The Politics Between Brokerages and their Full-Service Financial Advisors

The following is an excerpt from the recent edition of our firm's Investor Awareness Kit:

When a full-service financial advisor starts off at a full-service brokerage, they are given a starting salary for the first year only. Then, exclusively, they earn only on commissions. An advisor has a great deal of discretion to charge however they like. Whether they've been in the business for 26 months or 26 years...whether they've barely passed their licensing exams or hold a series of professional designations...It is up to them to decide how much they will charge their clients. What they don't have control over, however, is what percentage of the commission charged they will keep. That goes to the grid. Basically, the more commissions an advisor earns off his 'book' (the term used for all an advisor's clients), the higher percentage of their commissions the advisor gets to keep. For example, an advisor in his first few years of business will have fewer clients and therefore will be lower on the grid (take a lower percentage of commissions charged) then say somebody who has been in the business for years.

The grid, which varies from brokerage to brokerage, indicates the proportion of the commission that goes to the advisor versus the brokerage. The dynamics of the relationship between broker and brokerage is more like a partnership. The brokerage's responsibility is to provide the office, the assistant, the research, additional support and overhead, while the broker's responsibility is to provide the clients.

Keeping this partnership concept in mind, it must be noted that an investment advisor is more accurately running their own business. They are given a great deal of flexibility of what they can do with their clients, and they are fairly independent. The point is there can be great investment advisors at a specific brokerage firm, and there can be some not so great investment advisors. What's more important is that their value to the firm is assessed not by the success of their advice, but by the amount in commission being charged to their clients and going to the grid. An advisor on their brokerage's Presidents Club or Executive Club, being dubbed a Senior, Director or Vice President; are given these distinctions on account of this.