a brilliant man. Charlie once said something along the lines of incentives are everything. One of his exact quotes: “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.”

I feel the same way. Which is why, as entrepreneurs working in and running a business in the financial arena, we think so much about how we’re incentivizing our growing workforce. Barry, Kris, Michael and I have a very good idea of what we never want to become. It’s up to us to build what we do want to become, if such a thing even exists yet.

Source:

Charlie Munger, Unplugged (Wall Street Journal)