The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails by Steven M. Sears

Author:Steven M. Sears [Sears, Steven M.]
Language: eng
Format: epub
Tags: General, Business & Economics, Investments & Securities
ISBN: 9781118224335
Publisher: Wiley
Published: 2012-03-07T07:05:55+00:00

Stockbroker Pay

The destructive effect of fees on investor accounts is widely known on Wall Street. The subject is never really discussed in great detail, though occasionally an entity like Morningstar produces a report that shows how fees kill returns. Even then the report must compete with the day’s events for news coverage. In the normal pace of things, a story on a study about fees is inevitably buried deep within a paper, or lost on a financial news website. Stockbrokers know all about fees. That’s a major contributor to their income. Fees sustain stockbrokers’ lifestyles. Fees are tentacles that wind and wrap through the stockbrokerage industry and all of Wall Street.

A former hedge fund salesman with extensive experience dealing with stockbrokers says the first question many ask about investment products is: “How much does this pay?”

Understanding the full extent of stockbroker compensation is more difficult than learning Sanskrit. Compensation information varies widely. A top stockbroker in Manhattan, New York, says his branch manager—a stockbroker who handles administrative duties at a stockbrokerage office—has a hard time understanding his compensation structure. Stockbroker payouts are based on money management, plus some sales commissions, plus different commission rates for different products. Some stockbrokers are paid monthly. Some are paid quarterly. All of them make money mostly the same way, though they get different percentage payouts.

Increasingly, most investors are put into wrap accounts. They pay a flat, annual fee, usually 1 percent to 2 percent of total portfolio value. The wrap is apparently sometimes negotiable and sometimes not. The total wrap fee is split at varying percentages between the stockbroker and brokerage firm.

By itself, a 1 to 2 percent management fee seems benign. If the stock market is rising, the fee seems inconsequential. But it is incorrect to look at fees in isolation. Fees must be contextualized. Karl Rozak, an Oppenheimer & Company stockbroker in Manhattan, thinks about client accounts through what he calls the 3 percent guideline. If a client withdraws 3 percent or less from an investment account, the account’s value will continue to increase. If the client withdraws 5 percent from the account, the account will not increase in value. If the client withdraws more than 5 percent, the customer has triggered a process that will inevitably deplete the account. Through Rozak’s prism, a 1 to 2 percent management fee is anything but innocuous. Rozak is a rare stockbroker. Diogenes would have stopped looking for an honest man had he met Rozak.

Think of fees as important parts of your cost of capital (C-of-C). Professional investors always monitor their C-of-C because the less money they spend for something the more money they keep. Seasoned investors are always trying to maximize their gains and minimize anything that reduces their profits. Over time, investment fees might be the difference between a relaxing retirement, or a financial crisis at a time when you are least able to work, and most need money.

The wrap fee traditionally covers all transactions. Think of the wrap account like an all-expense paid vacation where most everything is covered.

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