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Endpiece: Broker or Used Car Salesman

Contests to push "preferred" products may be passe, but old habits--even those that hurt clients--die hard.

A salesman is a salesman — so the saying goes. In the not-so-distant past, it was not uncommon for management to motivate brokers, for example, by employing methods as primitive as those utilized by the guy running the used car lot with his team: “Move this lemon — there's a little something extra in it for you.”

I saw such practices firsthand. A branch manager in one of my old offices used to walk around with a wad of two-dollar bills that he dispensed to brokers who dropped a ticket on the “fund of the month.” The contest did not stop there: A broker could spend the two-dollar bill, or he could save them up and exchange them for prizes, such as gift certificates or pro sports jerseys. The manager called himself “The Prize Commissioner.” Some brokers chose not to participate, and I admired them. They were told in no uncertain terms, however, that taking such a stand could cost them management “support,” and no one doubted that this was so.

The point is that brokers often were given incentives to hawk particular products in a way that placed the interests of the firm ahead of those of the client. Despite the puny size of the incentive and the propensity of most brokers to put their clients first, I saw many reps go right along.

Over the years, the brokerage industry has worked to purge itself of the more unseemly aspects of the sales culture. Brokers have morphed into advisors, focused on long-term, fee-based relationships in which both the client and the advisor win. This transformation — driven by both investor sentiment and regulatory pressure — has made sales contests passé and reduced pressure to sell house products.

Or so you would think. According to my former colleagues, many questionable practices, including sales contests, persist in some shops. Though such activities are officially frowned upon by corporate compliance offices, branch managers are the ground floor decision makers — and most know that if they hit their numbers, they will hear no complaints from above.

Not that the game hasn't changed to suit the times. With the lights of government oversight shining brightly, some branch managers are replacing outright contests with more creative ways to reward brokers who push a new product. In such schemes, the client still gets the short end of the stick.

New ethical dilemmas present themselves all the time. Perhaps a rep accepts an expenses-paid trip to a wholesaler's home office and ends up golfing up a storm on the company's nickel. Should this sort of trip be mentioned when a rep pushes the wholesaler's fund to a client? Making the disclosure may be awkward, but it is the right thing to do.

There are ways to make ethical disclosures less clumsy. For instance, in the process of discussing a recommendation with the client, the rep can mention the trip, stressing that it afforded him access to the fund manager that might not otherwise have been proffered. If the disclosure's going to be worth anything, ethically speaking, it also must also spell out the potential conflict of interest: The trip was an all-expenses-paid affair.

Relatively few reps possess a proclivity for such candor — and the state of the retail investment industry reduces the likelihood of disclosures that might get in the way of sales.

In the end, the responsibility for ridding the industry of unethical sales practices may lie with the top level executives. To be sure, branch managers and reps bear some responsibility. But when branch managers' compensation is either revenue- or profit-driven with little or no non-financial performance bonuses, the writing is on the wall: Hit your numbers first and foremost.

If such a focus persists — and, let's face it, in all likelihood it will — the client will continue to lose. And that's not good for the long-term health of the industry.

Writer's BIO: David Israel David Israel is a freelance writer, consultant and former financial advisor. He can be reached at [email protected]

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